International supply arrangements give rise to the risk of cross-border disputes. What should British businesses consider when it comes to cross-border disputes? How might Brexit impact this, and what can businesses do now to prepare? We look at governing law, forum and enforcement of judgments.

The international nature of the automotive supply chain means that many UK automotive suppliers are likely to supply cross border, particularly into the EU. 65% of British-built automotive components are exported to the EU, and 79% of imported components originate from the EU[1]. International supply arrangements give rise to the risk of cross-border disputes. What should British businesses consider when it comes to cross-border disputes? How might Brexit impact this, and what can businesses do now to prepare?

Cross-border disputes - key considerations

When it comes to international contracts, there are three key areas to consider to minimise cross-border disputes risk:

  • Applicable law - which country's law will be applied in determining any dispute?
  • Forum - what forum will the parties use to resolve a dispute, and where? E.g. the courts of England, or arbitration in Paris.
  • Enforcing a judgment - will you be able effectively to enforce any judgment or award in your favour so you do not have a pyrrhic victory?

Currently, EU regulations and conventions set out a framework to determine each of these areas, thus minimising uncertainty in cross-border disputes and promoting trade. However, there is a risk that these EU regulations may disappear or be modified post-Brexit. That could affect levels of risk regarding disputes involving EU counterparties. We look at each of these areas in turn below - what it is, why it matters, how Brexit might impact, and what British businesses should do to prepare.

1. Applicable law

What is it and why does it matter?

The applicable law is the law which will be applied in determining any dispute (e.g. the law of England, Germany or France). Differences between national laws mean that a contract may be interpreted differently applying English law than it would by applying German law. The applicable law will govern matters including the existence, terms and breach of a contract, and the remedies available for any breach, so it could have a substantial impact on the outcome of a dispute. For more information on governing law clauses, see our article The Basics: What to consider when negotiating governing law and jurisdiction clauses.

What is the current position?

At the moment in disputes between EU parties, the applicable law is determined using what are known as the Rome I Convention. This sets out a hierarchy of rules to decide which country's laws govern a contract. Without getting into too much detail, if you expressly choose a governing law for your contract, that choice will be respected. If you don't, then the general fallback position is that the contract will be governed by the law of the seller's country. UK-based parts suppliers supplying into the EU therefore often benefit from English law for their supply contracts, unless they have expressly chosen a different governing law. There are however other exceptions to this rule.

How might Brexit change this?

The Rome I Convention does not require reciprocity, so it is possible for the UK to continue applying these rules itself. The question is whether the EU will also retain these rules after Brexit in relation to disputes with UK parties.

What can I do to prepare?

The prudent advice is (even more than it was before Brexit considerations) for parties to make an express choice of governing law in their contracts. That choice is likely to be respected after Brexit, giving certainty about the law which will apply to any disputes. UK based businesses are likely to prefer that the governing law is English, but of course that may not be commercially possible when dealing with large continental OEMs and suppliers.    

2. Forum

What is it and why does it matter?

Having thought about which country's laws will apply to a contract and dispute, you also have to consider the forum - i.e. who is actually going to hear the dispute and decide the outcome. For example the forum could be litigation in the courts of a particular country (which need not necessarily be the same country as the governing law, though that is usually sensible), or arbitration. Choosing the forum for disputes in advance can avoid expensive satellite disputes about where the claim should be heard and make sure the matter is resolved in a forum with which you are comfortable and with a decision that can be enforced. For more information on available modes of dispute resolution, see our article For more information on available modes of dispute resolution, see our article The Basics: what should a dispute resolution clause say?

What is the current position?

As with governing law, currently EU regulations set out a hierarchy of rules to determine which country's courts have 'jurisdiction' to hear a dispute. That hierarchy first of all respects any choice of forum the parties have already made, meaning it is wise to make a positive choice if at all possible. In the absence of party choice, other provisions then come into play. The default position is that a defendant must be sued in the courts of the EU country where it is domiciled. However, in a contract for the supply of goods or services, a claimant may choose instead to sue in the courts of the country where the goods or services were delivered (or supposed to be delivered). So, in the case of a German supplier supplying faulty goods into UK, it may be possible to sue either in Germany or the UK.

How might Brexit change this?

As with governing law, if the parties have made an express choice of forum through e.g. an arbitration or jurisdiction agreement in their contract, that is likely to be respected. Brexit does however cause some uncertainty about the position where the parties do not make such a choice. In the event of a no-deal Brexit, the regulation which addresses jurisdiction will cease to apply to Britain, meaning there will no longer be this reciprocal arrangement with the EU and uncertainty about whose courts will determine a dispute. It is currently uncertain exactly what arrangement the UK will have with the EU post-Brexit. For more information, see our article Brexit: what will it mean for dispute resolution?

What can I do to prepare?

Again, it remains prudent advice for parties to include an express choice of forum in their contracts, which is likely to be respected by courts even in a no-deal Brexit scenario. UK based suppliers will doubtless prefer for contracts to be subject to the exclusive jurisdiction of the courts of England & Wales, rather than an EU state. If however that is not commercially possible because of the stronger bargaining power of a European counter-party, then you could consider submitting disputes to arbitration instead. The benefits of arbitration include that it is a neutral forum (rather than being in the courts of one or other party's home country), and arbitration awards can often be enforced more easily than judgments from a state court - something which will take on increasing importance post-Brexit as we outline below.

3. Enforcement

What is it and why does it matter?

Enforcement is the process of realising a court judgment or arbitral award in your favour. In most cases it takes the form of obtaining actual payment of any damages and costs which you have been awarded, but it can also apply to other non-monetary remedies. Enforcement is a vital consideration in cross-border disputes, where your opponent (and their assets) are likely to be situated in another jurisdiction. You may therefore need to 'export' a judgment or award obtained in one country and enforce it in another.

What is the current position?

Enforcement of court judgments within the EU is currently regulated by the Brussels Recast Regulation, the same EU instrument which governs jurisdiction. There is a reciprocal arrangement between the current EU member states to simplify the process of enforcing a judgment from the courts of one EU state in another.

How might Brexit change this?

Although the UK and EU have reached political agreement that the current regime will continue through the transitional period, "nothing is agreed until everything is agreed". In the event of a no-deal Brexit therefore, the EU regime governing enforcement will simply fall away. That means there is a risk that, come 30 March 2019, the UK will have no reciprocal arrangement with the EU for enforcement of one another's judgments. Whilst this is a worst case scenario, it creates unwelcome uncertainty and could make enforcement very difficult or sometimes not possible at all.

What can I do to prepare?

Considering enforceability alone, there is one clear alternative which provides British businesses with certainty about their ability to enforce in the EU, and that is to submit disputes to arbitration rather than litigation. The reason for this is that there is an entirely separate regime for the enforcement of awards in international arbitration, under the New York Convention. This regime is independent of the EU and unaffected by Brexit, but all EU member states are signatories to it, meaning that awards can be enforced more easily in arbitration than litigation. Indeed, this is already a key attraction of arbitration, notwithstanding Brexit. Arbitration does differ from litigation in other important ways, which means enforceability alone may not make it suitable forum for disputes, but businesses should consider whether inserting arbitration agreements in their contracts gives both parties certainty.

Footnote

[1] Source: SMMT Motor Industry Facts, June 2018.