All Change In Europe
Patrick Sherrington and Giles Hutt of Hogan Lovells describe the challenges facing litigation parties today.
One of the challenges facing litigators today, especially those who handle a large number of cross-border disputes, is the steady stream of legislation flowing out of Brussels on questions of private international law. The challenge is not only to keep on top of the legislation, which is often highly technical and somewhat counter-intuitive for lawyers with a common law background, but also to participate in the debate that informs the drafting of the legislation in the first place. In addition, international law firms have a special role in helping the UK government decide whether or not to opt into specific Regulations, and making sure that their clients’ interests and their own practical experience in the courts are taken fully into account when a decision is made. The choice of opting into or out of a Regulation is a particularly difficult one given that it generally has to be made while the text of the Regulation is still in draft.
GOVERNING LAW
Not all of the EU’s recent legislation in this area has resulted in radical change. The Rome I Regulation on the law applicable to contractual obligations (EC 593/2008), for example, did little more than re-enact and refine the Rome Convention 1980 after a number of significant changes proposed by the European Commission were rejected by member states. However, other legislation, notably the Rome II Regulation (EC 864/2007), has made a fundamental difference in many EU jurisdictions to the way in which courts determine which law should govern non-contractual disputes. Under Rome II, parties to purely commercial transactions have for the first time been given the freedom to decide in advance which system of law should govern the whole of their legal relationships, and not just disputes of a strictly contractual nature.
There are uncertainties regarding the effect of specific provisions of Rome II, in particular the extent to which a choice of law has to be actively negotiated by the parties rather than included as standard wording in the contract (article 14(1)), and it seems likely that the Regulation as a whole will take some time to bed down. But there is no doubt that Rome II represents a major advance for businesses operating in the EU who want to ensure that their disputes, contractual and non-contractual, are tried in their own jurisdiction or another they are familiar with, and using a language and procedure they understand.
A NEW EUROPEAN CONTRACT
An interesting twist in this particular tale is the Commission’s recent proposal to allow parties to choose not only the national law of a country to govern their agreements, but also (in appropriate cases) an alternative and wholly new Common European Sales Law (CESL). This ‘28th regime’, as it has become known, should appeal especially to small and medium sized enterprises: unlike the majority of consumers, these businesses can be expected to grasp the broad implications of their choice, and should benefit by not having to tailor their standard business terms to the law of each EU member state in which they operate. However, this assumes that the new law will be widely perceived as neutral, and one that counterparties will readily submit to. In fact this is far from certain, partly because of the novelty of the law means that there are no court decisions clarifying how it might be applied in practice.
Nevertheless, the impact of the CESL on litigation could be huge, since not only contractual rights and obligations will be determined by the new law (where it is chosen), but also the remedies that are available to litigants and the specific legal bases on which those remedies can be granted. More generally, lawyers in the EU will have to get used to conducting litigation in their home jurisdiction applying what is, in effect, the law of another country – the notional 28th member state. Such hybrid litigation is already possible, of course, but it is something of a rarity, and not comfortable for anyone concerned.
Whether it is finally judged a success or not, this legal revolution contrasts starkly with other countries’ attempts to harmonise contract law across jurisdictional boundaries. In the US, for example, a much gentler approach has been taken with the adoption of their Uniform Commercial Code, backed by strong institutions such as the Uniform Law Commission and the American Law Institute. Unlike the EU’s 28th regime, the Uniform Commercial Code was introduced not as an alternative to state laws, but as a legal norm towards which they can gravitate. Its crucial article 2, which covers sale transactions, has now been adopted in 49 states, the exception being Louisiana, which has a civil rather than a common law heritage.
As a matter of fact, the European Commission did consider the US approach, as well as a number of milder and more radical alternatives, as possible means of harmonising EU contract law. (One option which was seriously considered was the abolition of whole swathes of national civil law, contractual and otherwise, in favour of a single European code.) However, after consulting widely, it eventually alighted on the CESL as a practical middle way. The European Parliament has voted in favour of the initiative, and the Commission has said that it intends to enact the law by the end of 2012 - the 20th anniversary of the EU’s Single Market.
AN END TO TORPEDOES?
Of course, commercial parties should have the freedom to decide not only which law should be applied to their disputes, but also where the disputes should be tried. The EU does not have a good track record on this. First it passed a Regulation, Brussels I (EC 44/2001), which contained quasi-automatic rules prioritising certainty and the avoidance of parallel litigation over party choice. Then the EU’s Court of Justice issued a string of decisions (Gasser v MISAT, Turner v Grovit, Owusu v Jackson) that enforced a rigid interpretation of the Regulation and allowed litigants to engage in tactics aimed at delaying litigation and frustrating choice of court agreements – the ‘torpedoes’.
Jurisdiction is something of a hot topic at present, as some defendants use any method they can to escape the effect of their own jurisdiction clauses in disputes concerning swaps and other financial agreements that have turned sour in the difficult economic climate – see for example the recent case of BVG v JP Morgan (Case C-144/10) in which the claimant, the Berlin public transport body, argued in English and German courts, and then before the Court of Justice in Luxembourg, that its agreement with JP Morgan to litigate in English courts was overridden by Brussels I rules on ‘exclusive jurisdiction’ (article 22).
Jurisdiction is also on the agenda now because, 10 years on, the Commission has published a draft revision of the Brussels I Regulation that at last makes party choice paramount, or at any rate subject only to limited exceptions, and which aims to stamp out some of the worst procedural abuses of the Regulation. Hogan Lovells and others, including England’s Bar Council, have warned that the draft wording of the revised Regulation may suppress some disruptive tactics but will allow others to spring up in their place. We are also concerned that a broadening of the scope of the Regulation to cover most “civil and commercial” disputes between parties, wherever they are domiciled, will tie the hands of English courts and prevent them accepting cases, at their discretion, on traditional grounds of justice and convenience. However, the revised Regulation does appear, on the whole, to be an improvement on the present Regulation from a commercial standpoint, since it supports the principle of party autonomy and also clears up confusion concerning the applicability of the Regulation to disputes concerning arbitration. The new Brussels I Regulation is expected to become law in two to three years’ time.