No Deal in effect: A hold to the free movement of judgments

The UK and the EU recently, to the relief of many businesses, agreed to a wide-ranging Brexit trading deal a few days before the end of the transition period. The deal leaves, however, the European civil judicial cooperation, among other areas, outside of the deal, in no-deal territory. This will with immediate effect impact the enforcement of English jurisdiction clauses and the recognition and enforcement of English judgments in the EU. This is particular relevant to certain matters such as the carriage of goods that now fall outside any common legal framework. While Brexit has brought forward many theoretical issues, this is an instance in which the no-deal scenario has actually materialised. Commercial parties should therefore carefully review the consequences and manner of agreeing to English jurisdiction.

The Christmas Deal

Almost 4½ years since the referendum, the United Kingdom and the European Union reached a post-Brexit Trade and Cooperation Agreement on Christmas Eve 2020. The agreement was provisionally ratified by both the European and the British Parliaments just days prior to the Brexit transition period ending on 31 December 2020. It is expected to receive final approval by the deadline set on 28 February 2021.

The deal has, for obvious reasons, been greeted with great relief by many British and European businesses that feared imminent disruptions in trade in the absence of a deal, i.e. with no detailed trading framework other than the WTO terms which would entail tariffs on goods and (even) harder borders^[1]. Now, a framework exceeding 1,200 pages covering a wide range of matters has diligently been prepared. The agreement covers the export/import of goods and provides for minimum regulatory standards in in areas such as health and safety, environmental protection and labour rights, tax transparency and state aid restrictions and it regulates the EU Member States’ access to fish stocks in British waters, among many other areas.

As most actors have readily recognised, the deal still has significant, unfortunate shortcomings, depending on the perspective. It sets in place a new bureaucracy for the export/import of goods and allows for divergent regulations to be adopted in the UK compared to the EU (within certain restrictions) leading to less uniformity and more complexity for businesses operating on both sides of the English Channel. More significantly, the deal is silent on many areas, including most services. For instance, British financial institutions will no longer possess a ‘passport’ (authorisation) required to serve the single market. They will have to, as many have already, move or set up (authorised) subsidiaries in an EU Member State.

One matter that has received little attention is the treaty’s apparent lack of any provisions relating to judicial cooperation in civil matters, including the administration of cross-border disputes and the recognition and enforcement of foreign judgments. These matters have been governed by detailed EU regulations that continued to apply in respect of the UK until the end of the transition period, i.e. 31 December 2020, under the Brexit Withdrawal Agreement concluded between the EU and the UK on 17 October 2019.

Now, however, based on the new, published agreement – that is silent on the matter – and based on the prior communications by the EU Commission and the UK Government, it appears that the EU regulations will no longer apply in respect of the UK in respect of legal proceedings that have not yet been initiated in either the UK or the EU. It is, in effect, a no-deal Brexit for the juridical cooperation. The courts will now be compelled to make use of the non-EU treaties and national laws that may apply to the matter.

The purpose of this newsletter is to describe how this new reality may affect the resolution of disputes between commercial parties in the UK/EU. In particular, the newsletter will consider the consequences for parties that have made or are considering making contracts subject to English court jurisdiction.

The European Judicial Cooperation in Civil Matters

Beginning in the days of European Community, the EU has gradually developed and expanded the European judicial cooperation in civil matters. The aim has been to support the efficiency of the single market and to enhance the access to justice by facilitating the ‘free circulation’ of judgments across the Member State borders and to remove other national barriers, e.g. on the service of writs and judicial documents.

The key instrument is the Brussels I Regulation (Recast) of 2012^[2]. This regulation puts in place uniform rules on jurisdiction and the recognition and enforcement of judgments from other Member States that are directly applicable in all EU Member States^[3]. The aim is to enhance the mutual trust between the courts. The regulation prohibits courts of exercising jurisdiction in cases in which proceedings have already been instituted in other Member States (save in the event the court subsequently seised is designated under an exclusive jurisdiction clauses)^[4]. The regulation provides for a uniform and efficient system for the recognition and (direct) enforcement of judgments in other Member States without any (national) procedure being required. The regulation has generally been viewed as a significant success to the integration of the union. A similar system is in place in respect of the EFTA states (Norway, Iceland, Switzerland and Lichtenstein) under the 2007 Lugano Convention (that is based on the original Brussels I Regulation of 2001)^[5].

In addition, the EU has issued several regulations to further facilitate the judicial cooperation, including the Service Regulation^[6], the European Order for Payment Procedure^[7] and the Evidence Regulation^[8].

Supplementary to its own regulations, the EU has ratified the 2005 Hague Convention on Choice of Court Agreements (see below) which allows for the recognition of judgments in the contracting states. This convention is mainly important in respect of third countries. The 2005 Hague Convention may therefore apply to EU’s relationship with the UK without any deal being made between the EU and the UK.

The 2005 Hague Choice of Court Convention

On 1 October 2015, the 2005 Hague Convention on Choice of Court Agreements^[9] came into force in the then-contracting states. As of 1 January 2021, the convention has been ratified by the Denmark^[10], the European Union (on behalf of all member states other than Denmark), Singapore, Mexico, Montenegro and, crucially, the United Kingdom^[11]. The convention has been signed, but not ratified, by other states including the United States and China. It is unclear when, if ever, the convention will be ratified by these states^[12].

In case the parties to a commercial transaction have entered into an exclusive jurisdiction agreement (i.e. designating the courts of a single contracting state), the courts of the other contracting states shall abstain from exercising jurisdiction in the same matter^[13]. Furthermore, the judgments of the courts of the chosen state (‘state of origin’) should be recognised and enforced in the other contracting states subject to certain defences, including the lack of legal capacity, due process violations and public policy^[14].

The convention applies, as a starting point, to all international civil and commercial law (like the Brussels I Regulation (Recast))^[15]. Compared to the Brussels Regulation, the Hague Convention has, however, a more limited subject matter scope and it offers less protection to the integrity of the court proceedings pending the final judgment. We will highlight the following differences between the two instruments:

1. The Hague Convention excludes several substantive matters from its scope. Particularly within the maritime and transportation sectors. Most importantly, it does not apply to the carriage of passengers and goods^[16]. This is based on the, in our view, flawed assumption that the matter is (sufficiently) regulated by other conventions, in particular the 1924/1967 Hague Visby Rules^[17]. The Hague Visby Rules contain substantive rules on the carrier’s liability for the carriage of goods by sea but include no provision on jurisdiction and the recognition of any foreign judgments. Not even the 1980 Hamburg Rules which contain a provision on court jurisdiction provide safeguards for the enforcement of judgments issued by (competent) courts^[18]. While some contracting states to these convention have unilaterally enacted statutory provisions giving effect to foreign judgments, this does not apply to all. As to vessel passengers’ claims, such will internationally often be regulated by the Athens Convention of 1971/2002. While ratified by the EU, the EU explicitly left out the jurisdiction provisions of the Athens Convention as such matters were covered by (now) the Brussels I Regulation (Recast)^[19]. Consequently, no uniform provisions on judgments will apply to the recognition of English judgments on passenger claims. In effect, the Hague Convention has, for no good reason, excluded disputes relating to the carriage of goods and passengers at sea. Similar issues may arise relating to the carriage of goods and passengers with other means of transport.
2. Among other matters, The Hague Convention will also not apply to marine pollution, general average and limitation of liability for maritime claims (while other maritime matters are covered); matters relating to personal injury; and matters on the validity of intellectual property rights and the infringement of certain intellectual property rights. In addition, the Hague Convention will also not apply between the EU and the UK to certain insurance contracts^[20].
3. Moreover, the Hague Convention only applies to exclusive jurisdiction agreements. This is defined as agreements that provide that disputes under the agreement may only be brought before the courts of a single state. If the agreement provides that the jurisdiction agreement is non-exclusive (permitting the parties to institute proceedings before the courts of other states that may enjoy jurisdiction according to their own, declaratory rules) or if the exclusivity of the jurisdiction agreement is not confined to one state (for instance allowing one party to initiate proceedings in an alternative jurisdiction), the Convention will not apply^[21]. It is very commonplace in loan agreements to allow the lender to sue the borrower in any alternative jurisdiction at the lender’s choice and similar clauses are found in many business standard terms^[22]. Unfortunately for all these parties, the jurisdiction agreement in its entirety will in such case be ineffective under the Convention.
4. The Hague Convention does not apply to interim measures (such as interim injunctions and attachment orders)^[23] unlike the Brussels I Regulation (Recast) which contains an elaborate ruleset for such orders^[24]. This will likely hamper the effective powers of the chosen court^[25].
5. The Brussels I Regulation (Recast) provides for an effective, enforcement system with uniform standards for the enforceability of judgments. Foreign judgments are to be enforced directly with no particular national requirements. The Convention, on the other hand, still requires the foreign judgment to be declared enforceable in the enforcing state according to the procedures of that state^[26]. This will entail a more cumbersome, lengthy and (likely) costly enforcement process.

In summary, the Hague Convention will, despite its good intentions, likely not be a full, efficient replacement for the Brussels I Regulation (Recast) as most commercial parties would have likely hoped for^[27].

The transition from the Brussels to the Hague Framework

Under the Withdrawal Agreement, the Brussels I Regulation (Recast) will continue to apply to legal proceedings that were initiated in the UK prior to 31 December 2020 and govern the recognition and enforcement of foreign judgments rendered as part of such proceedings^[28]. The Brussels I Regulation (Recast) will, on the other hand, not apply to legal proceedings that had not been initiated by the 31 December 2020 regardless of whether the jurisdiction agreement was concluded prior to that date.

The Hague Convention applies only to jurisdiction agreement concluded after the Convention has entered into force for the state of the chosen court^[29]. As noted in the UK’ Hague declaration of 28 September 2020, the UK became bound by the Convention as of 1 October 2015 by virtue of its membership of the EU. Under said declaration, the UK then became bound, in its own right, effective 1 January 2021 when the transition period ended^[30]. The Convention will in this way largely ensure the integrity of the pre-existing English jurisdiction agreement (provided the agreement falls within the substantive scope of the Convention).

This arrangement solves some transition issues but not all. Disputes falling under English choice of court agreements concluded prior to 1 October 2015 for which legal proceedings have not yet been initiated in England, it appears, will in no event be covered by either the Brussels or the Hague framework. In respect of such disputes – whether such are pending out-of-court or are yet to arise at all – the national law of the member state concerned will determine whether an English jurisdiction agreement is to be respected by its courts and which effect, if any, that is to be given to an English judgment issued in such dispute.

National legal systems to solve the void – in conflict?

Further to the above, some commercial parties who entered into contracts subject to English law and English jurisdiction in the (then reasonable) expectation that the jurisdiction agreement would be protected by the Brussels I Regulation (Recast) may now be surprised to learn that it may not be case. Adding insult to injury, a substantial part of these contracts may not even fall under the Hague Convention due to its more limited substantive scope or due to jurisdiction agreement being asymmetrical (see item 1, 2 and 3 above).

If neither the Brussels, nor the Hague, regime applies, the question is whether the 1968 Brussels Convention will re-emerge between the UK and the then-contracting parties (the EU Member States as of 2005). As the Brussels I (Recast) Regulation provides that it should supersede the 1968 Brussels Convention “as between the Member States“ (which then included the UK) with the only explicit exception of certain territories of EU Member States^[31], it appears most likely that the 1968 Brussels Convention should not become applicable  (again). While contested by some academics, the EU Commission seems to take the same view^[32].

Hence, it is more likely that courts should look for any (old) bilateral treaty that may still apply between the UK and the state concerned^[33]. The UK appears to have entered into such treaties with France (1934), Belgium (1934), (West) Germany (1960), Italy (1964) and the Netherlands (1967)^[34]. The scope of these treaties are, however, often narrow. The 1960 UK-Germany treaty is, for instance, limited to money judgments.

In the absence of any applicable bilateral treaties, the issues can only be solved by the potentially conflicting, national rules of England and Wales and the Member State(s) concerned. This may give rise to a string of problems. For instance, the rules may differ as to whether the jurisdiction agreement in question fulfils the formal and substantive requirements that relate to its formation and validity. More fundamentally, however, some EU states do not have any statutory rules in place for the recognition of foreign judgments in the absence of a bilateral treaty (with the state of origin). These include Denmark and Sweden.

Other states, such as Germany, will only recognise foreign judgment (absent a bilateral treaty) on the condition of reciprocity, i.e. in case the state of origin would recognise a German judgment in the same situation^[35]. Under common law, English courts do not as such recognise foreign money judgment but treat them instead as a contract debt (that may be given legal effect on certain conditions) and it is unclear whether, for instance, German courts will consider the condition of reciprocity to be fulfilled. In any event, the common law rules do not apply to non-money judgments (allowing for no reciprocity).

Some states, such as France, appear to have a friendlier stance towards foreign judgments, not conditioned on reciprocity, which will likely allow for the continued recognition of some English judgments in France^[36]. The judgment defendant will, however, still enjoy more defences compared to the Brussels I Regulation (Recast) and the Hague Convention and the enforcement procedure will be less efficient and costlier.

Risks of non-recognition and parallel proceedings

The ultimate predicament to commercial parties will naturally arise if the matter falls outside the scope of the 2005 Hague Convention and where there is, consequently, no clear basis for the recognition of English judgments in the other relevant EU Member States despite the existence of an English jurisdiction agreement. In such case, there is a great risk of parallel proceedings in the EU/UK as;

• the English courts will consider themselves competent based on the jurisdiction agreement entered into between the parties pursuant to the English common law rules; and
• the courts of the EU Member States may decide to exercise jurisdiction, based on the default rules on jurisdiction of the Brussels I Regulation (Recast) or national law (due to the fact that the courts may find that the English jurisdiction agreement has no binding force in that Member State)^[37].

Non-recognition also opens time bar issues. Absent agreement, the claimant will always have to initiate legal proceedings within a certain time period in order to avoid that the claim will be time-barred. In the case the parties have agreed upon English law and jurisdiction, the claimant must, as a matter of English law, file the claim with the English courts. However, depending on the national laws of the Member State concerned, the court may find that such filing does not suspend the time limitation, simply because the court does not consider the English courts to be competent as to the claim at hand. The claimant may, in such case, potentially have to decide if it wants to the risk of violating the jurisdiction agreement (in the eyes of the English court) by initiating an action in a Member State (on pain of sanctions by the English courts).

We may hope that the courts will, as some national laws permit, allow its own courts proceedings to be suspended pending a ruling in another jurisdiction (e.g. England and Wales) despite the court not recognising the competence of the chosen court based on pragmatic considerations^[38]. It is, however, likely that these uncertainties and the complexities of parallel proceedings will lead to much litigation.

Next steps and our advice

In the next two months, the European Parliament, the British Parliament and each Member State parliament are expected to debate and ratify the Trade and Collaboration Agreement. If all parliaments give their consent to the Agreement prior to 28 February 2021, the agreement will become permanent.

When it comes to financial services, the UK and EU have agreed to continue the negotiations in the coming months with the aim of concluding a separate deal. No such ambition has been expressed, however, in respect of the European judicial cooperation. This may seem odd considering the established, close interaction between the UK and the EU. From the perspective of the UK, the remaining EU states account for 43% of all exports and 52% of all imports in 2019^[39]. Unavoidable, it seems, we will see a vast amount of cross-border contractual (and non-contractual) disputes that will now only on some instances be covered by a common (and much less efficient) jurisdictional framework, i.e. the 2005 Hague Convention.

Hence, it would make sense for the UK and the EU to initiate negotiations to provide a broader framework for the civil judicial cooperation^[40]. We are however yet to see any indication that it will come about. In the meantime, it seem obvious that the many potential issues will be left for the courts to settle.

Unfortunately to many commercial parties, the no-deal scenario has now actually materialised in respect of the judicial cooperation. We will therefore suggest that all parties that currently have standard terms subject to English court jurisdiction and/or are considering to entering into English jurisdiction agreement to carefully review whether the (contemplated) jurisdiction agreement falls within the scope of the 2005 Hague Convention and, for instance, whether it is necessary to remove a choice of alternative venues.

In some instances, in which the matter has no clear connection to the UK and/or in which enforcement in the EU is crucial to keep, the parties should consider the alternatives to English court jurisdiction.

Parties may consider agreeing upon London arbitration. English arbitration has, however, certain drawbacks. This includes the broad access to challenge the award in the English court system under the 1996 Arbitration Act on issues of the application of English law^[41]. The parties may then end up with an English judgment which, returning to the main problem, may not be recognised and enforced in the EU.

The safer, more obvious choice – in particular if there is no convincing reason to make the agreement subject to English law – would be for the parties to make its standard terms or contracts subject to the court jurisdiction of a Member State. This would remove the risk of parallel court proceedings and ensure that judgments may be enforced in any other Member State under the well-known Brussels regime.