The choice of English law as the governing law of your international contract following Brexit
While often described as merely being part of the ‘boilerplate’ of a commercial agreement and therefore sometimes seen as being of secondary importance, a governing law clause is in fact key as it articulates the parties’ choice of the law that will govern the interpretation and legal effect of the terms of the agreement between them. English law is generally seen as being stable, predictable and upholds the principle of ‘freedom of contract’. For those reasons among others it is very often the first choice of the law to govern contracts between international counter parties, including those where neither has a connection to England or to the UK as a whole.
On 31 January 2020 ‘Brexit’ finally happened and the UK left the European Union (EU), albeit that while the UK remains in the transition/implementation period (which will run to 31 December 2020) EU law will continue to apply. How – if at all – does that affect the rationale for the choice of English law as the governing law of your contract, both in respect of its validity and its enforceability?
As articulated more fully in this article our view is that Brexit should have no impact on the rationale for the choice of English law. The factors that made English law an attractive choice of law before Brexit remain, and that choice will in almost all circumstances continue to be upheld both by the courts of the remaining member states of the EU and by the English courts themselves during and after the implementation stage of the UK’s withdrawal from the EU.
Why choose English law to govern your contract?
English law is generally seen as an attractive, pro-business choice of law to govern international commercial agreements. The fundamental principles of English contract law have been developed by the judges (the essence of the common law tradition) who move the law forward in line with precedent and in incremental steps to meet new situations rather than in significant leaps and bounds. This means that while English law is flexible it is to a large measure predictable and stable. The case law that has developed means that English law can be readily ascertained, and as such parties are able to contract on the basis of clear advice as to their respective rights and obligations.
In addition English law firmly supports the principle of ‘freedom of contact’, whereby English judges will seek to uphold the bargain the parties have reached and will not seek to re-write their agreement for them. For the parties this encourages certainty of position, of understanding and of outcome, which is what they require. This is reflected in repeated statements from the UK’s Supreme Court in cases concerning the interpretation of disputed terms of a contract which have stressed the importance that the courts should place on the words the parties have actually used in their agreements. It is also reflected in the high threshold test in place for implying terms into an agreement (what is effectively a contractual ‘gap filling’ exercise) and in the fact that English law has refused to accept that there is any general doctrine of ‘good faith’ to be implied into commercial agreements on the basis that this could lead to obligations that are vague and subjective and therefore inimical to the concept of contractual certainty.
Will an express choice of English law continue to be upheld by the courts of EU member states – the current position
The Rome 1 Regulation applies to all contracts concluded on or after 17 December 2009. As a Regulation it is of direct application in all member states of the EU.
The Rome 1 Regulation sets out the rules for determining the governing law of a contract and gives primacy to party choice. Article 3 provides that a contract shall be governed by the law chosen by the parties. That express choice of law is to be respected by the courts in all EU member states and, under Article 2, this applies whether or not the law of a member state is chosen – so the Rome 1 Regulation is to have ‘universal application’. By way of example, under the Rome 1 Regulation a court in Italy would have to uphold an express choice of English law in the same way that it would if the choice of the law to govern a particular contract was that of, say, the law of India.
As EU law continues to apply in the UK during the implementation period, the English courts would, in common with the courts of all the remaining EU member states, uphold a choice of English law in accordance with the Rome 1 Regulation.
With regard to contracts where the chosen dispute resolution method is arbitration under one of the principal arbitral institutions (for example the LCIA or the ICC) rather than through the courts of the UK or of an EU member state, party choice as to the governing law of the agreement is given primacy and this is unaffected by Brexit.
The position at the end of the implementation period
Article 66 of the Withdrawal Agreement provides that at the end of the implementation period the Rome 1 Regulation will continue to apply in the UK to contracts concluded before the end of the implementation period. As such an express choice of English law made in a contract concluded before 31 December 2020 will continue to be upheld by the English courts. This would also be the case in the courts of the member states of the EU under Article 2 of the Rome 1 Regulation, on the basis that it applies whether or not the law chosen is that of a member state (which the UK will not be).
For contracts concluded after the end of the implementation period (ie from 1 January 2021), and on the assumption that the Rome 1 Regulation will form part of the body of retained EU law going forwards, the express choice of English law as the governing law of a contract will continue to be upheld by the English courts. Similarly, the courts of the member states of the EU will continue to uphold an express choice of English law under Article 2 of the Rome 1 Regulation.
The factors that favoured the choice of English law to govern international contracts pre-Brexit remain valid following Brexit, and English law governing law clauses will continue to be upheld by the English courts and by the courts of the various EU member states.
Regulation (EC) 593/2008 on the law applicable to contractual obligations (Rome 1)
Pursuant to the transitional arrangements set out in the agreement between the EU and the UK detailing the arrangements for the UK’s withdrawal from the EU (the Withdrawal Agreement). This has been given effect in UK law by the European Union (Withdrawal Agreement) Act 2020
For example, Rule 22.3 of the LCIA Arbitration Rules (2014) provides that “The Arbitral Tribunal shall decide the parties’ dispute in accordance with the law(s) or rules of law chosen by the parties as applicable to the merits of their dispute. …”
Pursuant to the European Union (Withdrawal) Act 2018
Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.