As the UK adjusts to life outside the EU, Fieldfisher dispute resolution specialists Donna Goldsworthy and Anastasiya Lutsenko consider why arbitration may now be the best option for UK-based parties seeking to resolve cross-border disputes.
On 24 December 2020, the UK and the EU agreed terms of the EU-UK Trade and Cooperation Agreement ('TCA'). The TCA regulates UK-EU relations now that the UK has legally left the EU, as of 31 December 2020.
Unfortunately, the TCA did not include any provisions to help preserve the pre-Brexit status quo with regards to EU cross-border civil litigation processes.
Therefore, parties who currently conduct and wish to continue conducting international business in the EU need to carefully consider the dispute resolution mechanisms and jurisdiction clauses in their contracts, in view of potential barriers to the enforcement of English and EU judgments in their respective jurisdictions.
For example, is there an exclusive jurisdiction clause in the contract? What type of contract is it?
No automatic recognition and enforcement
For claims commenced prior to 31 December 2020, English judgments could be recognised and enforced within the EU as if they were judgments of other EU Member States, by virtue of the Recast Brussels Regulation (EU) 1215/2012 ('Recast Brussels Regulation').
For claims commenced from 1 January 2021 onwards, parties with an English judgment wishing to enforce within the EU (and vice versa) will no longer have the benefit of direct recognition and enforcement, which was previously afforded by the Recast Brussels Regulation.
While the UK applied to join the 2007 Lugano Convention in its own right, the EU, as of February 2021, has not consented to the UK joining this regime.
Until such time that the UK accedes to the 2007 Lugano Convention in its own right, where proceedings initiated on or after 1 January 2021, the claimants will need to consider:
The 2005 Hague Convention on Choice of Court Agreements – this applies to contractual disputes where there is an exclusive jurisdiction clause in favour of the English Court. However, certain categories of contract such as consumer, employment and insurance are specifically excluded from the remit of the 2005 Hague Convention on Choice of Court Agreements ('Hague Convention');
Whether any bilateral treaties dealing with enforcement exist between the relevant EU Member State and the UK; and
The local laws of the EU Member States regarding enforcement of the English judgments. Although it is likely in many cases, that EU will allow enforcement of English judgments in EU Member States in accordance with domestic laws, parties must be aware of potentially increased costs and delays.
If looking to rely upon the Hague Convention, parties will need to confirm when their exclusive jurisdiction clause was entered into as there is currently some uncertainty around whether other EU Member States will uphold exclusive jurisdiction clauses entered into after 1 October 2015 (when the Hague Convention came into force for the EU and the UK was still a member) but before 1 January 2021 (when the UK joined the Hague Convention in its own right).
In all other cases, without the Brussels Regulation or its equivalent, and until there is clarity on the UK's future participation in the 2007 Lugano Convention, the domestic laws of each EU Member State apply to enforcement of English judgments.
The inevitable uncertainties, which have been brought about by the changes to civil litigation post-Brexit, have shifted many businesses' focus to arbitration as an alternative.
Why choose arbitration?
Arbitration is a popular alternative to civil litigation. It is a proper adjudicative method of cross-border dispute settlement characterised by the binding nature of the decisions taken by an independent sole arbitrator or a panel of arbitrators, who are usually chosen for their expertise in a particular area, and by the enforceability of its awards.
Contrary to the functioning of the UK's domestic legal system, no dispute can be settled by arbitration without the prior agreement by the parties involved.
The UK's withdrawal from the EU has had no impact on the enforcement of English arbitral awards within the EU. This is by virtue of the UK and EU both being signatories to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 ('The New York Convention') – a convention wholly unrelated to the UK's former membership of the EU.
Only contracting states, of which there are more than a hundred worldwide, can benefit from its enforcement of awards provisions. The New York Convention, with exception of some very limited circumstances, provides a forum for recognition and enforcement of English arbitral awards in EU Member States and vice versa.
According to its 2019 casework report (which refers to claims underway in 2020), the LCIA alone received 406 referrals and recorded 346 arbitrations under its Rules, the highest figure ever, despite being in the midst of a global pandemic.
Parties who choose to arbitrate under the arbitration rules or the protective provisions of an international treaty will generally have a more controlled and certain method of enforcement of the arbitral awards.
Brexit has encouraged many businesses to reflect on the suitability of their dispute resolution strategy. Recent trends show that many international businesses are more likely to consider using arbitration as a mechanism for resolving disputes.
Due to the complex technical nature of some types of disputes such as the large-scale energy disputes that arise, the existing preference for arbitration is no surprise given the parties are free to choose industry expert arbitrators to determine their claim.
Other businesses, such as banking and finance, are beginning to open up to the idea of using arbitration.
Stability and binding precedent when construing financial contracts have been the driving forces behind choosing civil litigation over arbitration for these businesses in the past.
The UK's withdrawal from the EU has meant that businesses across different sectors have had to reconsider dispute resolution clauses in their international investment and trading contracts;
There is now no automatic recognition and enforcement of English judgments on or after 31 December 2020 in the courts of EU Member States;
The use of exclusive jurisdiction clauses in contracts may be favourable in order to circumvent issues with enforcement in EU Member States;
Parties may increasingly turn to arbitration, as an alternative method of resolving international disputes because the New York Convention provides a reliable enforcement regime of arbitral awards in the EU Member States;
Recent trends indicate that more businesses are willing to include arbitration provisions in international contracts.
In UK-EU disputes, parties will now need to consider a myriad of current and past regimes to identify how best to enforce an English judgement.
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