For businesses with a presence spanning the EU and the UK, Brexit was never going to be a clean break. Disputes is just one area where lawyers and businesses have to navigate through ambiguities, and consider in upcoming contracts. While there are mechanisms in place, lawyers say arbitration will likely emerge as the preferred option as litigation becomes increasingly complicated.

 

On Jan. 1, the European Union regime that had once facilitated litigation for disputes spanning the EU and United Kingdom border fell away. It was replaced with a regime founded on the Hague Convention on Choice of Court Agreements 2005, which relies on a combination of English common law, historic cross-border arrangements, and laws of EU members states.

Ashurst partners James Comber and Michael Weatherley, based in Hong Kong and Singapore respectively, say that for businesses contracting with EU counterparties, there are a variety of considerations parties must bear in mind as a result of Brexit.

But the impacts will depend on the particular types of disputes and contracts in question. Breaking it down, Comber and Weatherley say there is a range of outcomes as a result of Britain leaving the EU.

“Exclusive jurisdiction clauses in favour of English courts: These clauses are potentially less attractive as there is no longer an automatic right to enforce English court judgments throughout the EU,” the lawyers say.

“Although we would expect the majority of EU courts to adopt a sensible approach to enforcement, there is a risk, particularly if the relevant member state does not have a good enforcement track record. The Hague Convention provides a potential solution to the issue, but there is a question mark over when that will be regarded as coming into effect for the UK (as opposed to the EU) and that creates a risk.”

—James Comber and Michael Weatherley, Ashurst

“Although we would expect the majority of EU courts to adopt a sensible approach to enforcement, there is a risk, particularly if the relevant member state does not have a good enforcement track record. The Hague Convention provides a potential solution to the issue, but there is a question mark over when that will be regarded as coming into effect for the UK (as opposed to the EU) and that creates a risk. In addition, it does not currently cover the Lugano Convention states

(Norway, Switzerland, and Iceland). One possible option is to specify the courts of a member state (where the counter-party or assets are located) as having exclusive jurisdiction in addition to the English courts. However, post-Brexit, that runs the risk of parallel proceedings and takes the clause out of the Hague Convention,” they add.

Meanwhile, non-exclusive jurisdiction clauses, which have complications of their own, may become a preferable option for lawyers.

“Under these clauses, the parties have the option to sue in the jurisdiction where the counterparty is based or its assets are located, and so the enforcement issue is not as relevant. As such, non-exclusive clauses may be a more attractive alternative where enforcement within the EU is an issue and the parties are happy to be sued in jurisdictions other than the English courts. However, post-Brexit, there is an increased risk of parallel proceedings as, once the Brussels Regulations and Lugano Convention fall away, the mechanism for preventing parallel proceedings within the EU no longer applies. In addition, the Hague Convention will not apply as, although it can be extended to apply to judgments flowing from a non-exclusive jurisdiction clause, as yet no contracting states have exercised that option,” Comber and Weatherley note.

Robert Rhoda, a litigation partner at Dentons, says it is not uncommon to see contracts between Asian and EU counterparties providing for the jurisdiction of the English courts in the event of a dispute.

“Our advice to clients who still want to litigate in London is to ensure their clauses provide for the exclusive jurisdiction of the English courts. They can be confident that the clause will be respected by EU member state courts and that the resulting judgment will be enforceable throughout the EU under the 2005 Hague Convention.”

—Robert Rhoda, Dentons

“Our advice to clients who still want to litigate in London is to ensure their clauses provide for the exclusive jurisdiction of the English courts. They can be confident that the clause will be respected by EU member state courts and that the resulting judgment will be enforceable throughout the EU under the 2005 Hague Convention. Service of English proceedings on EU counter-parties is also potentially more cumber-some now given that the Hague Service Convention will now apply as opposed to the EU Service Regulation,” Rhoda says.

Given that the Hague Convention agreement, which has replaced the EU regime that previously facilitated litigation for disputes crossing the border, does not provide for reciprocal recognition and enforcement of interim measures, complications arise about the enforceability of such measures.

“If interim relief is obtained in the English courts (such as freezing orders), a party to a dispute can no longer depend on the near-automatic enforcement of those measures across the EU.

The chances of recognition and enforcement will now depend on the national law of the particular EU member state in which such recognition and enforcement are sought. This increases the time and cost, and reduces the certainty of recognition and enforcement, all of which tends to undermine the value of the interim order in the first place (particularly if it was obtained on an urgent basis in an attempt to prevent dissipation of assets),” Comber and Weatherley say.

“The obvious challenge this poses,” Rhoda says, “is that there is arguably a greater risk of dissipation of assets by an EU counterparty pending the outcome of litigation in the English courts, which risks undermining the very purpose of the litigation itself if there is nothing left to enforce against.”

Still, Comber and Weatherley say there is a possibility that other conventions could be applied in the future.

In April 2020, the UK formally applied to join the 2007 Convention on Jurisdiction and the recognition and Enforcement of Judgments in Civil and Commercial Matters (or the Lugano Convention) as an independent member.

“However, in order to accede to the Lugano Convention, there must be unanimous support from the Contracting Parties to the convention,” Comber and Weatherley say, noting the application is now pending “although the European Commission gave its views opposing the UK’s application on May 4, 2021.”

“The European Commissions’ main reason for rejecting the application was that the UK is not part of the European Economic Area and the European Free Trade Association. It explained that the Lugano Convention supported the EU’s relationship with third countries which have a ‘particularly close regulatory integration with the EU’. Describing the UK as a ‘third country without a special link to the internal market’, it saw no reason for the EU to depart from its general approach. Instead, it took the view that the Hague Convention provided a framework for future cooperation between the EU and the UK,” Comber and Weatherley say. But the lawyers note that it should be highlighted that the European Commission’s recommendation is not binding. “The decision still lies with the Contracting Parties to the Convention (i.e. EU, Denmark, Iceland, Norway and Switzerland),” they say.

CONTRACT OVERHAULS

With Brexit to consider, businesses are now reviewing their contracts to “identify weak points and clauses that might sensibly be renegotiated” should a dispute arise, Comber and Weatherley say.

“A key part of this review should be a close look at whether existing dispute resolution clauses are fit for purpose,” the lawyers note.

“Given the uncertain enforcement landscape in relation to court judgments as between the EU and UK, now might be the time to think about adopting international arbitration as the default dispute resolution mechanism for such contracts. Arbitration is not affected by Brexit. The New York Convention will continue to apply and to require contracting states to treat arbitration agreements as valid, and to recognise and enforce foreign arbitration awards. The New York Convention currently has 168 contracting state parties, including the 27 EU member states – meaning that arbitral awards, at least in theory, can be enforced almost universally.”

While there is currently “a lot of uncertainty,” says Simon Chapman, regional head of dispute resolution in Asia and international arbitration specialist focusing on cross-border disputes at Herbert Smith Freehills. “To take a step back, particularly on how this effects Asian parties doing business with Europe — in a disputes resolution context we’re looking at both litigation and arbitration, and Brexit only really effects litigation, so we’re talking about court judgments rather than arbitration awards.”

“That’s because arbitration isn’t regulated by EU law. So, the enforce-ability of a London-seated award, for example, is a matter that is governed by another convention that is called the New York convention, so that’s completely unaffected by Brexit,” Chapman adds.

Arbitration, Chapman says, has been growing for quite some time is likely to prove a popular choice going forward.

“I think the key thing that is driving the rise of arbitration is cross border enforcement,” he says, noting while in mainland China, for example, one might struggle to secure a court judgment, “you can take an arbitral award and enforce that quite easily.”

“It’s a trend we’ve already seen and this pre-dates Brexit by quite a long time, but I think that will continue,” Chapman says.

Another theme emerging, largely driven by the pandemic, is the unstoppable rise of virtual hearings for arbitration, Comber and Weatherley say.

“Virtual hearings have played a signifi cant role during the pandemic in ensuring that cross-border disputes continue to be progressed towards resolution. Courts and arbitral tribunals around the world are, for the most part, embracing technology and making short shrift of attempts to delay proceedings because of the inability to meet in person,” the lawyers say, noting that virtual hearings have also been lauded as “reducing the time, cost and environmental impact of cross-border dispute resolution, increasing efficiency, and (in some cases) making justice more accessible to those who would otherwise lack the resources to properly engage in the process (particularly given the signifi -cant travel and accommodation costs usually associated with cross-border dispute resolution).”

But they say that virtual hear-ings are not, without their challenges. “The technology available may not be adequate, witness evidence may have shortcomings in an online setting, and cybersecurity and confidentiality concerns pervade virtual hearings,” they add.

Dentons’ Rhoda agrees that the rise of virtual hearings have allowed for “business as usual or at least as close to normal as possible.”

“In 2020, for example, during the height of COVID, the HKIAC hosted 117 hearings, of which 80 were fully or partially virtual hearings,” he says.

Chapman has seen this trend first-hand. “My experience three or four years ago was that there was always a bit of reluctance to get witnesses to come and testify via VC at a hearing, there was always this pressure to get them in a room regardless of where that was. Of course, all of that has changed over the past eighteen months,” he says.

“Almost all of my hearings this year have been via Zoom, so you can do them from literally anywhere in the world, you have tribunals that are spread all across different jurisdictions, witnesses, lawyers all in different time zones and actually the technology works really well. It’s not completely flawless, but it’s much, much better than it used to be. That has eased things a bit.”

—Simon Chapman, Herbert Smith Freehills

“Almost all of my hearings this year have been via Zoom, so you can do them from literally anywhere in the world, you have tribunals that are spread all across different jurisdictions, with witnesses, lawyers all in different time zones and the technology works really well. It’s not completely flawless, but it’s much, much better than it used to be. That has eased things a bit,” Chapman adds.

But while the digitalisation of disputes and the cross-border nature of enforcement may improve the accessibility of arbitration, in the meantime Chapman says Brexit complications are likely to keep lawyers busy.

“There’s definitely a lot of work for lawyers to do with these issues,” he says, noting, “I think uncertainty does create work for lawyers.”

 

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