Brexit and dispute resolution clauses: the options for finance parties

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The end of the Brexit transition period on 31 December 2021 marked a period of momentous change in the field of private international law, with the UK departing from long standing regimes covering the allocation of jurisdiction, the enforcement of judgments and governing law.

On jurisdiction, from 1 January 2021 the UK Is no longer bound by the Brussels Recast Regulation and the Lugano Convention. This means that, save in legacy cases, English jurisdiction clauses and English judgments will no longer benefit from near automatic recognition under these longstanding regimes in EU Member States, Switzerland, Iceland and Norway.

Also, on 1 January 2021 the UK re-joined the 2005 Hague Convention on Choice of Court Agreements (the Hague Convention) as an independent sovereign state. Under this international treaty, English exclusive jurisdiction clauses within scope and resulting English judgments will be recognised in other contracting states: currently this includes all EU Member States, Singapore, Mexico and Montenegro.

As a result, we may see some shift in the approach to disputes clauses over the coming months. It is widely considered that only mutually exclusive English jurisdiction clauses fall within the scope of the Hague Convention and so financial parties may consider adapting their asymmetric jurisdiction clauses on new deals to include mutually exclusive English jurisdiction clauses so as to benefit from enforcement under the Hague Convention where a borrower has assets in those EU member states (or other Hague jurisdictions) where enforcement might otherwise be problematic.

The UK Government has applied to re-join the Lugano Convention as an independent sovereign state. This application is pending, with Switzerland, Iceland and Norway indicating their consent. The EU’s position however remains unclear and re-accession requires unanimity. If there is positive movement on the UK’s pending application in the short term, any market shift away from asymmetric jurisdiction clauses may be less pronounced. Finance parties may be content to rely upon the recognition and enforcement regime under the Lugano Convention (which covers a wider range of jurisdiction clauses than the Hague Convention, as well as other jurisdictional grounds). Pending re-accession, where enforcement is a priority, and the borrower has assets in a non-Hague jurisdiction, finance parties may consider a pure arbitration clause to be a more suitable disputes clause.

On governing law, the position from 1 January 2021 can be described as ‘business as usual’; with the UK transposing Rome I and Rome II into UK domestic law, with only minor amendments. These codified regimes on the applicable law for contractual and non contractual obligations will continue to be applied by English courts and English law will continued to be respected as the chosen law in commercial contracts by EU Member State courts on essentially the same basis as previously.

The selection of English law is therefore likely to continue to be a popular choice for commercial parties for this reason (as well as for reasons of legal certainty, commerciality, availability of precedents and flexibility).

Commercial parties will no doubt continue to watch developments in this area closely over coming months.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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