Is your dispute resolution clause Brexit-ready?

Claire StockfordPosted by

In the deal-making environment, dispute resolution clauses are often neglected. The parties, understandably, devote most of their attention to the substance of the deal – who will do what, when and for how much – rather than planning for how disputes will be resolved if the deal goes wrong. Nonetheless, there is merit in giving proper thought to dispute resolution, particularly with Brexit uncertainty looming.

This post will start by looking at a number of the points parties should consider when drafting dispute resolution clauses, before moving on to look at the situations in which the uncertainties around Brexit should play into those considerations.

What to consider when drafting a dispute resolution clause

The first point to consider is what should be the governing law of the contract. This will often be influenced by the jurisdiction(s) in which the parties operate. If both are based in the same jurisdiction, they will in many cases be happy to have their contract governed by the law of that jurisdiction. However, if the parties are based in two (or more) different jurisdictions, neither may wish to opt for the other party’s home state law, with which they are unfamiliar and may feel gives their counterparty an advantage. Often in these circumstances the parties will chose a “neutral” governing law. It is important to obtain advice on the chosen governing law, to avoid any unintended consequences.

The next point to consider is the method of dispute resolution. Should the contract provide for litigation, arbitration or some other form of alternative dispute resolution (ADR)? If litigation, which courts should have jurisdiction? That might be an easy decision if both parties are from the same jurisdiction but can become more complex if the parties are from different jurisdictions. Is one party happy to litigate in the home state of the other? If not, can the parties agree on a neutral third country in which to litigate? Brexit uncertainty could complicate this choice.

If the parties opt for arbitration they will need to consider the seat (the law of the seat will govern, e.g. whether applications can be made to the local courts for interim measures such as an injunction), the language of the procedure, how many arbitrators will form the tribunal and how they should be nominated. They will need to consider whether the procedure should be governed by the rules of one of the arbitration institutions such as the London Court of International Arbitration (LCIA) or International Chamber of Commerce (ICC), or run on an ad hoc basis.

There are also other dispute resolution options available, such as expert determination and adjudication, although in practice these are rarely used outside a few sectors, such as the construction and engineering industries.

Additional Brexit-related considerations

The tentacles of Brexit spread into every area of commercial life, and dispute resolution is no exception. The good news is that if your deal is between UK entities and any assets you would want to enforce a judgment against are also in the UK, Brexit should not affect a choice to resolve your disputes in the UK courts. The UK courts remain highly regarded around the world as a good venue for the resolution of disputes. Similarly, if you favour arbitration, even for a cross –border matter, Brexit should not affect the resolution of your dispute. Arbitral awards are usually enforced under the New York Convention, to which 159 states are signatories (including all EU member states).

The Convention provides that contracting states shall recognise arbitral awards emanating from any of the other contracting states as binding and enforce them as if they were domestic awards, so there should be no additional enforcement risk as a result of Brexit. However, if your preferred method of dispute resolution is litigation you will need to think about the consequences of the UK’s withdrawal from the EU.

Jurisdiction and the enforcement of judgments

Jurisdiction and the enforcement of judgments between EU Member States is currently governed by the Recast Brussels Regulation (the Regulation). The Regulation sets out rules applicable to all EU member state courts, requiring them to respect written agreements on the jurisdiction for resolving disputes, and a general rule that where there is no agreement on which courts should have jurisdiction, defendants should be sued in the state in which they are domiciled. Post-Brexit, these rules will no longer apply with regards to the UK.

The Regulation also provides that a judgment rendered in one Member State shall be recognised in another without any special procedure being required and shall be enforceable in that Member State without any declaration of enforceability being required.

Arrangements after Brexit

Unless provision is made for this arrangement to continue post Brexit, when the UK leaves the EU the provisions of the Regulation will no longer apply, meaning that it will potentially become a lot more challenging to enforce a UK judgment in an EU Member State and vice versa. This arguably makes arbitration a more attractive option for EU cross-border dispute resolution until we know what provisions the Brexit deal will make for recognition and enforcement of judgments across the UK/EU border.

It is always been advisable to give full consideration to how disputes should be resolved when making a contract. A small amount of time devoted to thinking about dispute resolution at the drafting stage could save a lot of money and a lot of time later on, should a dispute arise. Brexit brings to bear some additional considerations, particularly there is involvement from both the UK and one or more of the EU 27 states, whether in the deal itself or in any future enforcement.

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