Four recent developments highlight the benefit of arbitration clauses amidst uncertainty about choice of court clauses.

Introduction

With the end of the Brexit transition period on 31 December 2020 fast approaching, four new important and interrelated developments have highlighted uncertainty about which courts will have jurisdiction in cross-border disputes and the enforcement of judgments from 1 January 2021:

1. On 27 August 2020, the EU Commission published a revised Notice setting out its view of how various conflict of laws issues will be determined post-Brexit, including jurisdiction and the enforcement of judgments (the EU Notice).[1]
2. On 28 September 2020, the UK deposited its instrument of accession to the Hague Convention on Choice of Court Agreements 2005 (Hague Convention 2005), ensuring continuity in application of the Hague Convention 2005 after the end of the Brexit transition period.[2]
3. On 30 September 2020, the UK Ministry of Justice published “Cross-border civil and commercial legal cases: guidance for legal professionals from 1 January 2021” (the MoJ Guidance),[3] which is the UK equivalent to the EU Notice.
4. On 1 October 2020, the deadline passed for the UK’s accession to the Lugano Convention 2007 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Lugano Convention 2007) to be approved in time for it to apply as of the end of the Brexit transition period, absent some work-around agreed at the time of any eventual Free Trade Agreement (FTA).

These developments and their implications are described in further detail below, including two key issues of uncertainty with regards to the Hague Convention 2005 that may be tested in the courts in due course.

The Lugano Convention 2007

Latham previously published a post on the UK’s plan to accede to the Lugano Convention 2007, the UK’s preferred regime for governing questions of jurisdiction and the enforcement of judgments with EU countries after the end of the Brexit transition period on 31 December 2020. As described in that post, the Lugano Convention 2007 largely replicates the existing regime for jurisdiction and the enforcement of judgments between the UK and EU (albeit with some noteworthy differences), and would therefore ensure a high degree of continuity once the transition period ends.

Accession to the Lugano Convention is a four-step process. Step one was accomplished on 8 April 2020 when the UK applied to join. Step two requires the EU (along with the other contracting parties) to approve the UK’s application to join, followed in step three by the UK depositing the instrument of accession. Step four is a three-month period, during which the EU (or any other contracting state) may object, in which case the convention will not enter into force between the UK and that party. Only after that three-month period has expired does the convention enter into force.

Therefore, in order for the Lugano Convention 2007 to have entered into force by 1 January 2021 after the end of the Brexit transition period, the UK had to have received the EU’s approval and deposited its instrument of accession by 1 October 2020. Neither have occurred.

The last minute nature of any deal between the UK and EU as to the regime governing jurisdiction and enforcement of judgments after Brexit may well have always been inevitable — after all, the EU’s negotiating mantra throughout Brexit, as embodied in the European Council’s negotiating guidelines, has always been “nothing is agreed until everything is agreed”.[4] If the UK’s request to join the Lugano Convention 2007 is eventually approved by the EU, that approval likely will only be granted alongside the agreement of an overall FTA — and, absent some workaround, that approval will now come too late for the Lugano Convention 2007 to be in force by the end of the Brexit transition period. The likelihood of the EU approving the UK’s request to join in a “no FTA” scenario now seems remote.

Notably, the EU Notice makes no mention at all of the Lugano Convention 2007, presumably reflecting the EU’s approach to negotiating the UK’s accession. Instead the EU Notice envisages a situation in which the UK is a contracting party to the Hague Convention 2005 but has not acceded to the Lugano Convention 2007.

The Hague Convention 2005

Without the Lugano Convention 2007, the default position after the end of the transition period is that jurisdiction and enforcement of judgments for new cases issued in England and Wales will be determined by the common law, supplemented by the Hague Convention 2005.

The Hague Convention 2005 gives effect to exclusive choice of court clauses, and provides for judgments given by courts that are designated by such clauses to be recognised and enforced in other contracting states. The contracting states include the EU, Singapore, Mexico, and Montenegro. The USA, China, and Ukraine have signed the Hague Convention 2005, but have not ratified or acceded to it, and it therefore does not currently apply in those countries.

The UK is currently a contracting party to the Hague Convention 2005 because it continues to benefit from the EU’s status as contracting party until the end of the Brexit transition period on 31 December 2020. The EU acceded on 1 October 2015. By (re-)depositing the instrument of accession on 28 September 2020, the UK will ensure that the Hague Convention 2005 continues to apply seamlessly from 1 January 2021.

There are however two major contentious issues with regards to the material and temporal scope of the Hague Convention 2005, and the EU and UK’s positions differ on those issues. They are likely to provoke litigation in years to come.

1. Material scope: what is an “exclusive choice of court agreement”?

The Hague Convention 2005 only applies to exclusive choice of court agreements (Article 1), so the issue of whether a choice of court agreement is “exclusive” or not is critical to whether the convention applies.

Exclusive choice of court agreements are defined in Article 3(a) as those that designate “for the purpose of deciding disputes which have arisen or may arise in connection with a particular legal relationship, the courts of one Contracting State or one or more specific courts of one Contracting State to the exclusion of the jurisdiction of any other courts”.

Non-exclusive choice of court agreements are defined in Article 22(1) as choice of court agreements which designate “a court or courts of one or more Contracting States”.

Although this is a fairly clear distinction with regards to “simple” choice of court agreements, “asymmetric” or “unilateral” agreements are not so easily categorised. These types of jurisdiction agreements are a common feature of English law governed finance documents (such agreements appear in many Loan Market Association standard forms). They generally give one contracting party (the lender) the choice of a range of courts in which to sue, while limiting the other party (the borrower) to the courts of a single state — usually the lender’s home state.

There are divergent views as to whether asymmetric choice of court agreements are exclusive or non-exclusive for the purposes of the Hague Convention 2005. Two English High Court judges have expressed the view, obiter, that there are “good arguments” that choice of court agreements should be regarded as exclusive under the convention.[5] However, the explanatory report that accompanied the Hague Convention 2005,[6] case law in EU jurisdictions,[7] a report by the Financial Markets Law Committee (FMLC),[8] and academic commentary all suggest the opposite.[9]

One sensible way of resolving this issue in the future could be for the UK and EU to make reciprocal declarations that the Hague Convention 2005 applies to non-exclusive jurisdiction agreements as well as exclusive jurisdiction agreements, as is contemplated in Article 22 of the convention, but there has been no indication to date by either the UK or EU that they intend to do so.

2. Temporal scope: when did the convention “enter into force” in the UK?

The Hague Convention 2005 only applies to exclusive choice of court agreements concluded “after its entry into force for the State of the chosen court” (Article 16).

The EU Notice therefore states that the convention will only apply between the EU and UK to exclusive choice of court agreements “concluded after the Convention enters into force in the United Kingdom as a party in its own right to the Convention” — i.e., from 1 January 2021.

The MoJ Guidance, on the other hand, states that the Hague Convention 2005 “will continue to apply to the UK (without interruption) from its original entry into force date of 1st October 2015”, which is when the EU became a signatory to the convention, at which time the convention also entered into force in the UK by virtue of the UK being an EU Member State. The UK even took the step of spelling this out in the declaration that accompanied its deposit of the instrument of accession, stating: “the United Kingdom considers that the 2005 Hague Convention entered into force for the United Kingdom on 1 October 2015 and that the United Kingdom is a Contracting State without interruption from that date.”[10]

Most UK commentators (perhaps unsurprisingly) share the MoJ’s view. Those commentators include Professor Trevor Hartley, writing on behalf of the FMLC, who also co-wrote the explanatory report for the Hague Convention 2005.[11]

Conclusion

As with Brexit more generally, the issue of which regime will govern jurisdiction and the enforcement of judgments as between the UK and EU remains uncertain.

One thing seems clear however — the Hague Convention 2005 is set to play a bigger role in the future. The issues around its material and temporal scope likewise seem set to cause controversy given the apparent divergence in views between the UK and EU as to their proper interpretation. These may need to be resolved in the courts in due course.

In the meantime, parties may want to consider including arbitration clauses in their contracts. The recognition and enforcement of arbitral awards is governed by an entirely different treaty, the New York Convention,[12] and is unaffected by Brexit, as discussed in this Latham blog post. The authors expect London to maintain its reputation as one of the most popular and trusted arbitral seats in the world.

Latham will provide further updates as developments continue to unfold.

This post was prepared with the assistance of James Mathieson in the London office of Latham & Watkins.

[1] https://ec.europa.eu/info/sites/info/files/brexit_files/info_site/civil_justice_en.pdf

[2] This is the second time the UK has deposited its instrument of accession — having first deposited it on 28 December 2018 and then withdrawn it on 31 January 2020 when the UK left the EU and entered the Brexit transition period.

[3] https://www.gov.uk/government/publications/cross-border-civil-and-commercial-legal-cases-guidance-for-legal-professionals-from-1-january-2021/cross-border-civil-and-commercial-legal-cases-guidance-for-legal-professionals-from-1-january-2021

[4] https://www.consilium.europa.eu/en/press/press-releases/2017/04/29/euco-brexit-guidelines/

[5] Jacobs J at para. 217 of Etihad Airways PJSC v Prof. Dr. Lucas Flother [2019] EWHC 3107 (Comm).

[6] Hartley and Doguachi Explanatory Report, June 2005, page 37.

[7] See for example a recent case in the Piraeus Court of First Instance nr. 3106/2019, described here: https://conflictoflaws.net/2020/first-contact-of-greek-courts-with-the-2005-hague-choice-of-court-convention/

[8] http://fmlc.org/wp-content/uploads/2018/03/brexit_-_english_law_and_jurisdiction_paper.pdf at para 5.4; http://fmlc.org/wp-content/uploads/2019/10/Hague-Convention-report.pdf at para 2.4.

[9] See e.g. B. Marshall, “The 2005 Hague Convention: A Panacea for Non-Exclusive and Asymmetric Jurisdiction Agreements Too?”, in Douglas et al (eds.), “Commercial Issues in Private International Law: A Common Law Perspective” (Hart, 2019).

[10] https://www.hcch.net/en/instruments/conventions/status-table/notifications/?csid=1318&disp=resdn

[11] http://fmlc.org/wp-content/uploads/2019/10/Hague-Convention-report.pdf

[12] The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958.