Until now, any business chasing another party based in the EU for outstanding debts could rely on the fact that judgments made by a UK court would be legally recognised in the EU and enforced there.
After the Brexit transition period ends at 11pm on 31 December 2020 though, the status quo will change, and the rules that allow easy enforcement of court decisions in the EU and most EFTA member states (Iceland, Norway and Switzerland) will cease to apply to UK judgments.
With less than a month to go, businesses that have a dispute with a party in those countries should consider starting legal proceedings now, before these changes come into effect.
Under the Withdrawal Agreement between the UK and EU, the UK left the EU on 31 January 2020. However, the Agreement provided for a transition period that broadly maintains the pre-Brexit status quo.
This period will end at 11pm on 31 December 2020, but the Agreement also provides that the current enforcement rules will continue to apply to any legal proceedings that have started by then, even if the judgment is made many months afterwards.
The impact of the changes to cross-border enforcement is not exclusive to those businesses already involved in cross-border disputes; it also has potential consequences for any business that has a contract with an EU party, who should be reviewing those contractual clauses that relate to dispute resolution.
What happens after 11pm on 31 December? The enforcement of UK judgments will, subject to any relevant international convention, be governed by the national rules of the relevant member state. This change is likely to create additional costs and delay for any UK business seeking to enforce a judgment in that country.
However, the UK has taken steps towards signing up to two international conventions that might be of assistance to businesses; the 2005 Hague Convention on Choice of Court Agreements, and the 2007 Lugano Convention.
States that are signatories to the Hague Convention undertake to recognise contractual exclusive jurisdiction clauses and are required to enforce judgments issued by the courts selected by the parties.
The UK will join the Hague Convention, in its own right, from 1 January 2021.
Unfortunately, there are complexities involved, which mean businesses cannot wholly rely on this remedy.
The Convention entered into force on 1 October 2015 in all EU member states (except Denmark) and so only applies to contracts entered into after that date.
It also only applies where a contract has an exclusive jurisdiction clause included – i.e. one that gives a country exclusive jurisdiction to hear a dispute in its courts. The EU Commission has issued a statement suggesting that the UK can only apply the Convention to contracts entered into after 1 January 2021, that being when the UK becomes a party to the Convention in its own right.
The UK disagrees with that interpretation, but this does add uncertainty for those who may seek to rely on the Convention.
The UK has also taken steps to sign up to the Lugano Convention, which governs jurisdiction and the recognition and enforcement of judgments between the EU, Norway, Iceland and Switzerland. This Convention reflects earlier iterations of the current Brussels enforcement regime and so would be a better solution than the Hague Convention.
Unfortunately, while statements of support for the UK’s accession have been issued by Norway, Iceland and Switzerland, unanimous approval by all contracting parties (including the EU) is required and the EU has not yet agreed.
A failure to reach a wider deal with the EU may mean that the UK won’t be able to sign up to this Convention after all.
Rather than wait to see if these complexities are ironed out, businesses that are contemplating legal action where enforcement may be needed outside the UK should consider acting before 31 December, to take advantage of the current rules.
It is also worth reviewing contracts to establish which counterparties are in Hague Convention countries, the start date of those contracts, and whether they contain exclusive jurisdiction clauses that would enable legal action to be raised under the enforcement measures governed by the Hague Convention.
Businesses should also consider whether current or future contracts should include arbitration as an alternative dispute resolution option. Arbitration has its own set of rules which the UK and EU member states comply with independently of the EU, so enforcing an arbitral award made in the UK in an EU member state may be an effective alternative to recover outstanding debts.
Andrew Scott is a senior associate in litigation at Brodies LLP.
