Jurisdiction and enforcement and recognition of decisions post-Brexit

On 8 April 2020, the UK applied to join the 2007 Lugano Convention to pave the way for the post-Brexit area from the end of the transition period on 31 December 2020. This is a first step of a process to put in place a regime governing jurisdiction and recognition & enforcement of decisions from 1 January 2021. However, the road ahead is likely to be a long and complex one with no certainty at to where this may lead.

What is the Lugano Convention?

The Convention provides a set of rules regarding jurisdiction and enforcement & recognition of decisions in civil and commercial matters. It was signed in 2007 between the EU Member States, Iceland, Norway and Switzerland. It is largely similar to the 2001 Brussels Regulation.

Principles and exceptions

As far as jurisdiction is concerned, the main principle is that defendants are sued in the country in which they are domiciled. The Convention sets out a number of exceptions from this general rule. Those exceptions overrule the general rule in some cases, such as proceedings relating to immovable property and those about the dissolution of companies for instance.

In other cases of “special jurisdiction”, the exceptions are optional, meaning the claimant can sue either at the place where the defendant is domiciled or in the court of special jurisdiction, e.g. in contract the place of performance or in tort the place where the harmful event occurred.

The Convention also provides for recognition and enforceability of judgments in all other States bound by the Convention with only limited grounds for challenging a judgment’s enforceability.

The attraction of the Lugano Convention is that it is an already available set of rules which would save the UK reinventing the wheel or having to conclude separate treaties. It applies already between the EU and Norway, Iceland and Switzerland and is open to accession for third party countries (like the UK from early 2021).

By application of the 2019 Withdrawal Agreement, the UK is currently still part of the Lugano Convention as EU law effectively applies to the UK until 31 December 2020. This will end from 1 January 2021 unless the UK accedes to the Convention in its own right.

Process for accession to the Lugano Convention

There are several hurdles to clear before the UK effectively joins the Lugano Convention.

Applications and any other information required by the Convention must be sent to the Swiss Federal Council which acts as the Depositary for the Convention. This first step was completed by the UK Government on 8 April 2020.
The current signatories then need to give their unanimous consent. Signatories should endeavour to give their agreement within a year at the latest. So far, Norway, Iceland and Switzerland have welcomed the UK’s application.

However, the EU Commission reportedly said in April that it had reasons to reject the application. Therefore, it may take a while for the 27 EU Member States to reach a common position on this question, with the EU possibly looking to use some or all of the one year timeframe given by the Convention.

The EU may use this as a negotiating tool in the wider Brexit discussions having perhaps less to lose than the UK in this. One reason the EU may be reluctant is that the Lugano Convention would give the UK more leeway (than with the Brussels Recast Regulation for instance) with the UK courts only required to “pay due account” to the case law of the Court of Justice of the EU. This creates a risk of divergence of interpretation although this is not new as this is the position vis-a-vis Switzerland, Norway and Iceland.

Assuming unanimous agreement is eventually secured by the UK, an instrument of accession will need to be deposited by the UK with the Swiss Federal Council.
Afterwards, signatories are able to object to accession for a period of 3 months following the deposit of the instrument of accession.
If a signatory objects, then the Lugano Convention does not apply between that signatory and the country wishing to join.

Possible scenarios

1. All the steps are completed on time for the UK to become a signatory in its own rights of the Lugano Convention from 1 January 2021

This would be a smooth transition ensuring continuity in (commercial) cross-border exchanges.

2. The steps are completed but not in time, leaving a gap at the end of the transition period (31 December 2020)

This would mean going back to national laws until the UK accedes to the Convention. These laws would apply to decide (i) which court in which country has jurisdiction for a particular dispute and (ii) whether a decision can be enforced.

In the UK, common law would apply. Claimants would have to seek permission from the court to serve outside the jurisdiction when dealing with foreign defendants. Courts would consider factors connecting the case to the UK including domicile, place of sale or accident. Whilst this is a long established set of rules, it would lead to a regime more open to the courts’ discretion and interpretation which would create uncertainty for claimant and defendant alike.

At enforcement stage, one would revert to the application of existing individual treaties between the UK and a foreign country or international treaties of which both the UK and the foreign country are signatories. However, some of those treaties were signed in the early part of the 20^th century and are outdated.

3. If the application does not go through – for whatever reason – then common law would apply

This would result in the difficulties mentioned in 2 above. Businesses on both sides of the Channel need a straightforward solution which facilitates cross-borders transactions and promotes harmony. Rejecting the UK’s application would precisely go against this.

At this stage, no one can predict what the outcome of the UK’s application will be. It may also remain undetermined for a few months at least, and perhaps even longer. The current pandemic and the other on-going Brexit negotiations will also likely push this issue further down in the UK Government and EU Commission’s agenda.

Remedies available to businesses

Whilst there will likely be more pressing issues on people’s agendas right now, it is unfortunately yet another factor that may impact on a business’s financial position.

This situation creates legal uncertainty and unpredictability – both mid and long term - for businesses involved in cross-border transactions, whether they are based in the UK or in the EU.

Regardless of what may happen from 1 January 2021, litigators should continue to check – on issuing a claim – that any decision they might obtain will be enforceable where the claimants or defendants need it to be enforceable.

Businesses will need to seriously consider inserting in their contractual agreements either:

A solid choice of court clause

The UK is currently a party to the 2005 Hague Convention on Choice of Court Agreements via the EU but submitted the instrument of accession in 2018 to become a member in its own right post-Brexit. The instrument was withdrawn earlier this year, but the intention seems to be to deposit another one in the future to make the UK a full signatory of the Convention. This would provide some certainty in cases where there is a choice of court, by ensuring enforceability of said choice and recognition and enforceability of judgments in the other Contracting States.

Or an arbitration clause in their cross-border contracts

The 1958 New York Convention governs the recognition and enforcement of arbitral awards and remains entirely unaffected by the Brexit issues.

The next step is for the EU to communicate its official position on the UK’s application, which is expected over the next couple of months, so watch this space!

Read others items in London Market Brief - July 2020

Related items: