Brexit Update – Changes to loan documentation
Following the expiration of the transition period which ended on December 31, 2020 at 23:00 GMT (called “IP Completion Day”), the UK is no longer a member of the EU. During the transition period (between January 31, 2020, when the UK officially withdrew from the European Union) and IP Completion Day, the UK has implemented certain key pieces of legislation to ensure that after its exit from the European Union, the majority of EU laws that apply to financing transactions in their current form continue to apply, albeit with some changes in scope and application. In this article, we discuss some of the key changes from a documentary perspective for fundraising.
Choice of law
The use of English law for financial documentation is largely unchanged after the UK’s withdrawal from the European Union. English law remains the dominant and privileged choice of law (subject to the requirements of local law, particularly with regard to the taking of security) in the market due to the commercial orientation of English law and its transparency. English contract law is largely unaffected by EU law and therefore the UK’s withdrawal from the European Union does not result in any material changes.
The choice of law will continue to be recognized by courts in EU Member States. Before Brexit, the Rome I Regulation provides that all EU member states give effect to the parties’ choice of law. This includes the law of an EU member or non-EU member (for example, New York law). While the UK is no longer a member of the EU and therefore not a member of the Rome I Regulation, the UK has legislated to incorporate Rome I and Rome II into English law, under the Law applicable to contractual and non-contractual obligations (amendment, etc.) (EU Sortie) Regulations 2019. This means that the English courts will give effect to the parties’ choice of law, whether it is English law, EU law or the law of a non-EU state. EU courts will continue to apply Rome I and Rome II, and will therefore give effect to choice of any law (including English law as the law of a non-EU state). Therefore, choice of law and recognition of choice of law are largely unaffected by Brexit.
Choice of jurisdiction
It is common practice in loan documentation that lenders propose the use of “unilateral exclusive jurisdiction” clauses. These clauses provide that the borrower must sue in the courts of England only, while lenders can sue in any court of competent jurisdiction. This approach has been favored by lenders for many reasons. It enhances their flexibility in choosing the forum while ensuring that the borrower can only go to English courts to rule on matters relating to English law and therefore exposure is limited to only one jurisdiction. .
This unilateral exclusive jurisdiction clause was possible under the Brussels I Regulation, which provides that any court in the EU has jurisdiction and that the judgment of that court is enforceable throughout the EU. After Brexit, however, the UK is no longer part of this convention and therefore reciprocity no longer applies. This means that, unless the UK signs another convention with the EU or implements other similar legislation, the enforcement of foreign judgments falls under the 2005 Hague Convention, to which the UK is a party.
Under the Hague Convention, all EU member states will be required to respect the choice of court of the parties and to enforce English judgments on a contract containing a “two-way exclusive jurisdiction clause” . Unlike the one-way exclusive jurisdiction clause, the two-way exclusive jurisdiction clause is where both parties designate the same court in which proceedings can be brought.
Courts in EU member states will generally follow English exclusive jurisdiction clauses in both directions and enforce resulting judgments under the Hague Convention, and English courts will do the same with respect to the jurisdiction clause. exclusive in both directions of a court of an EU Member State.
The question for lenders, therefore, is whether, in the current circumstances, a two-way exclusive jurisdiction clause should be used in place of a unilateral exclusive jurisdiction clause given the recognition of exclusive jurisdiction provisions under the Hague Convention. On the one hand, the adoption of the two-way exclusive jurisdiction clause will ensure that the judgment will be recognized and enforced in any EU member state. On the other hand, if the judgment does not comply with the Hague Convention, enforcement will depend on the national rules of the EU member state concerned, which may or may not be so straightforward. Therefore, appropriate local legal advice would be needed to assess the potential applicability or otherwise of a judgment not delivered at The Hague in accordance with the national rules of any EU member state.
Application of European law
In accordance with the European Union (Withdrawal) Act 2018, as amended by the European Union (Withdrawal Agreement) Act 2020 (the “EUWAA”) (the “EUWA”), EU law existing law that applied in the UK before the end of the transition period will continue to apply as retained EU law.
In particular, Section 2 preserves UK law which implements EU law and Section 3 preserves EU law directly applicable in UK law. In addition, Article 8 of EUWA provides that retained EU law may be amended by a statutory instrument in the future.
It follows that the legislative references will have to change for the relevant regulatory instrument as they are implemented. The Loan Market Association (“LMA”) is in the process of updating these references in its published financial documentation.
The UK will become a third country for the purposes of Article 55 of the Bank Recovery and Resolution Directive (“BRRD”). This means that a bail-in clause will be required in the relevant document governed by English law. Section 55 of the BRRD is also retained EU law and therefore a bail-in provision of UK bail-in law will be required in any contract governed by EEA law.
The inclusion of the bail-in clause was recommended by LMA ahead of IP Completion Day, and market participants have included the bail-in clause in English law contracts for some time. The practice will remain the same after the IP completion date.