A common interest in common law

Brexit negotiators have expressed frustration at the slow pace of progress, but both sides agree on the need to avoid legal uncertainty.

The UK and the other 27 European Union countries have issued position papers expressing a desire to maintain mutual recognition and enforcement of court judgements after Brexit. At the moment, this is guaranteed under the Brussels 1 Regulation for EU countries, plus the Lugano Convention which extends the arrangement to Switzerland, Norway and Iceland.

“The consensus seems to be that everyone likes English law. They know how it works, they like London as a litigation forum and they like the freedom of contract English law provides,” says James Greig, a partner at White & Case.

Despite this common ground, however, nothing is agreed in the Brexit negotiations until everything is agreed. What if no deal is reached, or negotiations are still ongoing when the Article 50 deadline expires in March 2019? For derivatives trades extending beyond that date, this raises questions about the use of English courts as the jurisdiction to resolve disputes.

Almost all swaps, repo and securities lending transactions in the European Economic Area – and 85% of derivatives contracts worldwide – are currently governed by English law contracts positing English courts as the enforcing jurisdiction, according to the International Swaps and Derivatives Association.

There are already precedents for enforcing third-country judgements in the EU. The remaining 15% of derivatives contracts worldwide use New York law, and US judgements involving European counterparties have to be enforced in the EU. If no transition or deal is reached by March 2019, English law contracts that specify English court jurisdiction would be in the same boat.

“Absent an agreement post-Brexit, English law will become a third-country law after the UK exits the EU. An English court judgement will therefore not be automatically recognised in EU countries, which will add to the red tape for counterparties – firms trying to enforce an English court judgement would likely need to make a petition to the local jurisdiction court. Isda is working with members to consider the impact and how this issue can be addressed,” says Peter Werner, a senior director at Isda.

There is an antipathy expressed by derivatives lawyers of the risk of bringing into a derivatives contract all the panoply of European civil code law, which happens if you adopt, for example, French law as the governing law of your contract

James Greig, White & Case

For derivatives trades written after a no-deal Brexit, one option would be to adopt the law of an EU 27 jurisdiction, with courts designated in that jurisdiction for dispute resolution. But market consensus seems to be against this approach, because derivatives contracts could no longer make use of the UK’s flexible common law system, which is based on precedent rather than a fixed written constitution.

“There is an antipathy expressed by derivatives lawyers of the risk of bringing into a derivatives contract all the panoply of European civil code law, which happens if you adopt, for example, French law as the governing law of your contract,” says Greig.

There could be transitional problems for the market if many legacy contracts are still operating under English law, warns one hedging adviser. A dealer – or even an individual client – could end up with a portfolio of contracts operating under different legal regimes and court jurisdictions.

“If there is a default or an exchange of collateral or any specific legal action that has to be taken with respect to the whole portfolio of a certain investor, it will be extremely complicated to deal with it from a legal perspective – especially if the new jurisdiction has different bankruptcy laws from the UK with respect to collateral, for example,” says the adviser.

This perhaps explains why the French finance minister earlier suggested the radical idea of trying to set up a dedicated English law court in France, conducting proceedings in English with judges experienced in common law application. Even if English courts do not retain European primacy after Brexit, it seems English law will remain the lingua franca for derivatives contracts.