Choice of law/governing law clauses
It might be tempting to view the choice of law/governing law clause in a contract as a boilerplate clause with limited significance, concentrating instead on the terms relating to performance, price and so on. However, it is an important protection which should be given close consideration: choosing an unknown foreign law could result in unexpected and costly consequences. For example:
- The governing law will determine the length of time a claimant has to bring a claim (limitation periods).
- Many countries have civil codes which incorporate good faith requirements, requiring a party exercising a contractual right not to act in a purely self-interested way.
- Principles relating to pre-contractual negotiations and misrepresentation can vary significantly between legal systems.
Does Brexit mean that it no longer makes sense to use English law?
The reasons why lawyers have chosen English law to govern their contracts are not affected by Brexit. If English law was an appropriate choice before Brexit, it remains so now.
There are many benefits of an English choice of law clause. These include:
- English law is well understood and respected internationally. You should never agree to a law which you do not have a good knowledge of.
- English contract law is highly developed and sophisticated and has the flexibility to adapt to novel situations.
- The highly-developed system of binding case law/precedent gives a greater degree of certainty as to the proper interpretation of the law than many civil code-based legal systems.
- English remains the preferred language for a large number of international businesses.
Will an English law clause be respected by EU/EFTA countries?
The simple answer to this is yes. The rules about respecting the parties' choices of law in contracts remain the same as before Brexit for the UK and all EU countries.
A jurisdiction clause nominates the courts of a certain country to hear and determine any future dispute under the contract (and or any related disputes). The choice of jurisdiction can have a significant impact on not just the outcome of the case, but also the cost and time it takes to achieve that outcome. There is no requirement for the choice of governing law to match the country which hears the case, but in practical terms it usually makes sense to cater for that: the judges of a particular country apply their own law far more easily and reliably than a foreign law.
Does Brexit mean that it no longer makes sense to use the English courts now?
In short, in most situations, Brexit should make no real difference to the decision as to whether or not you choose to have disputes determined by the English courts.
There are many reasons to choose English courts to hear your dispute and, in general, these have nothing to do with the UK's former membership of the EU. These include:
- The reliability and quality of the English judicial system. English judges are experienced and impartial senior legal practitioners with a long-established familiarity with handling large and complex international disputes.
- Generally, decisions are reached in a timely fashion, without excessive delays that can occur in many legal systems.
- The English system forces opponents to disclose both supporting and adverse documents, unlike most civil law systems. This can be a very important factor in terms of achieving justice.
- Appeals will generally only be allowed if the court gives permission, thereby avoiding delays from meritless appeals.
- It is possible to obtain a wide range of interim injunctive relief against defendants and judgment debtors, and this can be of considerable strategic importance in cases where enforcement is likely to be difficult.
- The fact that the loser will normally be ordered to pay the winner's costs is an important strategic factor in encouraging parties to act in a commercially sensible manner in seeking to avoid litigation and to conduct it efficiently.
- The use of English language is an advantage, avoiding the need for translations in many situations.
Will English court judgments still be enforceable in other EU countries after Brexit?
Although the legal regimes governing the enforcement of judgments between the UK and the EU have changed following Brexit, in practical terms this is unlikely to present a real problem in most cases. Where the parties have agreed to an exclusive jurisdiction clause in a contract, then any judgment given by the named court will be enforceable in other countries where the Hague Convention on Choice of Court Agreements 2005 applies. All EU member states and the UK are party to this Convention and so if parties agree (post-Brexit) to an exclusive jurisdiction clause in favour of the English courts, any English court judgment arising from that contract will be enforceable in the courts of other EU member states (subject to some relatively rare exceptions set out in the Convention). There is some debate as to precisely how the Convention applies in respect of the period when the UK's accession to the Convention was via the EU, but that is not the subject of this article and is irrelevant to decisions about new jurisdiction clauses.
The same Convention obliges the courts of any EU country to recognise the validity of exclusive jurisdiction clauses and refuse to hear a case brought in breach of an exclusive English jurisdiction clause.
So, although the procedures for recognition of judgments between the UK and EU countries have changed slightly with Brexit, in practice this should have little significance in any negotiations and decisions over which courts to name in a contract.
In certain types of international case, choosing arbitration as the means for determining disputes may be more appropriate than choosing a national court system.
Benefits of arbitration include, in particular, the confidentiality of the process and the enforceability of arbitration awards internationally. If enforcement of a court judgment is likely to be an issue in the relevant jurisdiction, arbitration (rather than litigation) might be a better option. Arbitral awards can be recognised and enforced under the New York Convention 1958, to which 164 countries have signed up (including all EU countries).
It is however still important to choose the right "seat" (or place) of the arbitration. An arbitration in London, applying English law as the governing law of the dispute and subject to the rules of an institution like the London Centre for International Arbitration (LCIA), is likely to closely mirror proceedings in the Commercial Court in London in format and approach. Arbitral awards are very difficult to appeal before the English courts as well (as is the case in almost all of the countries which are signatories to the New York Convention). The English courts are also highly supportive of the arbitral process and the principle of confidentiality is also recognised.
A potential downside to arbitration can be costs of the arbitral proceedings themselves but that will depend on the type of case (particularly if the tribunal is to be formed of 3 arbitrators). Although arbitration can sometimes be quicker than court litigation, the parties must pay for the costs of the tribunal, and that can be a significant cost. Arbitration is also less suited to multi-party disputes.
This is only a whistle-stop tour of the issues and so please do contact us for more detailed advice.