The uneasy rumblings in the media recently on whether the UK would be welcomed back by the European Union (EU) into the Lugano Convention family were confirmed on 4 May 2021, when the European Commission issued its ‘Communication from the Commission to the European Parliament and the Council’[1] with its assessment on the application of the UK to accede to the 2007 Lugano Convention on the jurisdiction and recognition and enforcement of judgments (Lugano Convention). It recommended that the EU should not give its consent to UK accession. This communication has been met with disappointment by the legal profession[2] and characterised by the media as a political decision, rather than one based on common sense. However, there is room for hope — this is not quite the last chapter in the saga of the EU/UK relationship in the area of choice of court agreements, jurisdiction and judgments.

What reasons does the Commission give for its stance?

The Commission’s four-page communication sets out its analysis as to (i) the nature of the Lugano Convention, and (ii) the international framework for cooperation with third countries. Here are the key points from the Commission’s conclusions:

  1. The Lugano Convention is the "essential feature of a common area of justice and is a flanking measure for the EU’s economic relations with the EFTA/EEA countries," which "mirrors the EU’s rules on international jurisdiction and quasi-automatic system of recognition and enforcement of judgments". In other words, the Lugano Convention is only aimed at countries with which the EU has a "particularly close regulatory integration", e.g. Switzerland, Iceland and Norway.
  2. While the Lugano Convention supports the EU’s relationship with such third countries, the UK is a third country with an "'ordinary' Free Trade Agreement" that does not include any of the fundamental freedoms and policies of the internal market. On this basis, it would not be appropriate for the UK to accede to the Lugano Convention. In particular, the Commission pointed to the fact that neither the Political Declaration on the framework of the future relationship between the EU and UK nor the Trade and Cooperation Agreement contain any reference to the Lugano Convention.
  3. The Commission reiterated the EU’s longstanding approach that third countries, including the UK, should rely on the Hague Convention on Choice of Court Agreements (Hague Convention). The Commission is planning to propose that the EU conclude the Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters 2019 (Hague Judgments Convention) and suggests the UK does the same.

What does this mean for finance transactions in practice?

The key issue to remember is that the Hague Convention applies to exclusive jurisdiction clauses where parties choose the court of one jurisdiction to determine the outcome of a dispute.

There are still some differing views on whether an asymmetric jurisdiction clause, typical in finance documentation (usually restricting the borrower to one court while giving the lender more scope to determine in which court to commence proceedings), can be classed as an 'exclusive' jurisdiction clause. However, this issue is not a new one and certainly existed prior to the end of the Brexit implementation period on 31 December 2020. Discussions on the recognition of such clauses are slowly playing out in the courts in a handful of cases under the Recast Brussels Regulation.[3] (For a reminder see our blog post "'Trade' and 'Cooperation' – Buzzwords for life beyond Brexit", 11 January 2021 on Talking Trade Finance).

As always, parties should carry on analysing the dispute resolution options available to them, which may include the courts, arbitration or mediation. For now, we should assume the Hague Convention is the applicable international treaty for its contracting states, including the UK and the EU member states, and parties should consider carefully whether a one-way (asymmetric) or two-way exclusive jurisdiction clause is appropriate on a case-by-case basis.

We will be keeping an eye on the outcome of EU member states' vote to see if the EU will formally consent to the application of the UK to accede to the Lugano Convention. Let us hope that the politicians can see past politics to the businesses and individuals who may need to rely on smooth judicial cooperation. Whether the UK successfully accedes to the Lugano Convention or not, we will be looking out as the UK expands into further free trade agreements or bilateral agreements on jurisdiction and judgments, which will also be key for international trade and dispute resolution.

What does the Commission’s recommendation mean for the UK?

It is helpful to consider the Commission’s recommendation in context alongside the current position under the Hague Convention.

  1. The contracting states of the Lugano Convention are the EU member states (27) and the European Free Trade Association (EFTA) states (other than Lichtenstein) being Switzerland, Norway and Iceland.
  2. Between the EU member states themselves, the Recast Brussels Regulation will regulate judicial cooperation, not the Lugano Convention. The Lugano Convention is not exactly the same as the Recast Brussels Regulation, as it is based on the original EU Brussels Regulation so, for example, there are some differences on how parallel proceedings are treated.
  3. The UK and Norway have had a bilateral agreement on jurisdiction and judgements in place since November 2020, pending an outcome on the Lugano Convention. Both Switzerland and Iceland support the UK’s application, so, in the event that the UK is unable to accede, perhaps they too would enter into a bilateral agreement with the UK along similar lines. Nothing is definite yet. As noted by the Commission, the Lugano Convention does not prohibit third country states acceding to it. So, it is not restricted to EU member states and EFTA states.
  4. The Hague Convention applies in the UK in relation to EU member states and Mexico, Montenegro and Singapore, which have ratified it. Some other states have signed but not completed the steps to enforcement, e.g. USA, China, Israel, North Macedonia and Ukraine.[4]
  5. Notwithstanding the Commission’s suggestion in relation to the Hague Judgments Convention, neither the EU, nor any of the EFTA states, nor the UK has signed or taken any steps to bring it into force. In fact, it has only three signatories so far, Ukraine, Israel and Uruguay.[5] It is not yet in force.

So, the Hague Convention remains the treaty to regulate judicial cooperation between the UK and any EU member state, and the EU and each of the other contracting parties and any which come on board. It gives protection to choice of court agreements in civil and commercial matters, and any judgment would be recognised and enforceable in another contracting state.

What has to happen now at the EU level for the UK to join the Lugano Convention?

While the Commission’s Communication is a formal recommendation to the European Parliament and Council, it is only one part of the process in acquiring the EU’s consent. Unlike the Hague Convention, unanimous consent of all contracting parties to the Lugano Convention is needed for a new state to accede. So, formal consent of the EU is required. Of the other contacting parties, Switzerland and Iceland both formally consented in February and March respectively this year, and Norway intends to support the application.

The final decision will be taken by the Council, which will form the decision of the EU. This is where the EU member states have their say, taking into account the views of the 27 national governments, which should hopefully consider the views of the legal profession. Media reports suggest that many EU member states are in favour of the UK’s application, with only one or two larger member states sharing the view of the Commission, however, nothing is set in stone until there is a vote at Council level. Unanimity of EU member states (in the vote at EU level) is not required as the issue is one that needs a qualified majority. So, as yet the final position still lies in the hands of the EU member states.[6] If there is formal consent from the EU and other contracting parties, then the UK would accede to the Lugano Convention within three months.

Clearly, if this does not happen then we carry on as we are, with English law as a recognised and practical system of law for international and domestic financial transactions, using the Hague Convention to recognise choice of law agreements and recognition and enforcement of judgments between the EU member states and the UK. Trade and international finance transactions stretch further afield than the EU and EFTA, so in analysing dispute resolution options for each case, we will be looking not just at the Hague Convention but also for the development of any new UK bilateral treaties on jurisdiction and judgments.