Preparing for Brussels I recast—declining jurisdiction in favour of the first court seised

With the Brussels I (recast) set to apply from January 2015, what do lawyers need to be aware of and prepare for when dealing with matters under the new regulation? Sarah Garvey, who heads up the litigation PSL team at Allen & Overy, says it seems likely that from 10 January 2015 the ‘torpedo’ as a litigation tactic will be much less effective where proceedings are pending in different member state courts.

What are the key changes in relation to lis pendens?

One of the most important (and helpful) changes introduced by Brussels I (recast) (Regulation (EU) 1215/2012)relates to the lis pendens rules. By way of reminder, the current lis pendens rules (at arts 27 and 28) set out a strict ‘first-in-time’ regime where the same claims between the same parties are pending before different member state courts, giving priority to the member state court seised first. The application of these lis pendens rules has been highly controversial, with litigants exploiting the rules to give themselves a perceived advantage. They do this by starting proceedings (in breach of an exclusive jurisdiction clause) in what is perceived to be a slow moving court and as these proceedings have been initiated first, they block the progress of any subsequent proceedings between the same parties on the same matter that might be brought in the contractually agreed court.

The harshness of the first-in-time rule has been tempered in Brussels I (recast). The new regulation includes a helpful new carve out from the existing lis pendens provisions for proceedings brought in circumstances where the parties have agreed an exclusive jurisdiction clause. The new carve out frees a member state court chosen in an exclusive jurisdiction clause to determine whether it has jurisdiction regardless of whether it was first seised of the relevant proceedings. Thus the original first-in-time rule (now at art 29(1)) is now expressed to be ‘without prejudice to Article 31(2)’ which says that ‘…where a court of a member state on which an agreement as referred to in Article 25 confers exclusive jurisdiction is seised, any court of another Member State shall stay the proceedings until such time as the court seised on the basis of the agreement declares that it has no jurisdiction under the agreement’. This new rule means that the member state court designated in an exclusive jurisdiction clause can continue to hear a claim, even if second seised, without waiting for the court first seised to stay its proceedings. Recital 22 sets out the policy justification for this revision, referencing the need to enhance the effectiveness of exclusive choice of court agreements and avoid ‘abusive litigation tactics’.

Article 31(3) also provides:

‘…where the court designated in the agreement has established jurisdiction in accordance with the agreement any court of any Member State shall decline jurisdiction in favour of that court.’

The discretionary rules for a stay in respect of related actions (old art 28, now art 30) remain essentially unchanged.

In addition, Brussels I (recast) introduces a new lis pendens rule where there are related proceedings in a third state (ie not a member state). New rules at arts 33 and 34 provide member state courts with a discretion in certain circumstances to stay proceedings before them to take into account proceedings involving the same cause of action and the same parties or related proceedings pending before the courts of a third state. This discretion is said to arise where proceedings have been brought before a member state court on the basis of domicile (art 4) or on the basis of the special alternative jurisdiction grounds (at arts 7, 8, 9). This discretion would not appear to be available where proceedings are brought before a member state court on the basis of an art 25 jurisdiction clause.

There are the significant restrictions on the exercise of this discretion. Most importantly, proceedings in the third state must have been started first. The member state court must also be satisfied that a stay is ‘necessary for the proper administration of justice’. For related proceedings only, the court must also be of the view that it is expedient to hear actions together to avoid irreconcilable judgments resulting from separate proceedings and that the court of the third state ‘will give a judgment capable of recognition and, where applicable, enforcement in the Member State’ (ie the member state which is considering whether to grant a stay). It is unclear whether this means that it must be established that a judgment debt of the relevant third state would be enforceable pursuant to a reciprocal enforcement treaty or whether it would be sufficient to establish that, for example, a judgment creditor can expect to sue on a judgment debt (subject to certain standard exceptions).

Article 33(3) provides that the court of a member state shall dismiss their proceedings if the third state proceedings ‘are concluded and have resulted in a judgment capable of recognition and, where applicable, of enforcement in that Member State’ (art 34(3)).

Member state courts can, however, continue proceedings notwithstanding the fact that proceedings are on foot in a third state if any of following apply:

there is no longer a risk of irreconcilable judgments (for related proceedings only)
proceedings in the third state are themselves stayed or discontinued
proceedings in the third state are unlikely to be concluded within a reasonable time, or
the continuation of proceedings before a member state court is required for the proper administration of justice

What is the extent of the new provisions giving the courts discretion to stay proceedings?

The new discretion given to member state courts in respect of the third state proceedings is fairly tightly constrained. As outlined above, the test for a stay is high—it requires first-in-time third state proceedings, expediency, necessity and a judgment ‘capable of recognition’ in a member state.

There is likely to be litigation as to what many of these new provisions mean.

Where there is a third state jurisdiction clause, member state courts may also find themselves in the unhappy position of effectively sanctioning a breach of contract if this high test is not met (raising potentially awkward questions of comity).

Concerns have also been raised that the requirement for third state proceedings to be first-in-time may increase the likelihood of parties initiating pre-emptive proceedings in third state courts, to establish their first-in-time position. Also, conceivably parties (potential judgment debtors perhaps) may initiate pre-emptive proceedings in a member state, perhaps the member state in which the counterparty is domiciled, in breach of a third state jurisdiction agreement. It may do so with a view to arguing that the member state court has mandatory jurisdiction and contend that the member state moreover has no discretion to stay proceedings before it because the test in art 34 has not been satisfied.

How will all of this work in practice?

It seems likely that from 10 January 2015 the ‘torpedo’ as a litigation tactic will be much less effective where proceedings are pending in different member state courts. A party will not necessarily be able to halt proceedings brought in breach of a jurisdiction clause in its tracks, but there will at least be no bar from continuing with its claim before the chosen court even if it is second seised. It should be remembered however that the lis pendens rules in the Lugano Convention remain unrevised and so, in theory at least, litigants could still seek to exploit the equivalent rules in that Convention.

One area where we may see litigation is where a party with the benefit of a hybrid or asymmetric jurisdiction clause (eg a lender) seeks to take the benefit of the carve-out to art 29(1). Would such a hybrid clause be categorised as an ‘exclusive’ clause for these purposes vis-à-vis the other party (eg the borrower)? See further discussion below.

Another related area of uncertainty is that recital 22 states expressly that art 31(2) will not apply where parties have entered into conflicting jurisdiction clauses, but in many cases it may be difficult to determine whether jurisdiction clauses do indeed conflict or whether they in fact seek to apply to different disputes.

There is also much uncertainty as to how the new international lis pendens rules will work in practice. Recital 24 provides some guidance on how the discretionary stay should be approached. It refers to the need for a member state court to assess ‘all the circumstances of the case before it’. It notes such circumstances may include connections between the facts of the case or parties and the third state concerned, the stage to which the proceedings in the third state have progressed by the time proceedings are initiated in the court of the member state and whether or not the third state court might be expected to give a judgment in a reasonable time.

Interestingly, it provides that the assessment may also include consideration of the question whether the third state court ‘has exclusive jurisdiction in the particular case in circumstances where a court of a Member State would have exclusive jurisdiction’. Presumably, such a consideration would include where there is an exclusive jurisdiction agreement in favour of a third state court or for example the third state had ‘subject matter’ jurisdiction under Brussels regime rules (old art 22/now art 24).

Are there any possible pitfalls in the new provisions?

As noted above, one possible pitfall with the new rule is that it is unclear whether it could be relied on by parties with the benefit of a hybrid or asymmetric jurisdiction clause as it is unclear whether such clauses could be described as ‘exclusive’ jurisdiction clauses for the purposes of this rule. As discussed, it may be possible to argue that such clauses do operate as exclusive jurisdiction clauses for one party because that party can only bring proceedings in the chosen courts. However, it is not clear whether the Court of Justice of the European Union (CJEU) would take this approach. This lack of clarity is particularly unfortunate given that asymmetric clauses are ubiquitous in the lending and capital markets contexts.

The new rule does not insulate a party from the costs and distraction of tactical litigation entirely. While art 31(2) is designed to allow the court chosen in a jurisdiction clause to continue with its proceedings although another member state court has also been seised of the same proceedings, it is not designed to speed up any decision by a non-chosen court on jurisdiction. (There had been a proposal, which was dropped in negotiations, to set a six-month deadline within which member state courts had to determine jurisdictional issues). While the new carve out largely removes the incentive to bring proceedings in a non-chosen court in the first place (as it will not now have the effect of torpedoing the proceedings in the chosen court), if a party does wish to act tactically and commence proceedings in the ‘wrong’ court, simply to increase the time and cost burden on its counterparty, this rule will not therefore entirely prevent that.

There is also likely to be a degree of uncertainty (and controversy) about the extent to which English courts have any residual discretion to stay proceedings before it on forum conveniens where for example, the dispute relates to real property in a third state or where such proceedings are brought in breach of a third state jurisdiction clause.

What should lawyers do next?

Lawyers will need to advise clients on their dispute resolution options in the light of these amendments. While forum selection in any transaction is dependent on a number of factors, many of which are deal specific, in the light of the amendment to the lis pendens rules at art 31(2) and the uncertainties regarding the categorisation of hybrid clauses in this context (discussed above), it may be that we will see parties favouring simple exclusive jurisdiction clauses (rather than more complex hybrid clauses) so as to ensure they can take advantage of the new carve out to the lis pendens rules. The new rules are also likely to impact behaviours at the disputes stage.

Lawyers will also be looking at legal opinion wording in the light of the new regulation.

Are there any further comments or observations you wish to add?

While sweeping away the requirement regarding the domicile of the parties, art 25 (jurisdiction clauses) remains confined to jurisdiction clauses that designate member state courts. This restriction means that there is still no uniform position across member state courts as to whether or not a jurisdiction clause in favour of a third state (for example, a New York jurisdiction clause) would be respected by them. Following the CJEU’s decision in Owusu v Jackson (t/a Villa Holidays Bal-Inn Villas): C-281/02 [2005] QB 801, [2005] 2 All ER (Comm) 577 there remains an unanswered question as to whether a member state court has discretion to stay proceedings brought before them (perhaps as the place of the defendant’s domicile) where those proceedings have been brought in breach of contract because is the contract contains a third state jurisdiction clause. There is arguably a further complication introduced into this analysis by the introduction in the recast of the new international lis pendens rule discussed above. Indeed, there is a view that third state jurisdiction clauses are now more vulnerable and less likely to be respected under Brussels I (recast) following the introduction of a new international lis pendens rules and related recital 24 (see above).

The Commission has indicated that the EU will soon ratify the Hague Convention on Choice of Courts Agreements of 30 June 2005 (Hague Convention). While this would be a helpful step, it is not a complete answer, not least because currently only Mexico has ratified the Hague Convention. This is likely to remain an area of concern for some time to come.

Sarah Garvey first qualified as a barrister before joining the litigation department at Allen & Overy. She has worked on a wide range of commercial matters, including banking disputes, complex cross-border fraud actions, disputes arising out of the sale and purchase of companies, oil and gas disputes and shareholder disputes. Sarah has higher rights of audience. In her role as head of the litigation PSL team, she is responsible for training and KnowHow. She has a particular interest in conflict of laws and speaks regularly on topics such as governing law, jurisdiction, immunity and arbitration. Sarah is a member of the Law Society’s EU Committee and a member of the Lord Chancellor’s Advisory Committee on Private International Law, chaired by Lord Mance.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.