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Brexit: Will Brexit affect choice of English law and jurisdiction clauses?

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24/06/2016

As the country gets to grip with the vote Leave decision, an area of particular interest in Brexit discussions is the impact of the decision to Leave on choice of law and jurisdiction clauses in contracts.

Will a clause electing “English law” become uncertain following Brexit?

A key question is, having chosen English law as the governing law under the contract, whether the composition of English law will change now and therefore whether the law envisaged on entering into the contract will in fact be quite different once England has left the EU. If “English law” becomes significantly different from the “English law” in place at the time the contract was entered into, this could arguably have an impact on the enforceability of English governing law clauses, and lead to uncertainty as to the composition of the law chosen by the parties.

However most commentators consider that it is unlikely a Brexit will have a substantive impact on the enforceability of English governing law clauses. In the general context of commercial contracts, English contract law has been largely unaffected by the proliferation of EU law and key contractual issues such as offer, acceptance, consideration and implications of terms derive principally from English law. In most cases it is presumed that a choice of English law would be interpreted to mean English law as it stands from time to time, subject to any variations, including such variations as may arise from an EU exit. Businesses may nevertheless wish to check their contracts for provisions which they (or their counterparties) may seek to rely on where the UK’s departure from the EU affects the operation of the contract in a way which was not foreseen when the contractual arrangements were made (examples include material adverse change, force majeure and termination provisions).

As to the composition of conflict of law rules following a Brexit, the UK Government may decide to leave in place the Rome I rules [1] currently in force, but with the English courts as opposed to the Court of Justice of the European Union being the final arbiter of how these rules are applied. Alternatively, if Rome I were to no longer apply, the English courts may revert to applying the rules that were in force before the regulation was implemented – the Rome Convention – in relation to contractual obligations. The Rome Convention is very similar in respect of the parties’ choice of law (they both in effect enforce any choice of law made by contracting parties), so the law governing contractual obligations is unlikely to change materially.

Therefore, while there is still some uncertainty as to the exact composition of English law following the vote to leave the EU (and the effect on some specific legal obligations may be more unclear, e.g. financial services regulation and consumer protection), the English law that applies to commercial contracts between parties conducting business internationally is likely to be, for the most part, unaffected by uncertainty.

Are parties less likely to choose English law to govern contractual relationships?

The answer to this question will depend on how much of a factor the UK’s membership of the EU was to people who use and choose English law to govern their contracts. It appears that the general consensus is that English law’s attractiveness and the reasons why parties choose English law to govern their relationships had little to do with the UK’s EU membership.

English law, as one of the oldest and universally respected legal systems in the world, is commonly viewed as reliable, its principles having been developed alongside centuries of commercial activity and reflecting commercial common sense. It is not clear that a Brexit would undermine this, and there is no reason to think that English law will be any less flexible post-Brexit. In the run up to the referendum the risk of Brexit had not caused English law to stop being used for international contracts.

Will choice of jurisdiction clauses be affected?

Under EU law, the position is that the courts should recognise the parties’ election of a specific jurisdiction. If there is no election, then generally the country in which the opposing party is based should deal with the dispute. EU law also provides for the cross-border recognition of judgments from the courts of EU Member States within the EU.

Whatever is decided in relation to the composition of English law following Brexit it is likely that English courts will continue to respect provisions in contracts which confer jurisdiction on the English courts by agreement. Other EU Member States will decide how such clauses will be treated, which could give rise to uncertainty, depending on how jurisdiction clauses are viewed by the courts of different EU Member States.

However, while in some cases the courts of a counterparty domiciled in another EU Member State may be reluctant to cede jurisdiction to the English courts even if that is what the parties have agreed, it is generally felt that a similar regime will be adopted post-Brexit. Internationally there is unlikely to be a significant change in attitude to choice of jurisdiction clauses following Brexit.

What should clients and law firms consider when drafting new choice of law and jurisdiction clauses?

As stated above, it is generally agreed that clients should not be overly concerned about the effects of a Brexit on English choice of law and jurisdiction clauses in commercial contracts governed by English law. UK businesses should review their contracts to ensure they are governed by English law and contracts may also require updating where reference to European legislation or use of European concepts is made.

Walker Morris Commerical lawyers can provide further assistance and guidance.

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[1] The Rome Regulation on the law applicable to contractual obligations (EC No 593/2008). It determines the law governing contracts concluded from 17 December 2009 and applies to all EU Member States except Denmark. The Rome Convention applies to contracts concluded before that date.

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