“The courts of England have exclusive jurisdiction…”
3 February 2021
In a nutshell: Many operational agreements in shipping, such as ship management and charter contracts as well as ship sale and purchase agreements and ship finance agreements provide for disputes to be heard by the courts of England. Post Brexit, the standardised regime under which English court judgments are recognised and enforced within the EU has changed and lenders, in particular, may need to consider whether their standard jurisdiction clauses need to be adapted to take account of this.
On 31 December 2020 the post-Brexit transition period expired, bringing to an end the UK’s participation in the reciprocal arrangements under which judgments of EU courts are directly enforceable in the other member states. Whilst the UK has applied to join the treaty under which judgments of EEA courts are directly enforceable in courts throughout the EEA, that process remains pending.
In the meantime, the agreement under which the UK withdrew from the EU provides that judgments of the courts of England given in legal proceedings that were instituted on or before 31 December 2020 will continue to be enforceable in the EU under the previous European framework. For judgments in proceedings instituted after that date, a new system is in place. There is no change in respect of enforcement of arbitration agreements.
Where court proceedings are commenced in 2021 or subsequently under a contract which assigns exclusive jurisdiction to the English court, enforcement of a resulting court judgment in EU member states should continue to be a straightforward process as both the EU and UK are signatories to the Hague Convention on Choice of Court Agreements which came into force in 2015 (the “2015 Hague Convention“). Where court jurisdiction (as opposed to arbitration, which is much more common) is selected in operational agreements in shipping, such as ship management and charter contracts as well as ship sale and purchase agreements, they will almost always fall within this class of “exclusive jurisdiction” clause. However, it should be noted that there is currently disagreement over whether this will apply to contracts entered into on or after 1 October 2015 (the UK view), or only to contracts entered into after 1 January 2021 (the European Commission view). On either view this leaves uncertainty regarding enforceability of judgments given by courts taking jurisdiction under pre-existing exclusive jurisdiction clauses (whether that is pre 1 October 2015 or pre 1 January 2021), such that parties should consider amending existing contracts to adopt their exclusive jurisdiction clause anew.
In contrast, where an agreement assigns non-exclusive jurisdiction to the English court, this falls outside of the 2015 Hague Convention. It would fall under the Hague Convention on the Recognition of Foreign Judgments in Civil and Commercial Matters 2019, however, as it currently stands, this convention has only been signed by the Ukraine and Uruguay. It is hopeful that the EU and UK will join this convention in due course. Until then, enforceability of judgments given by UK courts which acquire jurisdiction under non-exclusive jurisdiction provisions will depend upon whether there is a bilateral treaty between the UK and the jurisdiction where a claimant seeks to enforce its judgment or, in the absence of a treaty, general legal principles for the enforcement of the judgments of foreign courts in the jurisdiction where the claimant seeks to enforce its English judgment will apply. In practice these are the normal processes whereby court judgments from one jurisdiction are enforced in another jurisdiction, other than when enforcement is between EU or EEA member states.
Among the EU/EEA member states, the UK has bilateral enforcement treaties with Austria, Belgium, France, Germany, Italy, the Netherlands, and Norway. These treaties pre-date, and were superseded by, the UK becoming subject to the EU’s mutual enforcement treaties from 1987 onwards. As a result, some have questioned whether they continue to apply now that the EU treaties no longer apply to the UK, or whether new agreements or legislation are required in order to revive them. So far only the continued application of the prior treaty between the UK and Norway has been clarified with any certainty.
Having identified the different enforcement positions between judgments rendered under exclusive jurisdiction clauses and judgments given under non-exclusive jurisdiction clauses, a number of commentators have highlighted a possible issue where a jurisdiction clause is “asymmetric”. That is, a clause which grants jurisdiction to the courts of a single state (e.g. England), but at the same time gives one (but not the other) of the parties the option of bringing legal proceedings in any other state (provided that state’s own rules would give it jurisdiction). It is unclear whether these are to be regarded as “exclusive” or “non-exclusive” for the purposes of the 2015 Hague Convention.
If asymmetric jurisdiction clauses are “exclusive” then, where the English courts are specified by the clause, the 2015 Hague Convention will apply to make judgments made by the English court under such a provision enforceable within the states which have ratified that convention. If they are “non-exclusive”, enforcement of a judgment by an English court taking jurisdiction under such a provision will follow the same process as described above for non-exclusive jurisdiction clauses; that is, enforceability will depend on whether there is a bilateral treaty between the UK and the place where the claimant seeks to enforce its judgment, failing which it will depend upon general legal principles for the enforcement of the judgments of foreign courts in the place where the claimant seeks to enforce its English judgment.
Asymmetric clauses are therefore subject to a certain amount of uncertainty as things stand. Asymmetric clauses are typically found in ship finance agreements. They are often used in loan and/or leasing agreements (and in the related security agreements) where the lender or financing party will usually seek to have the benefit of an asymmetric arrangement, allowing it to bring proceedings anywhere it can, but restricting the borrower to bringing proceedings in England. Commercial parties considering using an asymmetric jurisdiction clause will need to consider whether there are places within the EU where it is likely to want to enforce a judgment and which are not on the list of bilateral treaty countries and, if so, whether the benefits of an asymmetric jurisdiction clause outweigh the difficulties that would be experienced if the 2015 Hague Convention would not apply. Where enforcement will be sought outside the EU there is no change from the pre-Brexit position.
Essentially, where a lender identifies that its customer has assets against which the lender may wish to enforce in an EU state which does not have a bilateral enforcement treaty with the UK, they need to consider whether it would be advisable to drop the asymmetric clause in favour of one which is clearly exclusive in order to gain certainty that any English judgment will then be enforceable throughout the EU under the 2015 Hague Convention regime, or whether the benefits of having the option to bring claims elsewhere (including, one would expect, the EU jurisdiction where the customer has assets) outweighs the benefit of having certainty that the 2015 Hague Convention enforcement regime will apply if judgment is obtained from the English court.
The primary benefit to using an asymmetric clause in a shipping finance context has typically been to be able to go direct to the jurisdiction where the borrower or security parties are located and/or have assets and obtain judgment there, without having to go through the process of first obtaining judgment in England and then seeking to enforce it overseas. Essentially this has been regarded as an important option for a lender, allowing it to assess, at the time when it seeks to enforce, where the debtor’s assets are located and whether an English court judgment will be directly enforceable there. If it will not, they have the option of commencing proceedings directly in that jurisdiction. For so long as the EU mutual enforcement treaties applied, this analysis was not required when looking at assets in an EU jurisdiction. Going forward it will be required. This creates something of a dilemma. One needs to choose between (i) the certainty of falling within the 2015 Hague Convention by having a true exclusive jurisdiction clause (which is good for enforcement within the EU but is only relevant to Mexico, Singapore and Montenegro outside the EU) and (ii) the option to sue directly in places which may not enforce English judgments (including any EU states where this may now be the case) by having an asymmetric jurisdiction clause.
This choice can be relevant in ship mortgage enforcement. Some jurisdictions will accept jurisdiction over a ship mortgage enforcement based on the ship having been arrested in their jurisdiction, even if the mortgage debt is subject to an agreement providing for the courts of another jurisdiction to have exclusive jurisdiction. Others will claim jurisdiction to make the arrest but will refuse to make a determination if the mortgage debt is subject to an agreement providing for the courts of another jurisdiction to have exclusive jurisdiction. They will instead keep the vessel under arrest until such time as a judgment is obtained from the specified jurisdiction. This does not come up too often as these tend to be jurisdictions where one would not, as a lender, choose to arrest, if one had the choice. But where it does come up, having an asymmetric jurisdiction clause can open up the option of persuading the arresting court to take jurisdiction.
The question of whether to opt for a true exclusive jurisdiction clause over an asymmetric jurisdiction clause (and thereby certainty that English judgments will fall within the 2015 Hague Convention and therefore be enforceable within the EU rather than uncertainty as to whether the 2015 Hague Convention will apply and therefore having to check whether a bilateral treaty exists or otherwise rely upon general legal principles) applies not only to new facilities, but also to existing ones. Moreover, as mentioned above, even where an existing agreement includes a true exclusive jurisdiction clause, there is doubt whether the 2015 Hague Convention rules apply to it if it pre-dates 1 January 2021 (the European Commission view) or, perhaps, 1 October 2015 (the UK view). Lenders and lessors may wish to consider whether jurisdiction provisions in existing agreements should be amended so as to “restate” them as at a date after these disputed implementation dates and, if they are not already true exclusive jurisdiction clauses, to amend them to be true exclusive jurisdiction clauses. However, where a lender considers that the benefits of certainty of falling within the 2015 Hague Convention enforcement regime are outweighed by the benefits of having an asymmetric enforcement clause, they may conclude this is not worthwhile. In making this assessment they will note that unless there is reason to think that enforcement will be required against assets or debtors within the EU, nothing should have changed from the pre-Brexit position.
Dr. Carolin Schmeding