BREXIT impact on jurisdictional clauses

If financiers require a judgment that is enforceable in the EU, then the analysis as to which jurisdiction clause would be most appropriate will now require especially careful consideration and most certainly local law advice.

Introduction

In 2016, the United Kingdom (the "UK") voted to leave the European Union (the "EU") as a Member State. Since then, the UK has maintained its participation in the EU for a transition period during which the EU legislative framework continued to apply to the UK. The transition period has since ended on 31 December 2020 ("IP Completion Day") and today, the UK is officially no longer a member of the EU. One major ramification relates to the recognition and enforcement of English court judgements in EU Member States which is key in respect of transactions involving borrowers or security parties located or based in the EU. If the enforceability of a judgment in the EU is a significant factor in the choice of jurisdiction, where does this leave parties to financing transactions that often provide for submission to the jurisdiction of the English courts?

Jurisdiction clauses

1. Pre and Post IP Completion Day

Prior to IP Completion Day, the jurisdiction of the English courts was largely dictated by Regulation (EU) No 1215/2012 (the "Recast Brussels Regulation"). If an agreement included a submission to the courts of a particular EU Member State (which includes the UK), the courts of other EU Member States were generally required to decline jurisdiction, and to defer to and enforce the judgement of the courts of that particular EU Member State pertaining to such an agreement.

Following IP Completion Day, the Recast Brussels Regulation has ceased to apply to the UK as the UK is no longer considered an EU Member State. The courts of EU Member States may therefore choose to accept jurisdiction even if an agreement provides for submission to English courts. The question of whether an English court judgement may still be enforceable in EU Member States will be determined by the local laws of each EU Member State and as such the analysis may be less straightforward than the regime previously applicable pre-IP Completion Day.

This has been partially mitigated by UK's accession to the Hague Choice of Court Convention 2005 (the "Hague Convention") which came into force in the UK on 1 January 2021.

In relation to an agreement entered into after the Hague Convention was ratified by a participating state (which includes the EU) and where the jurisdiction clause in such an agreement is a two-way exclusive jurisdiction clause submitting to the court of such participating state, the Hague Convention generally requires (although there are some exceptions) all other participating states to:

A. respect parties' choice of court in such participating state; and

B. enforce judgements made by such court.

2. Types of dispute resolution clauses

Parties may now wish to consider the two-way exclusive jurisdiction clause anew when deciding which dispute resolution clause to use for their contracts. Simply put, a two-way exclusive jurisdiction clause is a jurisdiction clause which provides that all parties to an agreement submit to the courts of a certain jurisdiction.

Two other types of dispute resolution clauses currently more commonly used in financing transactions are the following:

A. Asymmetrical jurisdiction clause – such a clause restricts one party to commencing proceedings only in the courts which they submitted to in the agreement, whilst allowing the other party to litigate in any jurisdiction.

B. Arbitration clause – such a clause provides that parties will resolve any disputes by way of arbitration rather than through a court-driven procedure.

Developments in the market have also pointed to a suggestion of using an asymmetrical hybrid clause which allows one party to choose between the jurisdiction of the English courts and arbitration, while restricting the other party to only either the English courts or arbitration as provided for in the agreement. In this regard, careful drafting is required. Under English law, while such asymmetrical hybrid clauses are valid and enforceable, it is uncertain whether such clauses will be covered by the Hague Convention (and perhaps unlikely based on obiter comments at the Court of Appeal level in December 2020). Further, the issue of whether such a clause is within the Hague Convention may not necessarily be decided in each case under English law – it could be the law of (for example) the country where enforcement of a judgment is sought.

In the context of resolving disputes within the UK legal system, with the UK's official exit from the EU, parties now have to decide if they should adopt the two-way exclusive jurisdiction clause for use in agreements instead of the other options available.

Key considerations include weighing up the benefits of ease of enforcement of an English court judgement in the EU via the two-way exclusive jurisdiction clause, against the benefits of having flexibility as to where proceedings may be commenced under an asymmetrical jurisdiction clause, which has traditionally been the preferred option of financiers. With the current uncertainty on enforcement of English judgements in the EU, parties may also consider whether arbitration may be more effective as a dispute resolution mechanism in the appropriate transaction documents since it is unlikely that Brexit will affect recognition or enforcement of an arbitral award, which are governed by the New York Convention 1958 and the resulting national laws in each contracting state.

Conclusion

If financiers require a judgment that is enforceable in the EU, then the analysis as to which jurisdiction clause would be most appropriate will now require especially careful consideration and most certainly local law advice.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.