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Brexit: Implications for London as a seat of arbitration?

The UK’s referendum on its future in the European Union is now only weeks away. The referendum comes at a time when arbitration in England is already facing both external and internal pressures. London continues to face competition from other successful arbitral seats. Its closest neighbour, Paris, has always had a strong offering, and Zurich, Geneva and Stockholm boast well-established arbitration markets. Further afield, the Asia-based institutions are constantly evolving, most recently seeking to capitalise on the perceived sensitivity to EU sanctions amongst London arbitration’s Russian client basis.

Arbitration and the English courts

Recently, the Lord Chief Justice of England and Wales, Lord Thomas of Cwmgiedd, delivered a high-profile speech in which he called for a re-balancing of the relationship between arbitration and the English courts, noting, amongst other things, that arbitration “retards public understanding of the law”. While Lord Thomas himself spoke on the same theme in November 2015, the discussion which this most recent speech provoked focussed attention on the potentially ambivalent attitude of the English courts to arbitration. It has also prompted questions about the London arbitration market and whether it is sufficiently robust to withstand a multitude of threats, challenges and developments.

Brexit

One such threat or challenge to the London arbitration market is a potential Brexit. So what might the impact be? English law is a hugely popular choice of substantive law in international contracts. Much has been written about the impact on the body of English law which would be brought about by Brexit. As the UK negotiates the terms of its exit, it will need to determine the extent to which both directly applicable EU law (including EU Regulations) and statutes that implement EU Directives will be incorporated into the law of the UK jurisdictions, including English law. However, for many commercial parties, English law is chosen for attributes which may be unaffected by Brexit. For example, leaving aside consumer contracts, English contract law has developed largely independently of the UK’s membership of the EU, and is mainly untouched by the EU acquis communautaire. If the appeal of English law is in the fairly stable application of a well-developed body of English contract law principles, it seems very unlikely that Brexit would bring about a change in attitude of international commercial parties to choosing English governing law for their contracts.

For those who favour English governing law, this often goes hand in hand with the choice of English court jurisdiction clauses or “English law, London seat” for their arbitration provisions. Whilst the UK remains within the EU, commercial parties are comfortable with the choice of the English courts to resolve their disputes. A choice of English court jurisdiction will be upheld throughout the EU, subject to a limited number of exceptions. Moreover, an English court judgment may be recognised and enforced throughout the EU under the reciprocal Brussels Regulation regime. If the UK were to embark on an exit from the EU, recognition and enforcement of a choice of English court jurisdiction or an English court judgment across the EU may be facilitated by an agreement between the UK and the EU to replicate the existing rules on jurisdiction and reciprocal recognition and enforcement. This could be achieved in part by the UK joining the Hague Convention on Choice of Court Agreements (to which it is currently a contracting state by virtue of its EU membership). However, whilst an international agreement of some sort is likely, this may offer little comfort to commercial parties when the terms, and indeed the timing, of any such international agreement are uncertain. In the absence of any such agreement, the recognition and enforcement of English jurisdiction clauses and judgments across the EU will be subject to the application of those parts of the Recast Brussels Regulation that apply to third states. Further, the national law of each of the member states may also lead to recognition and enforcement of English jurisdiction clauses and English court judgments.

Brexit-proofing and dispute resolution choices

For some, this position is not sufficiently concrete: the uncertainty surrounding how any potential exit would be structured means that we are seeing commercial parties currently entering into medium to long term transactions considering options for “Brexit-proofing” their contracts. This has included very careful choice of their dispute resolution mechanism. Parties are either choosing arbitration seated in London, and excluding court jurisdiction altogether, or including a “conditional” dispute resolution clause. Under such a clause, the parties agree that the English courts will have jurisdiction unless there is a Brexit or one of the parties is no longer domiciled within an EU member state, in which case disputes will be resolved by arbitration in London.

For those entering into long term agreements, this latter option has the benefit of accommodating any degree of disintegration of the EU or any part of it. The spectre of Grexit (Greek exit) has not completely evaporated, and a number of other EU member states remain in a state of financial difficulty or face increasingly vocal opposition to EU membership.

London attractions

So it appears, at least anecdotally, that in “Brexit-proofing” contracts, London is not suffering unduly: London-seated arbitration remains very popular. And so it should. Choosing a London-seated arbitration agreement provides the “comfort” of resolving the dispute under the supervisory jurisdiction of the English courts but with the enforcement benefit of the New York Convention. All EU member states are contracting states to the Convention; London-seated awards would continue to be recognised and enforced across the EU (and, of course, beyond), whether the UK remains or leaves.

Would London remain an attractive seat of arbitration if the UK were to exit the EU? It would retain many of the strengths as a seat: the arbitration law, and the role and attitude of the courts, would remain unaffected by withdrawal from the EU. Lord Thomas’ recent comments notwithstanding, many believe the Arbitration Act 1996 (the AA 1996) enshrines a healthy balance of power between the arbitral tribunal and the court. The role of the English court under the AA 1996 allows for limited, but supportive intervention and there are a multitude of cases which demonstrate in practice the combined strengths of the AA 1996 and this pro-arbitration attitude. English arbitration law and practice has flourished largely independently of the UK’s membership of the EU, and not because of it.

It would be preferable for a review of the AA 1996 to be focussed on both supporting London as a seat of arbitration and, as Lord Thomas proposes, ensuring the development of English law. If a review were to happen whilst the UK remained in the EU, it may accommodate other EU arbitration practices, or the potential for harmonisation and compromise (as envisaged by a European Parliament study).

It is also arguable that an exit from the strictures of the Brussels regime could give London an edge as a seat of arbitration. The English courts have been robust in protecting arbitration agreements, In Ust-Kamenogorsk Hydropower Plant JSC v AES Ust-Kamenogorsk Hydropower Plant LLP, the English court granted an anti-suit injunction in respect of proceedings brought in breach of an arbitration agreement, where no arbitration proceedings had been brought or contemplated. In the event of a Brexit, there might certainly be a move to re-establish the use of anti-suit injunctions by the English courts against EU member state courts.

Finally, it is wholly possible that Brexit could be good for business for the London arbitration market in all its guises. For many years, London has been a popular choice of seat of arbitration in international contracts. If Brexit prompts disputes under those contracts, a steady stream of arbitrations seated in London may emerge.

Yet it is important to remember that London’s place as a global centre for international dispute resolution is intrinsically linked to its role as an international business hub. While the short-term implications of a Brexit on London as a seat of arbitration are minor, the longer term implications for London as a seat of arbitration are bound up in the impact of Brexit on the UK’s global economy and trade.

Herbert Smith Freehills Vanessa Naish Hannah Ambrose

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