The United Kingdom (UK) will leave the European Union on 1 February 2020. The EU and the UK have already concluded a withdrawal agreement on 17 October 2019, which regulates a number of important points (e.g. the status of Britons living in the EU and vice versa and the Irish border). A very important provision of the agreement is the continuation of EU law in the UK between 01 February 2020 (withdrawal) and 31 December 2020. This transition period is intended to serve the negotiation of a final agreement, which will then regulate all important open points. This also includes jurisdiction, recognition and enforcement of judgments and the substantive law applicable in court proceedings. The problem is that at the moment it does not look as if the EU and the UK will agree on such an agreement.
This Insight therefore deals, as the second of three parts, with the impact of a possible “hard Brexit”, i.e. a Brexit without a (final) withdrawal agreement, on the substantive law applicable in court proceedings. This is a topic that seems very theoretical at first glance, but has serious practical implications. The article therefore starts with a few basics on conflict of laws (1.), before it then deals with the status quo under still applicable EU law (2.) and finally turns to the effects of a hard Brexit (3.) and consequences to be taken (4.).
1. Conflict of Laws: Basics!
One thing that, from experience, comes as a surprise to many clients:
A court does not necessarily decide according to its home law!
A German court always applies German procedural law (deadlines for briefs, rules of evidence, jurisdiction), but a German court does not necessarily apply German substantive law. Substantive law is all laws that regulate the content of legal relationships. For example, a German court may apply French commercial agency law. Or Dutch contract law. Or Japanese company law. Or Argentinian labour law.
Each court worldwide determines the applicable law according to its own conflict of laws rules. Conflict of laws rules regulate very important questions:
- What criteria determine the applicable law in certain contractual relationships?
- Under what conditions is a choice of law possible?
- What are the limits to the principle that a court must apply foreign substantive law?
What these conflict-of-laws rules looks like in Germany, the EU and the UK is described below (“2. Status Quo”). First, an important note: Unified (harmonised) substantive law takes precedence over national law, which is determined by conflict-of-laws rules. This arises from the fact that either the EU or even other states agree on uniform substantive law. This is important for internationally operating companies because it can make life incredibly easier for them. You then do not have to know the substantive law of different countries, but only the harmonised law. A prime example of this is the UN Sales Convention. Every exporting company must be aware of this possibility. Far too often we still see ill-considered exclusion clauses. There may be reasons to exclude the UN Sales Convention, but ignorance of it should not be one (see also: 9 reasons for the UN Sales Convention).
2. Status Quo
Ok, so how is the conflict of laws regulated in the EU (and transitionally in relation to the UK)?
In the so-called Rome I Regulation (formally: Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations). This regulation applies directly in all member states of the EU. The determination of the applicable law is therefore uniform and transparent. This ensures legal certainty.
A few examples:
- In principle, the parties to a contract are free to choose the applicable law (Art. 3). This is subject to a few restrictions. In particular, consumers and employees are protected. A choice of law should not be to their disadvantage.
- Otherwise, the domestic law of the contracting party with the so-called “characteristic performance” applies, i.e. in the case of a commercial agency contract the law of the commercial agent (Art. 4, para. 1, lit. f), in the case of a sales contract the law of the seller (Art. 4, para. 1, lit. a). Characteristic is mostly the performance, which is not the obligation to pay money. However, this is sometimes difficult to determine. How does this look, for example, in the case of a loan agreement?
- Assignment of claims is governed by the law between the parties to the assignment, but the law applicable to the claim also plays a role (Art. 14).
It can get really tricky and in some cases litigation can go on for weeks or months just arguing about the applicable law. This can be worth it – at least in proceedings with a high amount in dispute – because one or the other law often decides the legal dispute in favour or to the detriment of one or the other party.
Up to now, conflict of laws was uniformly regulated. Germany and the UK had the same rules that determined whether German or English commercial agency law or sales law applied. This would change in the event of a hard Brexit.
3. And what happens now?
It will not get easier. In the event of a hard Brexit, the UK will get its own conflict-of-laws rules (possibly revive the rules before it joined the EU). What that will look like is however still unclear. Even if the set screws are small, they can lead to seriously different results. If the IPR in the UK is only slightly different, the referral to a particular law would depend on it and on that the fate of a dispute.
But there are two scenarios to be distinguished here:
- For contracts concluded before 31 December 2020, the applicable law will continue to be determined according to the Rome I Regulation (Art. 66 of the Withdrawal Agreement).
- For contracts concluded after 31 December 2020, the determination of the applicable law is unclear. But this also needs to be subdivided once again. EU courts will continue to apply the Rome I Regulation even if a UK company is involved. This is because the Rome I Regulation is universally applicable (Art. 2). This is somewhat different from the Regulation on Jurisdiction and Enforcement. However, if the same dispute is now decided in a court in Great Britain or Northern Ireland, it is still not clear what conflict-of-laws rules the court will apply. This will create legal uncertainty.
4. What needs to be done?
Entrepreneurs should first be aware that there will be more legal uncertainty in relation to the UK. However, the situation is not hopeless and trade with UK companies will be possible even in the event of a hard Brexit.
In principle, contracts with UK companies should include (but not be limited to) two things:
- a carefully considered choice of law clause that will stand up to the scrutiny of the court in the event of a dispute;
- an arbitration clause or a choice of court agreement that is harmonised with the choice of law clause.
Both are advisable anyway, but will become increasingly important in relation to the UK. Arbitration clauses will become more attractive (Brexit Reloaded (1): Impact of Brexit on litigation), choice of court clauses need to be chosen by companies with care and foresight, choosing German courts when in doubt.
You only miss what you no longer have. So it is with Brexit. The UK will be missing from the EU and the EU will be missing from the UK. The common framework that EU civil procedure law and applicable law has meant for the EU and UK will also be missing and legal uncertainty will follow. But with a few simple steps and mindful planning, many of the consequences of Brexit for businesses trading with the UK can be mitigated.
Johannes Brand, lawyer and bar approved specialist in international business law, will help with questions regarding Brexit.