LMA Briefing Note on Applicable Law and Jurisdiction Post-Brexit

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1 LMA Briefing Note on Applicable Law and Jurisdiction Post-Brexit Introduction 1. As a Member State of the European Union (EU), the UK is subject to the Rome I Regulation 1 concerning the law applicable to contracts, including contracts of insurance, and the Recast Brussels Regulation 2 concerning jurisdiction and the recognition and enforcement of judgments in the EU. The application of these Regulations to the UK will cease on Brexit, currently 29 March It is not known what will replace them as regards their application to UK insurers sued and suing in EU Member States. It is possible that post-brexit, underwriters may find themselves subject to laws and courts that they had not anticipated when underwriting. The uncertainty may also detract from the attractiveness of UK policies to policyholders. 2. The Market Reform Contract (MRC) will usually have a clause specifying the choice of law and jurisdiction in the Risk Details section. If the risk or the insured is in the EU, the Rome I and Recast Brussels Regulations may apply to either or both the choice of law and the choice of jurisdiction, particularly if courts, rather than arbitration, are chosen as the forum to resolve coverage disputes. Not knowing what will replace the Regulations creates uncertainty which is of immediate effect as disputes arising after Brexit out of contracts written today may well be subject to whatever rules replace the Recast Brussels Regulation. 3. This briefing note outlines the uncertainties concerning the applicable law and court jurisdiction that may arise post-brexit, and how those uncertainties can be addressed through the selection of arbitration as the forum in which to resolve coverage disputes. Applicable Law 4. Although the Rome I Regulation was intended to simplify the rules relating to the law applicable to contracts, the sources of choice of law rules concerning insurance contracts remain a matter of considerable complexity. 3 In summary, the current position is as follows: 1 Regulation (EC) 593/2008 on the Law Applicable to Contractual Obligations which superseded the Rome Convention 1980, enacted in the UK by the Contracts (Applicable Law) Act Regulation (EU) 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters which superseded the Brussels Regulation 44/2001, which in turn superseded the 1968 Brussels Convention enacted in the UK by the Civil Jurisdiction and Judgments Act Lord Collins (ed.) Dicey, Morris and Collins on the Conflict of Laws (15th edn, Sweet & Maxwell 2012) para

2 Except for compulsory insurance, if the insured risk is a large risk 4 the insurance contract is governed by the law chosen by the parties (eg the law specified in the MRC). If there is no chosen law, then the governing law will be that where the insurer has its habitual residence (usually its place of central administration) at the time of underwriting, unless it is clear from all the circumstances that the contract is manifestly more closely connected with another country (for example, if the policy is issued by a branch of the insurer in another country), in which case the law of that other country will apply. 5 Where the contract is one of coinsurance, the habitual residence of the lead insurer will determine the applicable law. 6 This rule also applies to contracts of reinsurance, irrespective of the size of the risk 7 except that in considering whether the reinsurance is more closely connected to another country, regard will be had to its connection with reinsured contracts (and the laws of those contracts). 8 If the risk is not a large risk or reinsurance or compulsory insurance, if it is a risk situated in an EU Member State, the law chosen in a non-life insurance contract will apply if it is the law of (a) the Member State where the risk is situated, or (b) the country where the policyholder has its habitual residence, or (c) the Member State where events insured by the policy are to occur, or (d) if the policyholder pursues a business activity, the law of any of the Member States concerned with the risks, or the country of the policyholder s habitual residence 9. If the law of the Member State referred to in points (a), (b) and (d) grants greater freedom of choice of the applicable law, the parties can take advantage of that freedom. For example, if the risk is situated in London, so that English law applies, except where the insured is a consumer, the parties can choose any law to apply as English law permits that freedom of choice. 10 Other EU Member States may not recognise that freedom to choose the applicable law and may override the choice of English law if English law is not the applicable law under points (a) to (d). If the insured is a consumer, the law chosen in this way will apply except to the extent that it derogates from the protections afforded the consumer under the law of his 4 Large risks are defined in Article 13(27) of the Solvency II Directive. Large risks are risks of the following types: (a) railway rolling stock; (b) aircraft; (c) ships; (d) goods in transit; (e) aircraft liability and liability for ships; (f) credit and suretyship risks which relate to business carried on by the policyholder; and (g) vehicle, fire and natural forces, property, motor vehicle liability, general liability or miscellaneous financial loss risks where the policyholder carries on a business which satisfies at least two of the following criteria: (i) balance sheet total of 6.2 million, (ii) net turnover of 12.8 million, and (iii) an average number of 250 employees during the financial year. These criteria may be satisfied on the basis of group consolidated accounts if the insured belongs to a group. 5 Article 7(2) Rome I Regulation 6 Regulation 5 FSMA 2000 (Law Applicable to Contracts of Insurance) Regulations Articles 3, 4(1)(b), 4(3) and 19(3) Rome I Regulation 8 Recital (20) Rome I Regulation 9 Article 7(3) Rome I Regulation 10 Financial Services and Markets Act 2000 (Law Applicable to Contracts of Insurance) Regulations 2009 (SI 2009/3075), Art 4 2

3 or her habitual residence. 11 If no law is chosen, the law of the Member State in which the risk is situated at the time of underwriting will apply. 12 Where the risk is situated is determined by Article 13(13) Solvency II Directive. 13 In short, for non-life insurance this will be where the insured property is situated, or where the insured vehicle is registered, or where the policyholder is habitually resident or has an establishment to which the policy relates. A risk may be situated in several countries, including Member States and non-member States (for example, a policy may insure properties in different countries). Unless it is a large risk, the policy will be split into two or more contracts, one for each relevant Member State. 14 If the risk is situated in a country not in the EU and it is a large risk, then the rules applicable to large risks apply. 15 Otherwise the rules applicable to contracts generally under the Rome I Regulation will apply. In practice, these rules would be the same as those applied to a large risk. Where the insurance is compulsory (eg motor or employers liability insurance), the insurance terms must comply with the provisions required by the Member State in which the insurance applies and those provisions will prevail over the law of the Member State where the risk is situated The Rome I Regulation does not apply to arbitration agreements, 17 although it will apply to the determination of the law applicable to the contract which is subject to arbitration The European Union (Withdrawal) Bill introduced by the UK Government on 13 July 2017 provides that a regulation such as the Rome I Regulation will form part of UK domestic law on and after Brexit unless it is an exempt EU instrument, which it does not appear that the Rome I Regulation is intended to be. 19 The provisions of the regulation will accordingly be applied by the UK courts after Brexit in establishing the applicable law, although it is unclear how the rules will be applied in relation to EU 11 Article 6(2) Rome I Regulation 12 Article 7(3) Rome I Regulation 13 Article 7(6) Rome I Regulation 14 Article 7(5) Rome I Regulation 15 Articles 7(1) and (2) Rome I Regulation 16 Articles 7(4) & (5) Rome I Regulation 17 Article 1(2)(e) Rome 1 Regulation 18 Robert Merkin QC Arbitration Law, para 7.20 (Issue March 2017) 19 In its paper entitled Providing a cross-border civil judicial cooperation framework issued on 22 August 2017, HM Government said that it was its intention to incorporate into domestic law the Rome I and II instruments on choice of law and applicable law in contractual and non-contractual matters. 3

4 Member States. 20 The Bill provides that the Court of Justice of the European Union (CJEU) will cease to have supremacy over the interpretation of regulations transposed into UK law. 7. In EU Member States, after Brexit the UK will become a non-member State for the purposes of the Rome I Regulation. There will be an issue about the extent to which a UK insurer (or a plaintiff suing a UK insurer) could rely on the Regulation s predecessor, the Rome Convention 1980, in establishing the law to be applied in proceedings in a Member State. It is thought likely that the Rome Convention 1980 will apply post-brexit. 21 Article 1(3) of that Convention stipulates that it does not apply to contracts of insurance covering risks situated in the member states of what was then the EEC. What law applies to such contracts will depend on the view of the court considering the case as to where the risk is situated (applying the internal law of the state where the court is located), and which law it considers should apply once it has made that determination. At least as regards large risks, the uncertainty this creates can be mitigated by having a clear choice of applicable law in the policy. Jurisdiction 8. For nearly a century there have been treaties in place between the UK and a number of trading nations concerning the recognition and enforcement of judgments issued in contracting states. The Recast Brussels Regulation governs the recognition and enforcement of judgments in the EU. It has a section dedicated to jurisdiction in matters relating to insurance. 22 In summary, a Member State X will have jurisdiction over proceedings against an insurer domiciled in a Member State: If the insurer is domiciled in X. If the dispute arises out of the operations of a branch, agency or other establishment of the insurer in X. If the insured or beneficiary of the insurance is domiciled in X. If the insurer is a following co-insurer and the lead insurer is sued in X. Where liability insurance is involved or if the insured property includes immoveable property, and the harmful event occurred in X In the EU Commission s position paper on Judicial Cooperation in Civil and Commercial Matters dated 12 July 2017 (TF50 (2017) 9/2), it was said that the provisions of EU law in force on Brexit on the applicable law for contractual obligations should continue to apply to contracts concluded before Brexit. 21 Prof. Adrian Briggs QC (Hon) Secession from the European Union and Private International Law: the Cloud with a Silver Lining, ComBar Lecture 24 January 2017; Sir Richard Aikens Jurisdiction, Applicable Law and Arbitration Post-Brexit, BILA Lecture 19 June Section 3, Articles Recast Brussels Regulation 23 In Assens Havn v Navigators (judgment 13 July 2017) the European Court of Justice applying a similar provision in the Brussels Regulation held that a claimant bringing a direct action against the insurer of an insolvent insured was able to bring proceedings in Denmark in reliance on this provision notwithstanding an exclusive English jurisdiction clause in the policy. 4

5 In the case of liability insurance, where the injured third party has brought proceedings against the insured in X. If there is a jurisdiction clause in the policy (a) permitting the insured to sue the insurer in X, (b) providing for proceedings to be brought in X where both the insurer and the insured are domiciled or habitually resident in X, or (c) providing that X has jurisdiction and either the insured is not domiciled in a Member State (unless the insurance is compulsory or relates to immoveable property) or the risk is a large risk (see above). Insurers of large risks are generally able to enforce jurisdiction clauses. 24 If an agreement conferring jurisdiction on X is entered into after the dispute has arisen. 9. Although the primary rule in the Recast Brussels Convention is that the EU Member State court in which proceedings are first issued shall have jurisdiction, 25 Article 31(2) of the Recast Brussels Regulation provides that where a Member State court has exclusive jurisdiction because of a binding agreement, any other court shall stay proceedings before it until the agreed court has determined jurisdiction. Whether an exclusive jurisdiction clause in an insurance contract is binding on the insured or a beneficiary will depend on the rules set out above. 10. By means of the Lugano Convention, these rules also apply to Iceland, Norway and Switzerland. Although originally excluded, they also now apply to Denmark. 11. The rules concerning insurance do not apply to contracts of reinsurance, which are subject to the basic rules of the Recast Brussels Regulation which confer jurisdiction on the courts that the parties have agreed to, 26 or, absent such agreement, on the courts where the defendant is domiciled 27 or where the obligation in question is to be performed (typically in the case of reinsurance, where claims are to be paid) The Recast Brussels Regulation provides for the reciprocal recognition and enforcement in EU Member States of judgments issued by courts in other Member States, particularly where those courts have jurisdiction in accordance with the provisions of the Regulation Unless it is an exempt EU instrument, the European Union (Withdrawal) Bill provides that the Recast Brussels Regulation will form part of UK domestic law on Brexit. However, as the UK will cease to be an EU Member State, in the absence of 24 Article 25 Recast Brussels Regulation provides that the agreement on jurisdiction must be in writing, or evidenced in writing (including a durable record of an electronic communication) and shall be deemed to be exclusive unless the parties agree otherwise. 25 Article 29 Recast Brussels Regulation 26 Article 25(1) Recast Brussels regulation 27 Article 4(1) Recast Brussels Regulation 28 Article 7(1) Recast Brussels Regulation 29 Chapter III Recast Brussels Regulation 5

6 agreement with the EU, it is difficult to see how the regulation could continue to apply where a UK-domiciled insurer entity is sued in the EU. 30 If Brexit occurs without agreement on these matters, insurers domiciled in the UK will not be able to rely on the Recast Brussels Regulation when sued in an EU Member State and, unless the following apply, will be subject to the local court rules concerning jurisdiction over non-member State insurers: The Recast Brussels Regulation superseded the Brussels Convention 1968 to which the UK is a party. That Convention continues to apply to certain territories of Member States. It is arguable that post-brexit, the 1968 Convention would apply to the UK s relationship with EU Member States. 31 The 1968 Convention s provisions as regards insurance are as set out above in the Recast Brussels Regulation, but importantly they do not provide for the enforceability of jurisdiction clauses in non-mat large risk policies. It is uncertain whether an EU Member State court would acknowledge the application of the 1968 Brussels Convention to a dispute involving a UK insurer post-brexit. It is unlikely that the Lugano Convention still exists and so the relationship between the UK and Iceland, Norway and Switzerland would cease to be governed by any Convention post-brexit. 31 The rules applicable to the local court s jurisdiction over third country insurers would apply. There are bilateral treaties between the UK and certain EU Member States that pre-date the European Communities Act 1972 and would continue to apply to the recognition and enforcement of judgments. Most notably, these include treaties with France, Germany, Italy and the Netherlands. 32 They do not contain rules concerning jurisdiction in insurance matters. 14. Although some commentators welcome the opportunities that the UK courts may have if no longer subject to the Recast Brussels Regulation 33 (particularly the ability to issue anti-suit injunctions against parties bringing proceedings in another EU Member State in contravention of an exclusive UK jurisdiction clause), the uncertainty about the enforceability of judgments obtained in an EU Member State against UK insurers may undermine the attractiveness of UK policies to EU policyholders. Uncertainty over the applicable rules on jurisdiction and enforcement increase the costs and risks of litigation. An example case is attached at Appendix A to illustrate these points. 30 In its 12 July 2017 paper (see FN 20 above), the EU Commission said that the Withdrawal Agreement with the UK should ensure that the provisions of EU law concerning forum and enforcement applicable on Brexit should apply to proceedings commenced before Brexit, and to the choice of forum made prior to Brexit. 31 Richard Aikens and Andrew Dinsmore Jurisdiction, Enforcement and the Conflict of Laws in Cross-Border Commercial Disputes: What Are the Legal Consequences of Brexit? [2016] EBLR 903; Sara Masters QC & Belinda McRae What Does Brexit Mean for the Brussels Regime? (2016) 33 Journal of International Arbitration, Issue 7, Enforceable pursuant to the Foreign Judgments (Reciprocal Enforcement) Act Most notably, Professor Briggs. 6

7 Arbitration 15. The Recast Brussels Regulation does not apply to arbitration; 34 and does not affect the application of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) The Recast Brussels Regulation has clarified whether the English courts have jurisdiction to enforce a London arbitration clause where an insured (or third party claiming rights under the policy) has commenced proceedings in an EU Member State in a dispute subject to the arbitration agreement. 36 The English Court can require the insured to submit the dispute to arbitration, although it probably cannot injunct it from continuing its case in the other court. 37 That limitation will no longer apply if the Regulation ceases to apply post-brexit. 17. A London arbitration tribunal will apply the law chosen by the parties irrespective of whether that law is English law, the law of an EU Member State, or the law of a non- EU Member State, such as New York law. At present, if the risk is not a large risk, the tribunal will have to have regard to the rules of the Rome I Regulation in determining whether the choice of law is valid (see paragraph 4 above). Those rules are likely to continue to apply post-brexit (see paragraph 6 above). 18. Except for contracts of consumer insurance (which are subject to the Consumer Rights Act 2015 in relation to a potentially unfair arbitration agreement), agreements to submit coverage disputes to London arbitration are enforceable under the Recast Brussels Regulation, and will remain enforceable after Brexit. A valid London arbitration award is enforceable in the 157 states which are signatories to the New York Convention, including all 28 EU Member States and the United States. London arbitration awards are more widely enforceable in the world than UK court judgments. 19. This certainty about the position post-brexit makes it attractive for Lloyd s syndicates and their commercial policyholders to choose London arbitration as the forum for the resolution of coverage disputes concerning EU risks. It should remain the forum of choice in reinsurance contracts for this reason as well. A standard ARIAS arbitration clause is attached for convenience at Appendix B. Cooley (UK) LLP 10 October Article 1(2)(d) Recast Brussels Regulation 35 Article 73(2) Recast Brussels Regulation 36 An issue of some controversy prior to the Recast Brussels Regulation: see The Front Comor [2009] 1 Lloyd s Rep 413, The Atlantic Emperor [1992] 1 Lloyd s Rep 342 and The Wadi Sadr [2010] 1 Lloyd s Rep MacGillivray on Insurance Law, 13 th Edition, 2015 [13-005]; Re Gazprom OAO [2015] 1 Lloyd s Rep

8 Appendix A Example Case Lloyd s Syndicate insures a building in France owned by Z, which is incorporated in Member State X. The building burns down. Arson by the owners is suspected. The policy provides for English law and jurisdiction. Although the building is worth more than 6.2 million, Z s turnover is less than 12.8 million and it has 25 employees, so the risk is not a large risk. Z sues the syndicate in X seeking coverage. Under the current law The courts in X should apply the law of X as the law where the policyholder is habitually resident. If the law of X recognises the parties choice of law, then the courts may apply English law. As the risk is not a large risk, the choice of law clause is not automatically enforceable. The courts in X will have jurisdiction as Z is domiciled in X. The jurisdiction clause is not enforceable because the risk is not a large risk. After Brexit If the Rome Convention 1980 applies, the courts in X will determine whether the risk is situated in a Member State of the EEC. As France is such a Member State, the Convention will not apply and the court will apply local law, in determining the applicable law. Whether the courts in X will have jurisdiction over the syndicate will depend on local court rules. As the UK will no longer be an EU Member State, the court will not be obliged to recognise the exclusive jurisdiction clause. Large risk If Z satisfies two of the three criteria so that the risk is a large risk, under the current law, the courts in X would be obliged to apply English law and to enforce the choice of English jurisdiction. After Brexit, the courts in X may apply English law, although if Z relies on the Rome Convention 1980, they may apply local law. If the courts in X apply the Brussels Convention 1980, the choice of English jurisdiction will not be binding. 8

9 Appendix B ARIAS ARBITRATION CLAUSE All disputes and differences arising under or in connection with this contract shall be referred to arbitration under ARIAS Arbitration Rules. The Arbitration Tribunal shall consist of three arbitrators, one to be appointed by the Claimant, one to be appointed by the Respondent and the third to be appointed by the two appointed arbitrators. The third member of the Tribunal shall be appointed as soon as practicable (and no later than 28 days) after the appointment of the two party-appointed arbitrators. The Tribunal shall be constituted upon the appointment of the third arbitrator. The Arbitrators shall be persons (including those who have retired) with not less than ten years experience of insurance or reinsurance within the industry or as lawyers or other professional advisers serving the industry. Where a party fails to appoint an arbitrator within 14 days of being called upon to do so or where the two party-appointed arbitrators fail to appoint a third within 28 days of their appointment, then upon application ARIAS (UK) will appoint an arbitrator to fill the vacancy. At any time prior to the appointment by ARIAS (UK) the party or arbitrators in default may make such appointment. The Tribunal may in its sole discretion make such orders and directions as it considers to be necessary for the final determination of the matters in dispute. The Tribunal shall have the widest discretion permitted under the law governing the arbitral procedure when making such orders or directions. The seat of arbitration shall be.. The proper law of this contract shall be the law of. 9