On May 4, 2021, the European Commission rejected the UK’s application to join the Lugano Convention.  Whilst the Commission’s Communication is advisory only, it seems likely that both the Parliament and the Council (with whom the final decision lies by qualified majority) will follow the Commission’s lead.

Although the Convention may seem a rather abstract technicality, it is in fact an important legal tool, allowing for the cross-border application of civil and commercial law with practical implications for issues such as child maintenance in family law and facilitating international legal action for smaller companies.

What is the Convention?

The 2007 Lugano Convention is an international treaty concluded between the EU and three of the EFTA States.  A new State may join the Convention if its request to do so is approved by all contracting parties, but the competence to agree to the accession of a new Party lies exclusively with the EU.

The Lugano Convention is a so-called ‘Double Convention’ Treaty in that it not only governs international jurisdiction questions, but also the recognition and enforcement of foreign judgements in civil and criminal matters. Through this mechanism, the Convention gives legal certainty to businesses which operate across borders.

How Did it work for the UK as a Member State?

The EU’s original jurisdiction and enforcement treaty was the 1968 Brussels Convention, signed by France, Germany, Italy, The Netherlands, Luxembourg and Belgium.  The first Lugano Convention was signed in 1988 by the then 12 members of the European Community and the then six members of EFTA who were not eligible to sign the Brussels Convention.  The 1988 Lugano Convention was superseded by the 2007 version. For EU Member States, considerations of jurisdiction and enforcement are governed by the Brussels (Recast) Regulation 2012.

As a Member State of the EU, the UK legal services sector had gained significant value from the Regulation (and before it, the Convention), since they facilitated the UK being the chosen legal venue for legal disputes involving companies from across the EU.  Recognizing this value, the UK applied to accede to the Convention on 8 April 2020 as a third country outside the EU – the importance of accession was increased by the absence from the EU-UK TCA of a chapter on civil legal cooperation.

So Why Has the Commission Refused?

In its 3 May Communication, the Commission set out the reasons for the refusal of the UK’s request:

  • The Convention effectively extends the benefits of the EU framework of recognition and enforcement of judgments to signatory countries, thereby facilitating greatly access to the EU’s area of justice in civil and commercial matters.
  • The Convention therefore represents an essential feature of a common area of justice and acts as a solid legal basis for the EU’s economic relations with the EFTA/EEA countries.
  • The Convention supports the EU’s relationship with third countries which have close regulatory alignment with the EU.
  • The Convention can only be the appropriate general framework for judicial cooperation with third countries if that third country signs up to participation in the single market and to close regulatory alignment with the EU.

The Commission noted that the UK chose not to remain a member of the EU’s Internal Market and in rather pointed language (which perhaps hints at frustrations with the UK’s current relationship with the EU), noted that the ‘Convention is based on a high level of mutual trust among the Contracting Parties’.  The Commission concluded that, rather than the Lugano Convention, the EU-UK legal relationship should be governed by the 2005 Hague Convention.  The Commission’s communication closes with a barely disguised call for companies to consider using EU, rather than UK, law.

Since a number of commentators in the UK had pointed out that the UK leaving the Single Market would make it difficult for the terms of the Convention to continue to apply, the Commission’s position is perhaps not entirely surprising.

Is there more to this than Meets the Eye?

The Commission’s decision on UK membership seems at odds with reports of the positions of several EU and EFTA Member States.  But, with the UK-EU relationship particularly difficult at the moment, with issues from fishing to vaccines and the implementation of the Northern Ireland Protocol all creating points of tension, it is possible that the decision not to accept the UK application for accession is at least partly political.  Certainly, since the EU views the Convention as a means of protecting the Single Market, any prospect of future UK divergence from EU standards and norms present a real barrier to accession.

For its part the UK does not agree with the Commission’s reasoning and will continue to make its case, arguing that there is no requirement in the Convention for membership of the internal market and notes the benefits of accession to the Convention for ‘ families, consumers and businesses on both sides facing cross-border legal disputes in the future.’

What Does This Mean for Companies?

The Commission is correct to point to The 2005 Hague Convention on Choice of Court Agreements as offering some assistance both with jurisdiction and enforcement issues.  There are also a number of bilateral treaties between the UK and a number of EU and EFTA States (see Louise Freeman’s blog). However, this piecemeal approach, relying on a mixture of the Hague Convention and Bilateral Treaties may in due course prove unsatisfactory, in which case the UK and the EU may consider other ways to manage their jurisdictional and enforcement relationships.

In the meantime, companies should be aware that the protection offered by the Hague Convention applies only to exclusive jurisdiction clauses.  Moreover, it is unclear whether the Hague Convention applies to contracts entered into before 1 January 2021, which is the date on which the UK rejoined the Convention as a third country outside the EU.

If the Council does not follow the Commission’s communication and UK is accepted into Lugano, it would be welcome news.  Jurisdictional issues would be more easily resolved and judgments would be recognised and enforced across UK and EU / EFTA borders more swiftly and cost effectively.  For the UK to be part of the Lugano Convention would also provide a more predictable and settled framework for individuals who hold assets in different jurisdictions.

However, if the Council supports the Commission’s communication and the UK is not granted accession to the Lugano Convention, then only the Hague Convention 2005 applies.  That has implications for companies trading across EU/EFTA borders:

  • There is a gap in coverage between the protection provided by the Hague Convention and that which UK firms enjoyed under the Brussels Regulation (and would enjoy under Lugano).
  • Companies should ensure they understand the potential implications of that gap, including that, in the absence of an exclusive jurisdiction clause in a contract, national law will be applied in the event of a dispute, which is likely to complicate access to justice and the enforcement of cross-border judgments.
  • Jurisdictional and cross-border enforcement issues in UK-EU litigation will become more complex, meaning commercial parties will have to navigate the requirements of different national regimes.

In these circumstances, there are a number of steps that companies should consider taking now, including reviewing and amending standard jurisdiction clauses to ensure that they are exclusive (which should engage the Hague Convention) and considering in which jurisdiction claims are most likely to arise. And for some companies, there may be an upside – for example, being able to enforce jurisdiction clauses by way of anti-suit injunction.

Covington’s combined public policy and legal teams are well-placed to help clients navigate these changes and would be delighted to speak to companies that may potentially be affected by them.