Article

Choosing London: the effectiveness of exclusive choice-of-court agreements post-Brexit

Louise O’Callaghan

The implications of Brexit on private international law fail to make headlines. However, due to the overwhelming ‘europeanisation’ of this area, Brexit will have far-reaching consequences. EU law has drastically impacted the United Kingdom’s commercial judicial system, notably the procedure applicable to international commercial litigation. The Brussels I Regulation, and its Recast, determine which Member State has jurisdiction in a civil and commercial dispute involving an international element.

London maintains a dominant position as a jurisdiction of choice for international commercial disputes. While this reputation is built upon the experience of UK’s judges and the quality, certainty and efficiency of its legal system, it is heavily reliant on the procedural effectiveness guaranteed by the Brussels regime, especially with regards to choice-of-court agreements. A major accomplishment of the Brussels regime is ensuring the effectiveness of choice-of-court agreements by protecting them from pre-emptive proceedings in other Member States. However, post-Brexit, the Brussels regime will cease to apply to the UK. This paper examines whether choice-of-court agreements electing London will remain effective or whether they will be at risk of being undermined by pre-emptive strikes.

  1. Litigation Risk and Pre-emptive Proceedings

Commercial transactions involve many risks. However, pertinent to current discussion is litigation risk, in particular ‘venue risk’, being ‘the risk to each party that any dispute will not be resolved in their preferred forum.’[1] Choice-of-court agreements allow parties to manage this risk by contractually agreeing on a forum should a dispute arise. However, central to this choice being effective is the assumption that it will be respected and not undermined by proceedings in another court.

The phenomenon known as the ‘Italian torpedo’ is a procedural tactic that developed in intra-European commercial litigation. It operates whereby one party, often in breach of a choice-of-court agreement, pre-emptively initiates proceedings in another Member State. A pre-emptive strike provides a tactical advantage regardless of whether or not the court upholds the choice-of-court agreement. If the court holds the agreement as ineffective, the party is prejudiced as it faces further litigation in the non-chosen court. However, if the agreement is held to be valid, it is a ‘pyrrhic victory’ as the cost of defending the proceedings may be extensive and, moreover, justice delayed is justice denied. Furthermore, many Member States combine consideration of jurisdiction and the merits at a single hearing, which is doubly prejudicial, as pleading both issues simultaneously increases costs.[2] Clearly, the possibility of having to defend proceedings in a court other than that contractually agreed upon undermines choice-of-court agreements in their objective of minimising litigation risk.

  1. The Current Regime – from Brussels I to its Recast

The Italian torpedo was upheld by the Court of Justice of the European Union (CJEU) in Gasser v. MISAT. Gasser involved a choice-of-court agreement stipulating an Austrian court as the choice of jurisdiction, which MISAT breached by launching proceedings in an Italian court. In response, Gasser initiated proceedings in Austria, but was confronted with the lis pendens rule under Article 27 of Brussels I, requiring that if another court is already seised of a matter, the second court must decline jurisdiction. The Austrian court asked the CJEU whether it was obliged to apply Article 27 even when, due to a choice-of-court agreement, the first court clearly did not have jurisdiction. The Court, endorsing a strict application of the lis pendens rule, held that jurisdiction must be deferred to the court first seised, irrespective of a choice-of-court agreement. This decision was harshly criticised for, inter alia, nullifying the principle of pacta sunt servanda,[3] and undermining the core tenet of party autonomy.[4] It was recognised as creating additional costs and delays and undermining the legal certainty and predictability sought by choice-of-court agreements.[5] The crux of the issue raised by Gasser is one of competence-competence – the jurisdiction to determine jurisdiction.

To remedy this, the Brussel I Recast was introduced to reinforce the effectiveness of choice-of-court agreements. Article 25 of the Recast allows parties to designate a Member State court to have jurisdiction over any disputes which may arise in a particular legal relationship.[6] Article 31(2) establishes a reverse lis pendens rule – the court first seised must stay its proceedings pending the designated court’s decision on its jurisdiction. This confers sole competence on the designated court to determine its jurisdiction. The revised system enhances contractual management of litigation risk and allows party autonomy to prevail within the European judicial area. The result is extremely beneficial for commercial actors looking to reduce their litigation risk by means of exclusive choice-of-court agreements.

  1. Brexit – Life Outside the Brussels Regime

The UK’s position as a third-state would be problematic for commercial parties and for the minimisation of litigation risk under the Brussels regime. The protection afforded by Articles 25 and 31(2) of the Recast is limited to agreements in favour of EU Member States and does not extend to those stipulating jurisdiction of third-state’s courts. Moreover, the protection provided to third-state proceedings by the lis pendens rule in Articles 33 and 34 of the Recast only concern proceedings in third-state courts which are seised first; they do not address proceedings which are not first in time, but where there is an exclusive choice-of-court agreement in favour of that third-state.

Third-states are further prejudiced by the judgment in Owusu v. Jackson. In Owusu, the CJEU held that whenever a Member State is seised of jurisdiction under Article 4 of the Recast (jurisdiction based on domicile), it not only can exercise jurisdiction, but is under a positive duty to do so. This unqualified language means that the court of a party’s domicile cannot decline jurisdiction due to a choice-of-court agreement in favour of a third-state.

The resulting situation is problematic. Take, for example, a choice-of-court agreement stipulating a London court’s jurisdiction where one party (French domiciliary) initiates proceedings in Paris. In this situation, the Paris court will neither be bound to stay proceedings on the basis of Article 31(2) of the Recast nor bound to apply the lis pendens rules under Articles 33 and 34 of the Recast and, following Owusu, will be unable to decline jurisdiction of its own volition. This leaves scant protection for a choice-of-court agreement choosing a London court post-Brexit and therefore, a replacement framework is necessary if such choice-of-court agreements are to remain effective without being undermined by pre-emptive proceedings.

  1. Anti-suit Injunctions 

Anti-suit injunctions are a common law remedy which require a party to a dispute to not bring proceedings in a foreign court or to discontinue proceedings already commenced.[7] Such injunctions do offer protection to the effectiveness of choice-of-court agreements and therefore, it falls to be considered whether they could be relied upon as an alternative to the protection of the Brussels regime post-Brexit. In Turner v. Grovit, the CJEU considered anti-suit injunctions as incompatible with the principle of mutual trust, on the basis that they interfere with the jurisdiction of Member State courts. This decision was criticised by English commentators. For instance, Briggs stated that it ‘makes one rub one’s eyes in disbelief.’[8] Post-Brexit, the UK will not be constrained by mutual trust and will be free to grant anti-suit injunctions.

A pertinent question, however, is whether anti-suit injunctions constitute an effective tool against pre-emptive proceedings. Their effectiveness depends on their sanctions. In England, failure to comply with an anti-suit injunction constitutes contempt of court leading to a fine, a custodial sentence or sequestration of assets.[9] Therefore, anti-suit injunctions may be considered to be effective under English law. However, their effect is potentially limited as most foreign courts will not assist in their enforcement as they are perceived to be an intolerable interference with sovereignty.[10] Anti-suit injunctions are considered to be an interference with sovereignty due to the fact that the national court in question is prevented from deciding, for itself, whether it has jurisdiction to hear a respective case. In Germany, for example, the Oberlandesgericht Düsseldorf has refused to recognise the service of an anti-suit injunction, holding that they constitute an infringement of German jurisdiction and its sovereignty.[11] Therefore, while the English courts will be able to grant anti-suit injunctions, they would fail to offer a water-tight replacement for the Brussels regime due to the possibility that a foreign court would not enforce such an injunction.

  1. Hague Choice of Court Convention

The Hague Convention is an international agreement outside the EU framework and therefore is a potential alternative for protection of choice-of-court agreements post-Brexit. The Convention applies to exclusive choice-of-court agreements in international civil and commercial matters.[12] According to Article 5 of the Convention, the chosen court in an exclusive choice-of-court agreement shall have jurisdiction to decide a dispute, unless the agreement is null and void under the law of that state. Article 6 further provides that, if an exclusive choice-of-court agreement applies, any court other than the chosen court shall suspend or dismiss proceedings. Prima facie this is an attractive system, however, there are certain limitations which prevent it from providing equivalent protection to that found under the Recast.

The Convention is not engaged if both parties are EU-domiciled.[13] Therefore, if, for example, a French and Spanish company agree to have London as their forum, any pre-emptive strikes will be subject to the Recast rules in relation to third-states, i.e Gasser. Furthermore, the risk of pre-emptive proceedings is not entirely eliminated by the Hague Convention as, unlike Article 31(2) of the Recast, it does not confer sole competence to the chosen court to decide its own jurisdiction.[14] While, this problem is diminished as the Convention does not require the designated court to stay its proceedings if the courts of another Contracting State are first seised, the risk still remains.

Notably, the temporal limitation of the Convention cannot be underestimated. According to Article 16, the Convention only applies to (1) exclusive choice-of-court agreements concluded after its entry into force in the state of the chosen court and (2) proceedings instituted on or after its entry into force within the state of the court seized. The Convention currently applies in the UK due to its EU membership, and therefore the UK would need to accede independently post-Brexit. The practical implications of this are that any choice-of-court agreements currently drafted, and any drafted prior to the Convention entering into force in the UK will not avail of the Convention’s protection.

Moreover, agreements cannot avail of the Recast’s protection despite being drafted at a time when it was in force. Article 66 of the Recast provides that the Recast only applies to legal proceedings instituted after 10 January 2015. This has a ‘positive effect’ – if a choice-of-court agreement has been concluded prior to that date, but the proceedings commence after, the Recast applies.[15] Inversely, if an agreement is concluded prior to Brexit but proceedings commence after Brexit, parties cannot rely on the Recast. Therefore, even if the UK acceded to the Hague Convention, any agreement concluded prior to the entry into force of the Convention in the UK would be subject to the UK being viewed as a third-state under the Recast, which undermines the minimisation of litigation risk.

  1. Conclusion

If the United Kingdom wishes to maintain London as a major centre for commercial disputes, it should establish a framework which is as close as possible to the ‘status quo’. The ‘status quo’ guarantees the effectiveness of choice-of-court agreements within the European judicial area and provides legal certainty to commercial actors looking to minimise litigation risk. It is evident that neither anti-suit injunctions nor accession to the Hague Convention provide a clear and comprehensive solution to the loss of the Brussels regime. Despite the reputation of the English judiciary and its legal system, the procedural rules protecting choice-of-court agreements from pre-emptive proceedings are central to the effectiveness of choosing London. However, outside the Brussels regime and the European judicial area, this is far from guaranteed.

 

The Author

Louise O’Callaghan completed the LLM programme in European Law at Leiden University in 2017 and obtained her undergraduate law degree from Trinity College Dublin.

 

 

[1] Fentiman, International Commercial Litigation (OUP 2015), 1.02.

[2] Fentiman, ‘Parallel Proceedings and Jurisdiction Agreements’ in de Vareilles-Sommières (ed), Forum Shopping in the European Judicial Area (Hart Publishing 2007) 40.

[3] Hartley, ‘The European Union and the Systematic Dismantling of the Common Law of Conflict of Laws’ (2005) 54 ICLQ 813, 821.

[4] Kenny and Hennigan, ‘Choice of Court Agreements, the Italian Torpedo, and the Recast of the Brussels I Regulation: a possible snag’ (2015) 64 ICLQ 197, 200.

[5] European Commission, Proposal for a Regulation of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Recast) COM (2010) 748 final 2010/0383 (COD).

[6] There are limited exceptions involving insurance (Article 15), consumer (Article 19) and employment (Article 23) contracts.

[7] Hartley, Choice-of-Court Agreements under the European and International Instruments (OUP 2013), 10.03.

[8] Briggs, ‘Anti-suit injunctions and Utopian ideals’ (2004) 120 LQR 529, 533.

[9] Contempt of Court Act 1981.

[10] Obesi and Nyombi, Recognition of anti suit injunctions in civil and common law jurisdictions’ (2015) 36(11) European Competition Law Review 473, 474.

[11] Re the Enforcement of an English Anti-Suit Injunction, Case 3 VA 11/95; [1997] I.L.Pr. 73.

[12] Article 1(1) Hague Convention.

[13] Article 26(6)(a) Hague Convention.

[14] Ahmed and Beaumont, ‘Exclusive choice of court agreements: some issues on the Hague Convention on Choice of Court Agreements and its relationship with the Brussels I Recast especially anti-suit injunctions, concurrent proceedings and the implications of Brexit’ (2016) 2 Centre for Private International Law Aberdeen Working Paper Series, Working Paper No. 2016/5, 8.

[15] Case 25/79, Sanicentral GmbH v. Collin [1979] ECR 3423, [6].