Global Vantage: The feeling isn’t mutual – EU Commission opposes UK’s application to accede to the Lugano Convention

On 4 May 2021, the European Commission (the “Commission”) published its assessment of the UK’s application to accede to the 2007 Lugano Convention on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “Lugano Convention”). Whilst not binding, its conclusion – that the EU should not consent to the accession – is a major blow to the UK application’s hopes of success.

The Lugano Convention currently governs issues of jurisdiction and the enforcement of judgments between EU Member States (including Denmark in its own right) and three out of the four members of the European Free Trade Association (“EFTA”). Its provisions allow for judgments that are issued by the Courts of one contracting state to be recognised and enforced in the Courts of another, as if they were a decision of the latter’s own domestic Courts. This helps to reduce the costs and uncertainty associated with cross-border litigation. Similar provisions are provided for within the Recast Brussels Regulation, which applies only to EU Member States (including Denmark). Since the end of the Brexit transition period, the UK has ceased to be a party to either of these agreements.

In light of the above, on 8 April 2020, the UK deposited a formal application to accede to the Lugano Convention in its own right. Articles 70 to 73 of the Lugano Convention address issues concerning the accession of new States. Notably, these include the need for there to be unanimous agreement between the Lugano Convention’s existing Contracting Parties for the accession to be approved (Article 72(3), Lugano Convention). Until the Commission released its assessment last week, the UK’s application to accede appeared to be progressing relatively unopposed, with public support for the application already offered by Norway, Iceland, and Switzerland. However, the Commission’s analysis now throws doubt on whether the Lugano Convention is the most appropriate framework for the governance of the parties’ future relationship in this area.

In support of its conclusion, the Commission cites the fact that, historically, the Lugano Convention has been used to support relationships between the EU and third countries that have “…a particularly close regulatory integration with the EU.” In this respect, it notes that the only non-EU Member States that are Contracting Parties to the Lugano Convention are those that participate, to some degree, in the EU’s internal market. Inevitably, these states are therefore required to adhere to certain EU legislation to facilitate their access to the single market. Post-Brexit there is no such “special link” (to borrow the Commission’s phrase) between the EU and the UK, with the Commission describing their contemporary relationship as that of “…a third country with an “ordinary” Free Trade Agreement…not including any fundamental freedoms and policies of the internal market.”

Instead, the Commission suggests that the EU’s approach to cooperation with the UK in this area should, going forward, be governed by the 2005 Hague Choice of Court Convention (the “Hague Convention”), and the 2019 Hague Judgements Convention. Whilst there is reportedly an on-going disagreement between the EU and the UK as to the exact date on which the UK acceded to the Hague Convention, it is accepted by both sides that, notwithstanding Brexit, the UK is already a member of the Hague Convention in its own right. However, despite the Commission’s apparent optimism for such a position, it is important to note that the Hague Convention only applies in circumstances where there is an exclusive jurisdiction clause in the relevant contract. It will not aid parties where, for example, there is a non-exclusive jurisdiction clause or no jurisdiction clause at all.

As such, if the Commission’s position is accepted, there could be drastic consequences for litigants seeking to resolve disputes which fall outside the remit of the Hague Convention. In the absence of protection from any of the other legislation described above, it is likely that those parties will be forced to consult domestic laws governing this area. This is a significantly more onerous position than that under the Lugano and Hague Conventions, with those in the UK potentially required to revert to the common law and treaties enacted pre-1973 (i.e. before the UK acceded to the EU) in an effort to understand their legal rights. Amongst other things, this could have an adverse impact on both the time and costs that litigants face in resolving their dispute and could even lead some to consider dropping their action(s) altogether.

Given the uncertainty that has been created by the Commission’s announcement, as a possible workaround we may see more parties choose to pursue arbitration as an alternative, ‘safer’, method of dispute resolution. Unlike litigation in the Courts, arbitration has generally been unaffected by Brexit and due to the widespread adoption of the “New York Convention”, in most cases it is relatively straightforward to have arbitral awards recognised and enforced in domestic Courts. Further, arbitration has other benefits over litigation, such as the flexibility that parties have over the procedural steps and the privacy of proceedings. Therefore, it will be interesting to see whether arbitral institutions report a noticeable increase in cases.

In the meantime, the Commission has now left it open to the European Parliament and Council to provide their views on the UK’s application to accede to the Lugano Convention. The EU has not set a deadline for its final decision on the UK’s application.