Brexit May Be Good News for Arbitration

On 23 June 51.9% of British voters voted to leave the EU. The referendum turnout was 71.8%, with more than 30 million people voting. It was the highest turnout in a UK-wide vote since the 1992 general election. England voted strongly for Brexit, by 53.4% to 46.6%, as did Wales, with Leave getting 52.5% of the vote and Remain 47.5%. Scotland and Northern Ireland both backed staying in the EU. Scotland backed Remain by 62% to 38%, while 55.8% in Northern Ireland voted Remain and 44.2% Leave.

Shortly after the vote the Scottish First Minister Nicola Sturgeon announced that a second referendum on the independence from the United will be held in Scotland given the strong pro-EU vote in Scotland. There have been calls for a referendum to unite Ireland and Northern Ireland.

Thus the implications of Brexit for the UK both regarding its internal configuration and external relations, be it with the rest of the EU or China are significant. They are also difficult to predict.

Part of the uncertainty relates to the fact that the Leave campaign has so far not spelt out what the exiting from the EU would look like legally. For example it is unclear at this point whether the UK will remain part of the European Single Market. Norway for example, which is part of the European Economic Area (EEA) but not the EU, pays significant contributions for the privilege and must also adhere to EU trade directives including those relating to free movement of people. It is likely that the EU will insist that the UK make contributions on a similar level to those made by Norway in return for staying in the EEA – a matter which may not be acceptable to the UK government given Leave’s campaign preceding the vote for the referendum. For the same reasons Britain is likely to be reluctant to agree to continue to allow the free movement of people. The arrangement ultimately agreed between the UK and the EU is more likely to resemble the arrangement currently in place between Switzerland and the EU.

The one thing that is clear at this point is that a process regarding UK’s withdrawal will be governed by Article 50 of Treaty on the Functioning of the EU. The provision provides a period of two years for negotiations between the UK and the EU from the date that the UK officially notifies the EU of its intention to withdraw. David Cameron has announced that he will resign as Prime Minister in October 2016, that UK general elections will called for November to give a new Parliament the mandate to negotiate Brexit. This means that the provisions of Article 50 will not be triggered until late this year/early next year. Pursuant to Article 50 the UK will automatically cease to be a member of the EU at the end of the two year period irrespective of whether an alternative arrangement governing EU/UK relations is in place by such date unless the European Council unanimously agreed to extend that period.

What does Brexit mean for Arbitration?

First, upon the entry into force of the withdrawal agreement, or the expiry of the two year period, the EU Treaties will no longer apply to the UK. This includes Article 288 of the TFEU, which provides for the direct application of EU Regulations. This means that, as of that moment, the Brussels I Regulation which governs both the allocation of civil and commercial jurisdiction among UK courts on the one hand and courts of other EU member state courts and the recognition and enforcement of UK judgements in the courts of other EU MS judgments and vice versa which was adopted in January 2015 will no longer be part of English law. Unless another agreement is put in place the Brussels Convention would remerge as the governing instrument in respect of these matters.

The disapplication of the Brussels I Regulation in the UK may be regarded as good news by the arbitration community. Under the new regime it is likely that English courts would regain the power to issue anti-suit injunctions restraining court proceedings brought in EU countries in violation of an arbitration agreement providing for England as a seat of arbitration. The UK Supreme Court made clear in the Ust-Kamenogorsk Hydropower Plant JSC v AES UstKamenogorsk Hydropower Plant LLP in 2013 that English courts’ general inherent jurisdiction to declare rights and to enforce the “negative obligation” of an arbitration agreement (i.e. the express or implied promise not to commence proceedings other than in the forum specified in the arbitration agreement) is long-standing and well-recognised, independent of the Arbitration Act 1996, and nothing in the 1996 Act has removed that power from the courts. The regaining of the power to grant anti-suit injunctions is likely to mean that parties to international contracts in the future favour the UK as a seat of arbitration.

Second, it is likely that the UK will take a more favourable approach to international investment treaty arbitration than that taken by the European Commission. In recent years, the Commission has challenged the jurisdiction of arbitral tribunals to rule on matters of EU law. It has gone as far as ordering Romania not to enforce an arbitral award rendered under the 1965 International Convention on the Settlement of Investment Disputes in the Micula v. Romania case.

Third, should the UK choose not to follow the Norway route, it is likely that it will take a less expansive interpretation of public policy than the Court of Justice of the European Union. In such circumstances the English courts may be more reluctant to exercise their discretion to set aside arbitral awards on the grounds of public policy than they were when they were bound by EU law.

Finally, since the UK is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Arbitral Awards and the 1965 International Convention on the Settlement of Investment Disputes in its own right the arbitral framework regarding the conduct and enforcement of arbitration in the UK will not change as a result of Brexit. Arbitration seated in London will carry on as usual as the 1996 Arbitration Act is not EU law. The UK will likely remain a preferred dispute resolution centre in the event of a Brexit for so long as it remains a global financial hub.

It is doubtful that a Brexit will have an impact on choice of English governing law for arbitrations. In the Queen Mary International Arbitration Survey for 2010, English law was the most common choice of governing law for the substance of arbitrations. English law was also a factor placing London as the “preferred seat” along with factors such as location, language, culture, and efficiency of court proceedings. The more recent Queen Mary International Arbitration Survey for 2015 ranked London amongst the five most preferred and widely used seats for arbitration.

For all these reasons Brexit may well be good news for arbitration in the UK although it is too early to say so with certainty. What is clear is that Brexit is unlikely to negatively impact London as a seat of arbitration in the short and medium term.

Ana Stanic, EU energy and international law specialist