Governing law and jurisdiction clauses: Brexit implications

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They may not be clauses which automatically grab your attention, but almost every loan agreement will contain governing law and jurisdiction clauses. These will rarely feature in negotiations but can be vital if a dispute arises between parties and there is a cross border element to the transaction.

What's the difference?

• A governing law clause deals with the law to be applied when interpreting a clause.
• A jurisdiction clause addresses which court will hear the dispute.

Brexit: what's the deal if there is 'no-deal'?

For finance documents drafted in the UK, governing law and jurisdiction clauses have had to take into account various complex international agreements and, as a member of the EU, the UK is subject to these. Brexit talks are ongoing (and ongoing, and ongoing…) but we need to consider the impact of a potential 'no-deal' Brexit on contracts including these provisions.

Changes to the UK's status post-Brexit and the impact of this on the applicability of key international agreements may affect governing law and jurisdiction clauses. Last year guidance was issued by the Government which included its advice on this issue. The guidance considers each clause, the different rules that apply to them and sets out proposals on each where possible.

Governing law

At the moment, if an agreement does not contain a governing law clause then the EU courts are required to look at either the closest connection (the Rome Convention) or habitual residence (Rome I). If it does contain a governing law clause, this should be recognised by EU countries (under Rome I, Rome II or the Rome Convention).

If there is 'no-deal', the provisions in Rome I and Rome II will be adopted into UK law as a result of draft regulations introduced under the Withdrawal Act (i.e. they will be retained law). So a UK court should take the same approach outlined above.

However, a court in an EU member state that has to decide the applicable law by applying the EU regulations could reach a different outcome to that of a UK court applying the UK retained version of those EU regulations. So, although it seems likely the approach will be similar, there is no guarantee that EU courts will always take the same approach, or reach the same decision, as the UK in determining governing law.

Despite this, if you want your agreement to be governed by English law, it is still best to continue to include an English governing law clause as it is likely to be recognised across the EU.

Jurisdiction

The situation is trickier when we ask whether a judgment in the English courts will be enforceable in a remaining EU state. The rules that currently apply rely on reciprocity (the Recast Brussels Regulation) so the UK can't unilaterally bring them into UK law. It is hoped an agreement will be reached which requires jurisdiction clauses in favour of an EU member state or the UK to be respected across the EU and the UK but, in the event of no-deal, this seems unlikely.

To minimise the impact of Brexit, the UK will accede to the Hague Convention on Choice of Court Agreements in its own right and this will apply from 1 April 2019 if there is 'no-deal' (and exit day is 29 March). The Hague Convention aims to ensure the effectiveness of choice of court agreements between contracting states (EU member states and some others). However it applies to exclusive jurisdiction clauses only. This will result in a choice of exclusive jurisdiction by the contracting parties being honoured (pssst….if you can't remember the difference between exclusive and non-exclusive jurisdiction clauses have a look at our previousblog on this).

However, in the absence of an agreement, the position is less certain in relation to the enforceability of non-exclusive jurisdiction clauses after Brexit. Based on case law (the 'common law'), the parties' choice of jurisdiction is generally upheld and this is also generally the case in the remaining EU countries.

Short of any agreement being reached between the UK and EU, an exclusive jurisdiction clause will give more certainty on jurisdiction. However this needs to be balanced with any flexibility required by the parties and the negotiating position of those parties. A non-exclusive jurisdiction clause will be less reliable, but should generally be upheld.

Wait and see…

As with all things Brexit, we can only wait and see what's decided (and hope it's decided soon!).

This post was written by Catherine Donnelly and Elliot Gibson.

For further information please contact:

Catherine Donnelly, Solicitor, Banking Unit

T: 0161 836 7706

E: [e-mail]