Dispute resolution after Brexit

The wider potential implications of Brexit for construction have been well publicised, such as problems with project funding, labour availability and materials supplies. These are likely to lead to project delays and even projects being stalled. Already we have seen the European Medicines Agency claim its £500m Canary Wharf office lease has been frustrated as a result of Brexit. We are likely to see further Brexit-related disputes come before the courts as companies try to wriggle out of what may have become less profitable or impracticable agreements. 

The validity of the contract itself, however, is just one piece of this puzzle. Even where contracts are valid and the court or arbitrator orders that one party must perform specific obligations or pay damages to the other, it must be ensured that the judgment can be enforced against a contractual counterparty and their assets. 

Enforcement against counterparties that are UK-based or whose assets are located in the UK should be unaffected by Brexit. However, careful consideration will need to be given to the appropriate choice of jurisdiction and governing law clause when dealing with counterparties based overseas or with overseas assets. 

Two years after the referendum, firms might be expected to have taken steps to Brexit-proof dispute resolution clauses in their commercial contracts. However, a study by Thomson Reuters last year revealed only 35% of businesses had changed their approach to jurisdiction and choice of law clauses after Brexit, and we have seen little evidence of this changing. As we edge closer to leaving the EU without a deal, this “wait and see” approach is increasingly inadvisable.

Losing the EU legal framework

The EU legal framework has provided considerable comfort to companies on dispute resolution issues thus far. The issues of governing law, jurisdiction and enforcement are governed by the Rome I, Rome II and Recast Brussels regulations. These arrangements have provided certainty and have allowed successful parties to enforce judgments against EU assets with relative ease. If the UK exits the EU on 29 March without a deal, this could all change. Without a deal, we will be left with no framework for civil judicial co-operation with the EU 27, Norway, Iceland or Switzerland. 

Even when it comes to enforcement against assets or counterparties outside the EU, Brexit could still have a substantial impact. The UK is not an independent signatory to the Hague Convention – it is a party through its membership of the EU. While steps are likely to be taken for the UK to become a signatory of the convention in its own right, this is currently another area of uncertainty. 

The government’s technical notice provides some comfort in respect of choice of law clauses. The notice states that the Rome I regulation, which governs choice of law in contractual matters, should be unaffected as reciprocity is not required (there is, however, a question mark as to whether the EU 27 countries will mirror this commitment to Rome I). Any contractual agreement as to the choice of law governing the contract should, therefore, continue to be respected by the courts.

Uncertainty of jurisdiction

The position, however, is more complex when it comes to jurisdiction and enforcement. Without the Recast Brussels Regulation applying, companies face uncertainty as to whether their choice of jurisdiction will be respected and may encounter considerable delay and costs when seeking to enforce judgments abroad. It also opens up the costly possibility of fighting on two fronts, as parallel actions could be raised that would run concurrently (and which may arrive at inconsistent judgments). 

In this scenario, the speed and effectiveness of the adjudication process, which has been strongly supported by the UK courts, would be undermined. In the absence of the counterparty’s compliance with an adjudication award against it, resorting to a UK court to enforce that award may well secure a court judgment in short order. However, enforcing that judgment may prove more difficult than before.   

Arbitration is unaffected

What can a company do to protect itself in the eventuality of a no-deal Brexit? The good news is that arbitration is unaffected. Arbitral awards are enforced under the New York Convention, which operates outside the EU legal order. The 159 signatories (including the UK and all EU 27 states) must recognise an award from any other New York Convention state as binding and enforce it as if it were a domestic award. 

Many construction contracts provide for a UK court to be the final tribunal for determining disputes – whether or not they follow an adjudication or other dispute resolution process such as mediation. It is always advisable to consider carefully the respective merits of court and arbitration proceedings as the final tribunal and make a conscious choice between these when finalising a contract. The uncertainty of enforcing court judgments abroad in a post-Brexit no-deal scenario increases the merits of choosing arbitration where it may be necessary to enforce a judgment in a different jurisdiction.

Claire Stockford is a barrister and partner, Iain Drummond a solicitor-advocate and partner and Caitlin McLean a solicitor (Scotland) at law firm Shepherd and Wedderburn