Analysis: Recast Brussels Regulation – What do I need to know?

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

The recast Brussels Regulation (Regulation (EU) No 1215/2012 on jurisdiction and the recognition of judgments in civil and commercial matters (recast)Regulation (EC) No 44/2001) ("Recast Regulation") will apply to proceedings commenced in the courts of the European Union's Member States from 10 January 2015. The Recast Regulation amends the original Brussels Regulation (,"Original Regulation") by clarifying certain rules on questions of jurisdiction and the enforcement of judgments in the EU.

Below we set out the key changes included in the Recast Regulation and the impact it is likely to have on businesses party to litigation in the courts of the Member States of the EU and why it is important for special consideration to be given to jurisdiction clauses when entering into contracts.

Will it make an exclusive jurisdiction clause easier to enforce?

The Recast Regulation improves the position for litigants who have agreed that a particular Member State is to be granted exclusive jurisdiction. If the jurisdiction agreement provides that a particular Member State has exclusive jurisdiction to resolve any disputes and the jurisdiction agreement is not "null and void as to its substantive validity" under the laws of the courts of the chosen jurisdiction, the parties will be able to rely on that agreement, regardless of where the parties are domiciled. The enforcement of exclusive jurisdiction clauses is further strengthened by new rules which provide that any challenge to the validity of a jurisdiction agreement is to be determined by the Member State identified as having exclusive jurisdiction.

When can a non-EU defendant be sued in a Member State court?

Under the Original Regulation the exercise of an exclusive jurisdiction clause was limited so that at least one party to the litigation had to be domiciled in an EU Member State for it to be enforceable. The Recast Regulation removes this requirement. This means that from 10 January 2015, a non-EU defendant can be sued in a Member State court where there is a jurisdiction agreement in favour of that court, regardless of where the parties to the litigation are domiciled.

The Recast Regulation provides that a non-EU defendant can be sued in a Member State court in consumer contract and employment cases, where services are offered or employees work in the EU. Similarly, the courts of the affected Member State may have jurisdiction (irrespective of where the parties are domiciled) in certain proceedings concerning land in a Member State, certain matters of company law and proceedings concerning the registration or validity of certain intellectual property rights.

Accordingly, the Recast Regulation could extend to non-EU based businesses where any element of their operation affects trade or persons in the EU. Here, consideration should be given to the inclusion of an exclusive jurisdiction clause in relevant contracts and whether the jurisdiction conferred should be on an EU Member State or a third state (i.e. a state which is not a member of the EU).

Will the "Italian Torpedo" still work?

One of the biggest criticisms of the Original Regulation was the vulnerability to tactical litigation - most notably the use of the so-called "Italian Torpedo", a practice whereby claims were brought in relation to the same cause of action in the courts of two (or more) different Member States. Under the Original Regulation the second (and any subsequent) court in which proceedings had been issued would have to stay proceedings until the first court in which proceedings had been issued had determined the issue of jurisdiction, even if the proceedings in the first court were brought in breach of an exclusive jurisdiction agreement in favour of the second or subsequent court. As a delaying tactic, a party could rush to commence litigation first in a slow-moving jurisdiction, such as Italy, thereby significantly delaying related proceedings.

The Recast Regulation seeks to safely detonate the risk of an "Italian Torpedo". In relation to all proceedings commenced on or after 10 January 2015 where parties have agreed to confer exclusive jurisdiction on the court of a Member State, that Member State will have jurisdiction to determine whether it (as a matter of law) has jurisdiction to hear a matter irrespective of whether proceedings have already been issued in a different Member State. This new rule should mitigate the effect of tactical litigation. Whilst litigants will still be able to file claims in several jurisdictions with a view to driving up costs, under the Recast Regulations such claims will not have the effect of delaying the litigation in the Member State which the parties agreed should have exclusive jurisdiction. Where a party has issued proceedings in other Member States, the courts of those Member States are required to stay the proceedings in their jurisdiction.

Are there any other situations where a Member State court might stay proceedings before it?

The Original Regulation was silent on the treatment of proceedings in courts outside of the EU. The Recast Regulation provides that in certain limited circumstances, Member State courts will have a discretion to stay proceedings in their own courts where related or parallel proceedings were first commenced in a court of a third state (i.e. outside of the EU).

For the Recast Regulation to apply the proceedings in the court of the third state must: (i) involve the same causes of actions which are before the court in the Member State; and (ii) the proceedings in the court of the Member State are issued on the basis of domicile or the jurisdiction provisions in the Recast Regulation. If the Recast Regulations do apply, the Member State court can exercise its discretion to stay proceedings in its court if the judgment of the third state court would be recognised and enforceable in the Member State and a stay is necessary for the proper administration of justice; for example to avoid the risk of irreconcilable judgments.

If a Member State court is petitioned to hear related or parallel proceedings in relation to which a third state court has already handed down a judgment, that Member State court must dismiss the proceedings if the judgment of the third state is recognised and enforceable in that Member State. The Recast Regulation provides that Member State courts may continue with proceedings where:

• there is no longer a risk of irreconcilable judgments;
• proceedings in a third state have been stayed, discontinued or are unlikely to be concluded in a reasonable time; or
• the continuation of proceedings is required for the proper administration of justice.

There is a risk of abuse of this rule by parties seeking to delay proceedings by filing claims in a slow-moving third state judicial system - but only time will tell the significance of this potential problem.

Will it be easier to enforce a judgment obtained elsewhere in the EU?

Under the Recast Regulation, parties seeking to enforce a judgment obtained in one EU Member State through the courts of another will no longer have to obtain a declaration of enforceability or to register the judgment in the Member State of enforcement. It will be sufficient to present a copy of the judgment to be enforced and a standard form certificate (which is set out in an annex to the Recast Regulation) issued by the court which handed down that judgment. It is likely that this standardised approach should ease the path to enforcement of judgments throughout the EU.

Will arbitration proceedings still be excluded from the ambit of the Recast Regulation?

Arbitration proceedings are explicitly excluded from the scope of the Recast Regulation. Nothing in the Recast Regulation should prevent a Member State court from referring a dispute to arbitration, from staying or dismissing proceedings in favour of arbitration or from examining whether an arbitration agreement is void, inoperative or incapable of being performed, in accordance with national law. Any ruling with respect to the legality or operability of an arbitration agreement will not be subject to the Recast Regulation. However, in the event that an arbitration agreement is determined to be unenforceable, a Member State court will still be able to issue judgment on the substance of the proceedings and that judgment will be enforceable pursuant to the Recast Regulation.

What difficulties still remain?

The Recast Regulation has gone a long way to clarifying concerns regarding jurisdiction and the enforcement of judgments in the EU. However, there are still a number of potential problems which litigants may face in the coming months and years as the Recast Regulation is put into practice.

There are a number of shortcomings in the Recast Regulation with respect to jurisdiction:

• Clarification is still required as to whether dual or hybrid jurisdiction clauses are to be treated in the same way as exclusive jurisdiction clauses. So far as the practical application of the Recast Regulation is concerned this is a real setback as dual and hybrid jurisdiction clauses are widely used commercially.
• It remains uncertain whether parties are able to disapply contractually the provisions in the Recast Regulation governing which Member State should determine questions of the validity of jurisdiction.
• The Recast Regulation does not provide a mechanism for dealing with conflicting jurisdiction clauses.
• It still remains unclear whether an exclusive jurisdiction clause in favour of a third state would be respected by the courts of Member States. This also raises questions over whether Member State courts would have discretion to stay proceedings where a third state has exclusive jurisdiction.
• The inclusion of a discretion for Member State courts to stay certain proceedings where parallel proceedings have been issued in a third state keeps alive the potential for proceedings to be issued in slow moving jurisdictions. In practice, it is unlikely that this will reproduce the "Italian Torpedo" effect given that the ability to stay proceedings remains at the discretion of the court of the Member State.

Many of these difficulties will work themselves out as these issues are considered by the Member State courts and in turn the Court of Justice of the European Union.

The Recast Regulation could impact all businesses which operate in the EU or who have operations with some activities in the EU. It is of paramount importance that proper consideration is now given to whether contracts should include an exclusive jurisdiction clause and if so, which jurisdiction (EU or otherwise) should be agreed upon. Once the Recast Regulation is in operation, parties who have agreed that a particular Member State is to have exclusive jurisdiction to determine disputes will not be able to change their minds if the parties fall out.