Post-Brexit: should our contracts still have English law and jurisdiction clauses?
Published on 6th Nov 2017
English law and jurisdiction will continue to be a sound choice for international contracts, regardless of the form that Brexit takes. English governing law and jurisdiction clauses are likely to continue to be widely recognised by courts in other jurisdictions, and English judgments enforceable. Where there are commercial pressures to avoid London courts, international arbitration in England, which is essentially ‘Brexit-proof’, may well offer the answer.
Why does it matter what governing law and jurisdiction we agree to?
In the rush to get a contract signed, and particularly where the in-house lawyer is only brought in at the last minute, there can be limited commercial or practical opportunity to negotiate ‘boilerplate’ terms like governing law and jurisdiction.
If the contract runs entirely smoothly, these terms may not matter at all. However, disputes can and do arise, and when this happens in an international contract, the choice of law and jurisdiction can make all the difference.
Depending on the governing law, the same words in a contract can at times be interpreted in very different ways. For example, English courts are very reluctant to imply the sort of general good faith obligations that are common in many other European jurisdictions. Your contract might contain a termination right, but whether you are able to exercise that right could depend on which law you have agreed will apply.
The choice of jurisdiction can at times have an even greater impact. Compared to many jurisdictions, litigation in the UK is relatively speedy, with judges used to proactively managing cases and making interim rulings where urgency is required. By contrast, litigation in some other jurisdictions can be notoriously slow, with crafty opponents able to obtain lengthy adjournments and multiple automatic rights of appeal.
In the most extreme cases, the choice of law and jurisdiction can render essential contractual rights effectively unenforceable. Getting it right at the outset can make all the difference down the line.
Why are English law and jurisdiction popular for international contracts?
It is often said, with good reason, that English law is the law for international contracts.
Amongst the factors that make English governing law attractive are the following:
- it is well known by businesses across the world;
- it is well developed and therefore offers a high degree of certainty – owing to the combination of a common law (precedent-based) system and the volume of disputes involving English law and courts;
- it allows contracts to be interpreted in their commercial context, and has at its heart the principle of contractual autonomy; and
- the English common law and equitable principles are flexible enough to allow the courts to deal with unexpected situations.
Likewise, the English courts are very commonly chosen as the forum for resolving disputes in international contracts, because:
- the courts have highly experienced and able lawyers as judges;
- the court system is widely respected for its independence and impartiality;
- the courts do not, in general, grant punitive damages and awards are set by judges, not juries;
- proceedings are conducted in English;
- cases proceed (relatively) efficiently and expediently, with judges taking a proactive approach to case and cost management;
- the English courts are used to granting interim injunctions, in support of preserving assets and enforcing judgments;
- the English courts are very experienced in dealing with complex international disputes, including those involving conflict of law and jurisdiction issues and the application of foreign laws; and
- the English procedures for disclosure of documents and cross-examination of witnesses are considered by many to be an important part of obtaining justice.
How will Brexit affect English governing law and jurisdiction provisions?
The regime relating to governing law will be largely unaffected by Brexit. The EU Rome I Regulation (which the UK government intends to adopt into national legislation) sets out the rules under which EU courts decide issues of governing law for contracts. The guiding principle is that the courts will give effect to governing law clauses – whether they specify the law of an EU Member State or any other jurisdiction. This freedom to choose governing law will be restricted in certain types of contract such as employment contracts or contracts relating to land, and any mandatory national rules of the place of the contract, such as terms implied into consumer contracts in the UK under the Sale of Goods Act. These restrictions apply whether the place of the contract is within or outside the EU.
Post-Brexit, courts in EU Member States and the UK will therefore continue to respect an English governing law clause.
The EU regime that applies to questions of jurisdiction and recognition of civil judgments involving EU Member States is the EU Recast Brussels Regulation. As with the Rome I Regulation, this is based on the principle that where the parties have chosen the applicable jurisdiction, that choice should be respected. It also provides for a simplified mechanism for the recognition and enforcement of judgments of another jurisdiction. However, unlike the Rome I Regulation, these provisions only apply as between EU Member States.
After Brexit, the Brussels Regulation regime will not therefore apply to the UK. However, as we have previously explained, there are a number of potential alternatives to the Brussels Regulation. As we have also reported, the UK has said that it intends to seek a solution that is as close as possible to the existing regime. Even under the fall-back position, where questions of jurisdiction are determined according to national law, express jurisdiction clauses are still generally respected, and judgments of other courts enforceable. The procedures involved may not be as streamlined as under the Brussels Regulation, but where conflicts of law and jurisdiction, and international enforcement, are involved, proceedings are rarely entirely straightforward, whatever regime applies.
What about arbitration?
In most commercial contracts, it is open to the parties to opt for disputes to be resolved by international arbitration, rather than by the courts of any particular country. There are a number of reasons why some parties choose international arbitration, including:
- the perceived neutrality of arbitral tribunals, with the parties able to nominate their own arbitrators, or process for choosing arbitrators;
- the ability of parties to choose whatever governing law they wish, independent of the ‘seat’ of arbitration;
- the application of the New York Convention, which has been ratified by over 150 countries, for the enforcement of arbitral awards;
- the document production process is generally less wide-ranging than in jurisdictions such as England and Wales, which can be preferable in certain circumstances;
- the confidentiality and privacy of the process; and
- depending on the institutional rules chosen and the seat of arbitration, the availability of expedited procedures and interim relief (injunctions) granted by either the courts or the tribunal itself in support of the arbitration.
As the legal framework for arbitration and the enforcement of arbitral awards is not established by EU law, nor dependent on the UK’s membership of the EU, Brexit will have little, if any, effect on international arbitration. That is why international arbitration is being described as a ‘Brexit-proof’ dispute resolution mechanism.
So, should we continue using English law and jurisdiction clauses?
If your preference is English law and jurisdiction, there is no reason why you should not continue to use this combination post-Brexit. There are a number of practical and legal factors that influence the choice of governing law and jurisdiction, which are likely to override any limited uncertainties about applicable procedures for enforcement post-Brexit.
If there are practical or commercial reasons why you might want/need to offer an alternative to the English courts as your choice of forum, you could consider the combination of English law and international arbitration as the forum, which some will see as a politically neutral, Brexit-proof option. There are a number of factors, in addition to those listed above, which may determine whether international arbitration is suitable for your contract, and you would need to consider issues such as the applicable seat or arbitration and rules of arbitration.
Whether enforced through arbitration or litigation, what seems clear is that Brexit is unlikely to affect the prevalence of English law for major international contracts.