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Why UK firms should reconsider jurisdiction in technology contracts after Brexit
UK companies may need to reconsider how they draft some IT contracts with suppliers since the country left the European Union
Most areas of contract law have not been harmonised within Europe. However, important exceptions are the three separate concepts of law, jurisdiction and enforcement of judgments. The first deals with which governing law is applicable to an agreement, the second with which courts have jurisdiction over an agreement. There is a third related area of enforcement that deals with where, having obtained a judicial decision in your favour in one country, that judgment can be enforced in another country.
A full discussion of these three topics is outside the scope of this article, but a summary of the post-Brexit position in Europe is as follows.
The starting point is that, with the exception of litigation cases that commenced before 1 January 2021, the European Union (EU) conventions on law, jurisdiction and enforcement no longer apply. Therefore, there are now some differences in the position on law, jurisdiction and enforcement as between the member states of the European Economic Area and the UK.
In the EU, governing law in an agreement is dealt with by the Rome I Convention (Regulation No 593/2008). The starting point for governing law is that the parties may choose which law applies, and this rule applies whether or not both parties are within the EU. The same position now also exists in the UK which has, post-Brexit, enacted domestic law similar to the Rome I Convention. Overall, therefore, Brexit has little effect on a choice of law clause.
By way of contrast, Brexit has made a large difference to both choice of jurisdiction and enforcement. Dealing first with jurisdiction, this is dealt with under the Brussels Regulation (No 1215/2012). Article 25 of the Brussels Regulation enforces either an exclusive or a non-exclusive choice of jurisdiction where the parties agree, unless one of the exceptions apply.
An example of such an exception, which is notable in the context of IT, is a dispute regarding the registration or validity of a patent, in which case the only court that has jurisdiction is the court of the relevant member state in which the patent is existent. However, the Brussels Regulation only applies where all the parties to the agreement are within the EU. Agreements with British companies are therefore affected by Brexit.
The Brussels Regulation is extended to the EFTA countries of Iceland, Norway and Liechtenstein, and also Switzerland by the Lugano Convention. The UK has applied to join the Lugano Convention, but at the moment the prospect of this being acceded to quickly looks remote. The application has, during 2021, become a political football. In particular, on 4 May 2021, the European Commission (EC) announced its intention to block the UK’s application. This was followed by the EC formally effecting this blockage on 1 July.
Until and unless the Lugano Convention applies in the UK, the only international convention dealing with jurisdiction of which the UK is now a party is the Hague Convention. The Hague Convention covers 87 countries, including almost all of the world’s industrialised countries. The scope of this convention is much more limited, as it only respects the party’s choice of jurisdiction where the choice is an exclusive choice of jurisdiction.
A further issue to be considered is the enforcement of any judgment. Within the EU, this is also dealt with in the Brussels Regulation. Because, after Brexit, this no longer applies to the UK, enforcing a judgment between the UK and an EU member state has now become harder. In practice, this means that before a plaintiff commences a case where the defendant does not have assets in the chosen country of jurisdiction, the plaintiff should consider the potential enforceability of a judgment in the local laws of the country where the defendant does have assets. This will therefore sometimes change the choice of jurisdiction that a party may otherwise have opted for.
An exception to the difficulties introduced by Brexit to enforcement of a judgment is arbitration. The enforcement of arbitration awards is not dealt with by the Brussels Regulation, but by the international New York Convention. The latter is unaffected by Brexit.
This article discusses the following clauses in a typical IT contract where the parties do not reside in the same country within Europe, or where there is some other similar foreign element in the contract:
- A governing law clause that states which law will be used to determine any disputes.
- The courts of which jurisdiction will determine any dispute. It should be noted that this is a separate independent question to the first.
- Whether instead of having a court determine any dispute, the parties wish to include an arbitration clause so that an arbitrator decides the dispute instead.
- Whether having obtained a judgment in your favour from a court or an arbitrator, that judgment can be easily enforced.
It is always advisable in any contract in which not all the parties reside in the same country, or where there is some other foreign element, to consider and deal with these four issues. In conclusion, we see that:
- It is now important to use an exclusive rather than a non-exclusive jurisdiction clause in Europe when one of the parties is an English entity.
- Where enforcement of a judgment is important, there is now an additional reason for an English entity to consider including an arbitration clause in the original agreement.
IT contracts have generally contained “non-exclusive” rather than “exclusive” jurisdiction clauses. This is because one of the principal remedies for a software supplier for a breach of intellectual property rights is to seek an injunction. In practice, it would be necessary for a software supplier to seek an injunction in the country in which the breach is occurring.
This is not something that has, before Brexit, been a point of contention, because agreeing the “non-exclusive” jurisdiction of the English courts was usually regarded as “reasonable” by a software licensee, acceding to that request.
The court of a country other than that given “non-exclusive” jurisdiction would still need to be adequately persuaded to accept the proceedings, but that should not be difficult in a case where the supplier was seeking such an injunction.
Post-Brexit, however, including a “non-exclusive” jurisdiction clause becomes more of an issue. Either party could always argue against a “non-exclusive” jurisdiction clause because it is outside any international convention. The enforceability of the clause is, at best, ambiguous.
For this reason, it is now better for both the supplier and the buyer (or licensee) in an IT contract, in which one party is an English entity, to opt for certainty and elect to include an exclusive, rather than a non-exclusive, jurisdiction clause. Whether that jurisdiction should be the exclusive jurisdiction of an English court or a foreign court is, of course, open for agreement between the parties.
The factors affecting whether an arbitration clause should be included in an IT contract has also changed post-Brexit. An arbitration clause is one that states that a decision should be determined privately in arbitration, by an arbitrator appointed by a competent body, such as the Institution of Engineering and Technology. If there is no arbitration clause, any dispute would be dealt with by a court that has competent jurisdiction. This increases the cost, because the arbitrator has to be paid, but it keeps the dispute out of the public eye.
Although a discussion of all the relevant factors determining whether to include or exclude an arbitration clause is outside the scope of this article, there are two strong factors that have historically persuaded buyers or licensees with bargaining power not to include an arbitration clause.
The first factor is that although judges are impartial, there may nevertheless be an innate tendency for judges to favour buyers in a typical computer dispute. If it is difficult for the parties to explain the complex IT issues under dispute to a judge, the judge may well consider that the buyer was “oversold” the software. The second factor is that while it is invariably the case that neither party wants to have a public court case, there is a much greater tendency for software suppliers not to wish to be exposed to publicity than buyers.
Consider, by way of example, the fact that many software suppliers include a clause in their supply agreement purporting to prevent licensees from publicising benchmark tests. For both these reasons, in the absence of there being strong grounds for considering the contrary, where an IT buyer has had bargaining power, I have invariably recommended that IT system buyers exclude an arbitration clause.
Post-Brexit, the decision on whether to include an arbitration clause may, however, be less clear cut in a particular contract. As has been discussed above, where there are complex considerations of enforcement of a judgment in another country, the ability to use the New York Convention may become a decisive factor and persuade an English entity to include an arbitration clause in an IT contract.