Dechert OnPoint: Why Brexit is Not Bad News for UK-Based Arbitration and Litigation

Dechert is partnering with Georgia Today on a regular section of the paper which will provide updated information regarding significant legal changes and developments in Georgia. In particular, we highlight significant issues which may impact businesses operating in Georgia. Contributing this week are London-based Dechert Partners Arif Ali and Miriam Gonzalez, London-based Senior Directors Roger Matthews and Andrew Hood, London-based Senior Associate Daniel Dozsa, and Brussels-based Special Counsel Erica Stein. Together, they make up Dechert's Brexit and International Arbitration team, which has market-leading experience in advising clients in all aspects of Brexit, including international arbitration and litigation issues associated with it.

Why Brexit is not bad news for UK-based arbitration and litigation

A lot has been said about the uncertainties surrounding Brexit and its likely impact on doing business with and within the UK. Will London remain Europe’s financial center? Will the UK reinstate customs duties on imports and will the EU reciprocate? Will the UK impose restrictions on the free movement of workers? Just to name a few examples. Answering these questions is, at the moment, difficult. However, when it comes to Brexit’s likely impact on UK-based arbitration and litigation, the picture is clearer and the outlook more positive.

London’s position as one of the world’s leading arbitration centers is unlikely to change

EU law by and large does not apply to arbitration. The Brussels Regulation, which governs the recognition and enforcement of judgments within the EU, does not apply to arbitration (Art. 1(2)(d) of Regulation No 1215/2012 (Recast) – for the sake of simplicity, we will refer to both the Brussels Regulation (Recast) (No 1215/2012) and the predecessor Brussels Regulation (No 44/2001) as the Brussels Regulation.

Arbitral awards within and outside the EU are recognized and enforced under the 1958 New York Convention, which currently counts 156 members, and is widely considered as the single most important international legal instrument governing the international resolution of commercial disputes. Brexit will not change that.

Thus, arbitral awards rendered in London will continue to be enforced post-Brexit internationally, including within the EU, in accordance with the New York Convention.

The UK is renowned for its arbitration-friendly laws and experienced legal bar applying such laws. Brexit will not change that. Brexit, therefore, is unlikely to impact London’s standing as a leading international arbitration center.

In fact, there may be an opportunity for London to become the go-to neutral forum to resolve intra-EU disputes.

EU law is currently incorporated into UK law by virtue of the 1972 European Communities Act. To implement Brexit, the UK will have to repeal or substantially amend the European Communities Act (hence the on-going debate whether Parliament, as the legislator, is required to approve the Government’s “Article 50” notice to the EU – a cardinal question that will ultimately be decided by the UK Supreme Court at the beginning of 2017).

While the UK’s post-Brexit legal framework is thus difficult to predict, it is almost certain that Brexit will terminate the primacy of EU law over domestic UK law and will free the UK courts from the controlling jurisdiction of the Court of Justice of the EU (CJEU). Currently, many EU companies opt for Swiss-seated arbitrations, precisely because EU law is not part of Swiss domestic law and Swiss courts are not subject to the controlling jurisdiction of the CJEU or the European Commission. Switzerland is thus widely considered neutral ground, where claims based on EU law (including the competition and state aid defenses often invoked by respondent states and companies alike) are dealt with expeditiously and without the pro-EU slant often exhibited by EU member states’ courts, which are under an obligation of “sincere cooperation” in the enforcement of EU law (Art. 4(3) Treaty on European Union).

Thus, by simplifying English law and the English legal system, Brexit could in fact make the UK a more attractive and neutral jurisdiction to resolve international disputes. Furthermore, the UK judges’ and legal practitioners’ decades of experience in applying EU law could serve them well in efficiently resolving disputes with an EU element.

As to court proceedings, it is highly unlikely that Brexit will terminate the free movement of judgments between the UK and the EU.

The free movement of domestic court judgments in the EU is older than the UK’s EU membership. The members of the EEC (later, EC, then EU) ratified the Brussels Convention in 1968, ensuring that domestic court judgments made in one Member State would be recognized and enforced throughout the other Member States of the EEC. The UK acceded to the Brussels Convention in 1978, ten years after its inception and five years after the UK’s accession to the EEC. Although the Brussels Convention was generally superseded by the Brussels Regulation in 2001, it continues to apply to certain overseas territories of EU member states (Art. 68(1) Brussels Regulation).

The “Brussels Regime” has thus become part of EU law. However, the EU has also extended the Brussels Regime to neighboring, non-EU states. In 1988, the EC and the Member States of EFTA with the exception of Lichtenstein (today, Iceland, Switzerland and Norway) ratified the Lugano Convention, the terms of which mirrored the Brussels Convention. When the EU internalized the Brussels Convention through the Brussels Regulation, the EFTA states followed suit by entering into new Lugano Convention (recast, 2007), which mirrored the terms of the Brussels Regulation. Thus, membership in the EU has never been a pre-condition to being part of the European area of free movement of judgments.

In summary, although there is uncertainty as to how the free movement of judgments will be ensured between the UK and the EU, post-Brexit, it is highly unlikely that either the UK or the EU would seek the UK’s exit from the Brussels Regime, because the ensuing judicial vacuum would seriously undermine the UK’s commercial stability and its role as a finance hub and it would also hurt the EU’s commercial interests.

Finally, Brexit could reinforce the UK’s intra-EU Bilateral Investment Treaties, reducing investors’ enforcement risk.

Another consequence of Brexit will be that the UK’s Bilateral Investment Treaties (BITs) with other EU member states will no longer be “intra-EU” BITs. In general, BITs promote foreign direct investment by protecting investors from illegal expropriation, discrimination, or the breach of their legitimate expectations and by giving them the powerful recourse to have their potential grievances against the host state adjudicated before a neutral, international arbitration forum, as opposed to the host state’s domestic courts. As such, ensuring proper BIT coverage, where available, is essential in structuring any large scale cross-border investment.

The European Commission has taken the position that intra-EU BITs have been superseded by EU law and should therefore be considered void or, at the very least, terminated by the Member States concerned, and the illegality of arbitral awards rendered under intra-EU BITs is routinely raised by losing states in proceedings to enforce or set aside arbitral awards before Member State courts. The CJEU (the only court that can give an authoritative opinion on this issue) is yet to deliver its preliminary ruling on the legality of one such intra-EU BIT, and even if it does determine such arbitral awards rendered under intra EU-BITs to be illegal, it is uncertain whether the CJEU will constrain its opinion to the legality of the specific BIT at issue (between the Netherlands and Slovakia), or whether it will opine on the broader issue of the compatibility of intra-EU BITs with the EU legal order.

The UK has intra-EU BITs with twelve member states (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia). These BITs will cease to be intra-EU BITs, post-Brexit. Therefore, investors relying on these intra-EU BITs to bring claims against EU Member States post-Brexit will be able to do so with the reduced risk of the respondent state successfully raising the EU defense in the arbitration, or in the subsequent annulment or enforcement proceedings. And even if the UK were to terminate these intra-EU BITs in the course of Brexit (which is yet to be determined), it is very unlikely that such termination would affect investments that have already been made at the time of the BITs’ termination.

Therefore, companies intending to make significant investments in countries with which the UK has intra-EU BITs are well-advised to consider structuring their investment so as to benefit from the protections that the UK’s BITs could have to offer.

* * *

Note: This article does not constitute legal advice. You are responsible for consulting with your own professional legal advisors concerning specific circumstances for your business.

Dechert Georgia is the Tbilisi branch of Dechert LLP, a global specialist law firm that focuses on core transactional and litigation practices, providing world-class services to major corporations, financial institutions and private funds worldwide. With more than 900 Lawyers in our global practice groups working in 27 offices across Europe, the CIS, Asia, the Middle East and the United States, Dechert has the resources to deliver seamless, high quality legal services to clients worldwide. For more information, please visit www.dechert.com or contact Nicola Mariani at nicola.mariani@dechert.com.