Negotiating arbitration clauses post-Brexit

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19-07-2016

Contract negotiators in the construction and engineering industry will be looking carefully at how contract terms may need to change in the light of Brexit.  This includes their dispute resolution clauses which, on international projects, most commonly provide for arbitration. Can these clauses be left as they are?

Should you still choose arbitration in principle?

One of the main reasons for a choosing arbitration is ease of enforcement against overseas parties: arbitral awards issued in any state that is signed up to the New York Convention[1] can be enforced on a reciprocal basis in any of the other signatory states, of which there are over 150. 

This ease of enforcement should not be affected by Brexit. 

EU legislation does not cover arbitration and the New York Convention pre-dated the EU. Crucially, all EU member states, including the UK, are signatories to it.  This means that arbitration awards issued in London will continue to be enforceable through the EU courts even when London is outside the EU. 

In fact, this ease of enforcement may make arbitration even more popular than it already is, because Brexit will make enforcement of court judgments more uncertain.  Legislation governing the mutual recognition and enforcement of court judgments between the EU member states has been enshrined in British legislation for over 30 years, but may cease to apply depending on the future relationship between the UK and the EU.  It is unclear what would replace it (click here for an analysis of the options).

Arbitration offers far more certain enforceability in this transitional period. 

Should you still choose London as the seat of your arbitration?

London is a popular choice of seat for construction and engineering arbitrations and is often expressly selected in EPC contracts on international projects.  The choice of seat determines the procedural law that is applied to the arbitration process. The law governing the contract, which can be different, is applied to the substantive issues in dispute. 

The reasons for selecting London are many and varied. 

All these advantages to London arbitration remain, regardless of Brexit.

1. Reputation - London has a long-established and respected arbitration tradition, with a statutory basis and a duty of fairness upon arbitrators. The London Court of International Arbitration is a prominent arbitral institution.

2. English courts strongly support arbitration - They will stay (halt) litigation in favour of arbitration and can make other orders, if asked, to support the process.

3. Autonomy – The parties have a high degree of autonomy over the arbitration procedure. The arbitrator also has fairly broad powers, including on costs.

4. Arbitrator, counsel and expert availability - There is a large pool of experienced arbitrators, counsel and technical experts in London, bringing confidence in the quality of the arbitral award.

5. Finality - There are very limited rights of appeal unless the parties otherwise agree.

6. Legally sensible choice - It can often make sense to match the procedural law with the substantive law governing the dispute.  Therefore London arbitration is a sensible choice if English law applies to the contract, which is often the case for international EPC contracts.

There may be the additional advantage of arbitration costing less, if the value of the pound sterling declines.

However there are wider factors that could now make some contracting parties reluctant to arbitrate in London. 

• London’s arbitration tradition may suffer if the city’s standing as a financial capital declines. 
• Brexit may have a psychological impact. If Britain is seen as isolated from the rest of the EU, Paris may seem a more appealing arbitration seat.
• Legal uncertainty may concern some parties. Until the terms of the UK’s future relationship with the EU have been agreed and current EU-based legislation has gradually been reviewed, it is unclear how closely aligned English law will be with EU law in the future. A risk-averse party may be reluctant to agree to English law governing its contract.   

But abandoning English law is risky and likely to be unnecessary.

There are good reasons why English law has become the law of international business.  Probably the most important is its fundamental principle of “freedom of contract”, whereby effect is given to the will of the parties, as expressed in their contract, subject only to certain safeguards in the public interest. The same freedom is not necessarily available in other jurisdictions.  English law is also neutral, not favouring employer above contractor or vice versa.  It is sophisticated and well-developed through hundreds of years of case law. These fundamental principles of English law have not been altered by EU law, and will remain unaffected following Britain’s exit from the EU.

Furthermore, defects and delays, which arguably give rise to the majority of construction and engineering disputes, are hardly touched by EU legislation.

There is always the risk that changes of law will take place during a project - this is not new to Brexit. And there are established ways of dealing with this: “change of law” clauses; renegotiation and termination rights; even “force majeure” clauses.

Britain does not have a reputation of making major legislative changes rashly and there is commonly a transitional stage before changes fully take effect.  There is therefore no reason for the parties to taken by surprise.

Conversely, some parties will view English law as more, not less, certain if it can no longer be changed by the EU.

In summary

Arbitration remains an invaluable process for resolving international disputes. Its key benefit, ease of enforcement, is unaffected by Brexit. In fact, it may make arbitration a better option than litigation.

With some parties, it may be slightly more difficult to negotiate dispute resolution clauses providing for London as the arbitration seat in the post-Brexit era. However the difficulties are probably more “perceived” than “actual”. The reputations of the London arbitration sector and of English law more widely, that have been acquired over decades, still very much stand. It would be unwise to ignore the substantial benefits that they offer.

If this article has been of interest, please take two minutes to answer five short questions about your business’s perception of arbitration to date and going forward.

[1] 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards