Lenders and finance lawyers are all familiar with the asymmetric jurisdiction clause. It's nestled near the end of the loan agreement, and is one of those standard clauses that generally gets scant attention. It states that the Lender can sue under the agreement either in the court specified (for example, England and Wales) or any other competent court of its choosing, but the borrower can only sue in the court specified. The one-way nature of the clause distinguishes it from an 'exclusive' jurisdiction clause, where both parties are required to use the court specified in the contract. The use of asymmetric clauses has been market practice in the syndicated loan industry for years, and is included in the Loan Market Association recommended form templates. For the first time in a long time, we need to re-consider our blanket use of this clause.
At the moment, English and EU Member State courts apply the recast EU Brussels Regulation on jurisdiction and recognition of judgments. The Brussels Regulation provides a regime to establish whether the courts of a particular Member State have jurisdiction to hear a dispute, and when judgment is given by one of those courts, for it to be enforceable in the courts of any other Member State. It's an efficient and cost-effective process. But this Regulation will not survive the end of the Brexit transition period. From 1 January 2021, English judgments will be treated by the courts of EU countries in the same way as those of any other third country.
What are the alternatives to Brussels?
The Lugano Convention largely replicates the Brussels Regulation and would provide an almost seamless transition with regard to recognition of jurisdiction and enforcement of judgments across the UK and the EU. On 8 April 2020 the UK applied to join the Lugano Convention, but in order for that application to be progressed, the EU has to agree to it. So far, that agreement has not been forthcoming. Considering that 'nothing is agreed, until everything is agreed' we may only see the UK's application to Lugano approved once (and, if) a free trade agreement is concluded. Given the time frames hard-wired into the Lugano accession process, it is now impossible for that acceptance to come in time for the UK to accede before the end of transition.
On 28 September 2020 the UK acceded to the Hague Convention on Choice of Court Agreements 2005 in its own right. The courts of members of the Hague Convention must recognise jurisdiction clauses in favour of other members and enforce judgments made by those courts. The EU is a member, so this would apply in relation to all EU Member States states. It's a useful step, but one with significant limitations:
- the Convention only applies to agreements made after the relevant state has joined. The UK argues that this applies since it joined as part of our EU membership in 2015, but the EU disagrees. It believes the terms of the Hague Convention would only apply to contracts entered into after the end of the transition period, when the Hague Convention takes effect in relation to UK as a member in its own right. As such, jurisdiction (and consequently enforcement of judgments) for contracts entered into before 1 January 2021 would fall to be considered under the national laws of the EU countries.
- The crucial point for asymmetric clauses is that Hague only applies to exclusive jurisdiction clauses, which means EU states will be under no obligation, by virtue of the rules of the Convention, to recognise jurisdiction or enforce judgments of English courts made in relation to finance documents containing asymmetric jurisdiction clauses.
How will this affect loan agreements?
From 1 January 2021 we will be in a position where we have no convention or treaty that governs and standardises the way in which standard English asymmetric jurisdiction loan contracts are treated throughout the EU, in terms of recognition of jurisdiction or enforcement of judgments of the English courts. Instead, each case would depend on the local law in the jurisdiction in question and would require local law advice.
This isn't necessarily the end of the world; it is how New York judgments are currently dealt with throughout Europe. Most states offer means of enforcing a foreign judgment that is not subject to a treaty, and English judgments are, with some limited potential exceptions, likely to remain respected and enforceable. But those means of enforcement are unlikely to be as efficient and cost-effective as under the Brussels Regulation.
We are not suggesting that the asymmetric clause is banished to the bottom drawer to gather dust (or to wait patiently for the UK to be accepted to Lugano), rather that we now need to carefully consider the best approach on each deal.
A lender may wish to consider how likely it is that an English judgment would need to be enforced in an EU state. This isn't the same as insolvency risk, it's not about enforcing security, it's about realising the assets of the borrower to pay a judgment debt when that borrower is refusing to pay following litigation. Where a full robust security suite is in place, it may be that needing to enforce a judgment debt is unlikely. Equally, where the borrowing group has no subsidiaries or notable assets situated in the EU, then perhaps there is no reason for a lender to enforce in an EU state.
A borrower may consider how likely it is that it would need to sue the lender, given that the obligations in a loan agreement generally rest on the borrower's shoulders.
In these circumstances, the client and their lawyers may conclude that the asymmetric clause can remain without any undue risk to either party.
However, there will be deals where treatment of a judgment in a specific member state is essential, or where there is uncertainty over the potential location of enforcement of judgments. In that case, there are various options open to the parties:
- Take local law advice in all relevant jurisdictions to determine how readily non-EU judgments are recognised in that location. That advice may quell any concerns, or indeed it may convince the parties to use one of the options below. The one certainty is that it will add to the initial deal costs.
- Opt for an exclusive jurisdiction clause to ensure that the loan agreement will fall within the remit of the Hague convention. This may be an acceptable approach if the parties need to ensure that litigation takes place in a chosen court. If the lender's legal team is in the UK and the contract is subject to English law, for example, how likely is it that the lender would want to start a claim in another jurisdiction? It also gives reassurance that judgment made in that court will be respected throughout the EU. However it provides less flexibility for the lender, and care must be taken that it does not restrict the lender to an unacceptable extent.
- Opt for arbitration. This approach has not historically been common in the syndicated loan market, but given the current confusion over the court approach, we expect to see it becoming a more regular feature. Arbitration clauses have been described as 'Brexit Proof' because recognition and enforcement of arbitral awards is governed by the 1958 New York Convention which has been adopted by 160 countries (including the UK) and is entirely unaffected by Brexit. In this article, Greg Fullelove and Michelle Radom ask 'Are we entering the Age of Arbitration' and champion some of the benefits of arbitration; confidentiality, neutrality, flexibility, speed and, crucially, ease of enforcement. Lenders and finance lawyers are likely to take note.
When drafting and negotiating loan agreements, jurisdiction is no longer the standard clause we can skim read, it requires careful analysis on a deal-by-deal basis. We anticipate seeing exclusive jurisdiction clauses used in loan agreements over the coming months, and arbitration to be a feature of more complex, cross-border transactions.