Cross-border disputes post-Brexit: leaving Lugano
The UK’s anticipated welcoming back by the EU into the Lugano Convention came to an abrupt halt on 4 May 2021. Following assessment of the UK’s application to accede to the 2007 Convention, the EU Commission officially recommended to the European Parliament that the EU should not give consent for UK accession. While the Council of the European Union have the final say, it is believed that the Commission's formal answer was sent to the Swiss Government (guarantors of the Convention) on 23 June, thereby sealing the deal.
Is this the last chapter in the EU/UK relationship with regard to choice of court agreements, jurisdiction and judgments? We suspect not.
The post-Brexit processes for enforcing court judgments across borders has led to uncertainty, additional hurdles and lack of precedent and guidance, and in many cases, has resulted in increased costs and protracted litigation. Here, we consider the EU Commission’s reasoning and the impact on jurisdiction and enforcement. We provide case studies from various lines of business, both commercial and civil, of jurisdictional challenges stemming from the end of the transition period and the UK leaving the EU. Finally, we look ahead to provide insight into what the future may hold for cross-jurisdictional disputes.
What were the EU Commission’s reasons for denying the UK’s accession to Lugano?
The main EU instruments on jurisdiction and enforcement of judgment are the Lugano Convention (the Convention) and the Recast Brussels Regulation, the detail of which we discuss in our first in our series of Brexit impact reports.
The EU Commission explained that the Lugano Convention "is a flanking measure of the internal market and relates to the EU-EFTA/EEA context.” It characterises an essential feature of a common area of justice and is based on a high level of mutual trust among the Contracting Parties.
Although the Convention is open to accession of “any other State”, the EU Commission’s position is that it is not the appropriate general framework for judicial cooperation with any given third country. In the field of civil judicial cooperation, this is to be provided by the Hague Conventions.
The Commission’s stance is perhaps not entirely surprising in light of the difficult political relationship between the EU and UK over recent months. The UK’s Lord Chancellor and Justice Secretary Robert Buckland QC reportedly commented that there is “no legal basis” for the Commission’s position, arguing that the Convention is open to third parties with no requirement for single market membership.
Is it all bad news for the UK?
The UK not being bound by either the Recast Brussels Regulation/Lugano jurisdictional regimes is likely to produce increased jurisdiction disputes in the short-term. But the EU will find that the English legal system is well able to protect the interest of litigants, as English statutory and common law jurisdiction rules are broader in scope than under the Recast Brussels Regulation/Lugano regimes. There will be some problems of recognition and enforcement of English judgments in Europe that don’t fall within the scope of the Hague Choice of Court Convention 2005, but they are likely to be less than the EU Commission would like.
Michael McParland QC, 39 Essex Street
If the UK is not bound by the Lugano Convention, it does not have to abide by the obligations associated with it. This could make the English courts a more attractive jurisdiction in certain cases. Further, English court judgments are still enforceable in the EU under a Member State’s domestic laws and rules which ultimately means that such judgments will be treated in the same way as those originating from the courts of countries such as the US. We may find that alternative methods of dispute resolution may become increasingly attractive such as arbitration which is often less costly than court proceedings.
We take a look at the immediate challenges through the lens of various lines of business.
Remote witness evidence - case study: personal injury claims
Before the UK left the EU, an English court could rely on its European partners to take the evidence (under Regulation (EC) 1206/2001 on Taking of Evidence).
Since the transition period expired, this regulation has ceased to apply. Further, not all EU countries, such as Austria, are signatories to the Hague Convention of Taking Evidence Abroad in Civil or Commercial Matters 1970 (the 1970 Hague Convention). Previous conventions exist, for example, the 1931 Convention regarding legal proceedings in civil and commercial matters between UK and Austria. However, it is not clear how such conventions might be applied in the modern context, since the internet, email and WIFI had not yet been invented at the time they were set up.
Austrian law (the Code of Civil Procedure) does not permit the taking of evidence by video link by a UK court, from a witness in their jurisdiction, in a civil or commercial matter. As such, consideration must be given at an early stage as to whether witnesses can attend the trial in person, calling into question access to justice and a retrograde step away from the principles of remote hearings in the UK.
However, only three EU countries (Austria, Belgium and Ireland) are not signatories to the 1970 Hague Convention. For the 64 signatories that are, it is business as usual.
Service out of the jurisdiction - case study: marine litigation
The Civil Procedure (Amendment) Rules 2021, which came into effect on 6 April 2021, remove the requirement to seek permission from the court to serve a claim form on a defendant out of the jurisdiction in the following circumstances:
1(a) whenever the court has power to determine that claim under the 2005 Hague Convention and the defendant is a party to an exclusive choice of court agreement conferring jurisdiction on that court within the meaning of Article 3 of the 2005 Hague Convention or
(b) a contract contains a term to the effect that the court shall have jurisdiction to determine that claim.
The new rule is much wider than the Recast Brussels Regulation and also applies to service on defendants located in any jurisdiction. This is a significant change, introduced to instil confidence so that businesses continue to choose choice of court agreements in favour of the courts of England and Wales. This reflects a clear benefit for claimants and will save both time and costs in the long-term.
However, without an English choice of court agreement, there are only limited cases where claimants will find that they will not need to apply to the court for permission before serving out of the jurisdiction. Therefore, extra time is needed to prepare the court application. Once an order to serve out of the jurisdiction has been received, the documents need to be translated, processed by the Foreign Process Section and thereafter, sent to the relevant country for service.
The challenge is that service (for example via a central authority) can take a further three months once the documents have been received in the relevant jurisdiction, in accordance with local practice. In order to ensure that the claim form is validly served within the six month time period, the process for service out of the jurisdiction should begin as soon as the claim form is issued.
A renewed emphasis on dispute clauses and the difficulties of enforcement - case study: professional liability
For British professionals working on cross-border projects, the absence of the Lugano Convention should prompt a renewed focus on jurisdiction clauses, choice of law and dispute resolution clauses – particularly if the professional wants to ensure that the relevant British law (i.e. England and Wales, Scotland or Northern Ireland) will apply to any dispute with the relevant British court having exclusive jurisdiction.
Many contractual arrangements - and any disputes arising as a result – will fall outside the scope of the Hague Convention, and will be left subject to the local domestic laws with the local courts having jurisdiction. Inevitably, this will (as it is already) lead to difficulties in pursuing/defending claims, jurisdictional disputes, uncertainty and increased costs, often with the involvement of multiple legal teams.
A British choice of law and jurisdiction clause will not necessarily be readily accepted, particularly by European countries with the benefit of EU law. Therefore, caution should continue to be exercised when negotiating new agreements and contracts should give serious consideration to what the contractual wording could mean for any dispute. More often than not, we see that this is something taken into account when it is already too late.
Insurers should take care when placing professional indemnity policies with non-UK policyholders. The increased difficulties with enforcement of cross-border judgments will be compounded by the complicated common law regime.
Hannah Williams, Partner, Kennedys
In addition to the complexities that arise with the disputes themselves, parties will now also face increased difficulties with the enforcement of cross-border judgments. The common law regime is notoriously elongated, complicated and expensive. Insurers should consider this carefully when it comes to placing professional indemnity policies with non-UK policyholders.
Jurisdiction issues for companies entering into cross-border contracts: is arbitration the solution? case study: commercial
For companies entering into cross-border contracts, whilst we remain in a period of uncertainty, English law is still a properly viable option as to jurisdiction but they ought to take advice on the local law, particularly on enforcement, for example. In many EU countries, foreign judgments are enforceable without a reciprocal arrangement. Arbitration under the New York Convention is unaffected and is likely to increase in popularity, to avoid the jurisdiction challenges.
For smaller parties (such as SMEs) and individual entrepreneurs, having to operate outside of the Lugano Convention is now almost catastrophic. It is an expensive and challenging process for a person domiciled in the EU to serve a claim against a UK company. Meanwhile, the court in their country might not accept jurisdiction if the contract for services, supply of goods, or employment was undertaken abroad. Making provision for arbitration when entering into cross-border contracts will offer more certainty regarding forum and means of enforcement. Arbitration is also less costly, confrontational, formal and a faster process. It is also difficult to appeal.
What does the future hold?
The new 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters is designed to provide a single framework for the free circulation and enforcement of judgments on civil or commercial matters across jurisdictions.
Neither the UK nor the EU has yet signed the Convention and it is anticipated that the ratification process will take several years. Although the Convention offers no solution in the short-term, it may prove helpful in the future for UK-EU jurisdiction and enforcement issues.
It will also be interesting to see if there is a shift in dynamic within the EU27, in light of new personnel after the next election to the European Parliament (scheduled for 2024) and the national elections within Europe in the next 12 months, particularly France and Germany. We, therefore, watch with interest as the narrative develops.
The EU Commission’s decision on the UK’s accession to the Lugano Convention appears at odds with reports of the positions of several EU and EFTA Member States. With the UK-EU relationship being particularly thorny at the moment, this communication has been reported by the media as a political play, in light of ongoing tension around the Northern Ireland Protocol, COVID-19 vaccines and fishing. Certainly, since the Commission considers the Lugano Convention as a mechanism to protect the Single Market, any future UK departure from EU standards presents a real obstacle to UK accession.
However, if the EU does indeed deny the UK’s accession to the Lugano Convention, although there may be continued short-term teething problems, in the longer-term, the future does not look as bleak as once thought.
As long as the Commission considers the Lugano Convention to be a mechanism to protect the Single Market, any future UK departure from EU standards presents a real obstacle to UK accession.
Deborah Newberry, Corporate Affairs Director, Kennedys