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07 April 2020
Can parties' conduct during litigation amount to an implied choice-of-law agreement based on EU Regulation 593/2008 (Rome I Regulation)? This article analyses a recent Supreme Court judgment concerning this question.(1)
The plaintiff, a service provider in Serbia, and the defendant, a customer in Hungary, concluded a contract for agency and business counselling in 2012.
According to the agency contract, the plaintiff had to advise the defendant with regard to:
Due to the plaintiff's activity, the defendant concluded a contract for the transfer of 70% of the business shares of the target for €812.347 to a purchaser in 2012. Pursuant to the share purchase contract, the purchase price of the business shares could be changed depending on the final audit report.
The ownership title of the purchaser was registered in the company registry on the basis of the share purchase contract. However, the defendant failed to pay the commission for the plaintiff. Meanwhile, the defendant and the purchaser agreed that the transfer of the business shares was free of charge. In addition, the plaintiff did not entirely complete its contractual tasks.
The plaintiff initiated legal proceedings to recover its fee in Budapest at the seat of the defendant. Although the contract contained no choice-of-law clause, the plaintiff based its action on the respective provisions of the Hungarian Civil Code.
The defendant submitted a detailed statement of defence, but failed to dispute that Hungarian law was applicable to the legal relation of the parties. The first-instance court ordered the defendant to pay the fee as requested by the plaintiff.
The defendant appealed against the judgment and contested the applicability of Hungarian law. According to the defendant, the legal dispute should have been decided under Serbian law pursuant to the Rome I Regulation as the plaintiff service provider was seated in Serbia.(2)
The second-instance court highlighted that, pursuant to the general principle of good faith, which applies when parties exercise and fulfil their procedural rights and obligations, the defendant should have submitted in his statement of defence that his defence was based on Serbian law and not the Hungarian Civil Code, which was clearly indicated in the plaintiff's statement of claim.
According to the second-instance court, the assertion of rights by the plaintiff on the basis of the Hungarian Civil Code and the defendant's statement of defence, which also referred to this source of law, together leave no doubt that choice of the applicable law (Hungarian law) by the parties expressly occurred by making these declarations. The second-instance court assessed the first-instance court's decision on the merits and upheld the decision.
The defendant submitted a request for review against the second-instance decision. With regard to the applicable law, the defendant underlined that he had neither made an explicit declaration on the acceptance of the application of the Hungarian law nor referred to it by implied conduct. Further, the defendant highlighted that in relation with the choice of law, the court should act on the basis of the parties' real intention – thus, the occurrence of choice of law cannot be decided on the basis of a hypothetic intention.
With regard to the merit of the decision, the defendant submitted that the plaintiff's service was indivisible. However, the plaintiff had not taken part in the preparation of the contract and had not checked the purchaser's financial situation; therefore, the consequences of this partial breach of contract must apply to the whole contract and, consequently, the plaintiff was not entitled to remuneration.
The Supreme Court shared the defendant's view to that extent that pursuant to the Rome I Regulation, in the absence of choice of law, Serbian law would be applicable. However, the court stated that the fact that the parties had made an implied choice of law as per the Rome I Regulation did not restrict the possibility of choosing law only on the date of the conclusion of the contract.
Referring to legal literature, the Supreme Court emphasised that the parties may agree on the law applicable to their contract at any time, at any stage of the contractual negotiations or even after the legal dispute has arisen before the court or arbitral tribunal. This agreement may be tacit, on condition that it should be demonstrated by the provisions of the contract or from the circumstances of the case, and the intention of the parties should be established undoubtedly.(3)
According to the Supreme Court, the second-instance court correctly assessed together the claim of the plaintiff before a Hungarian court, relying on the provisions of the Hungarian Civil Code on the one hand, and the detailed, substantive statement of defence without any objections submitted by the defendant, as an implied choice of law by the parties' conduct on the other.
Pursuant to the Supreme Court, the defendant's conduct whereby he contested the applicability of Hungarian law in his appeal can be interpreted as the unilateral termination of the choice-of-law agreement by the defendant. However, according to the Supreme Court, this is not possible on the basis of the Rome I Regulation.
In the absence of a European Court of Justice judgment interpreting the relative provision of the Rome I Regulation, the historical and grammatical interpretation of the text can provide some interpretative guidance in relation with the tacit choice of law under the Rome I regime.
Pursuant to the Rome Convention, which was adopted in 1980 and is considered to be the forerunner of the Rome I Regulation, the tacit choice must be "demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case".(4)
The Rome I Regulation provides that "the choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case"(5) regarding the tacit choice of law. More scholars argue that, in relation to the implied choice of law, the Rome I Regulation contains stricter conditions than the Rome Convention.(6)
When it comes to the 'circumstances of the case', this term is identical in both the Rome Convention and the Rome I Regulation; however, it is unclear whether it includes the conduct of the parties, besides the circumstances of the conclusion of the contract.
The draft of the regulation proposed by the European Commission referred to the "conduct of the parties" separately as a circumstance which should be taken into account concerning the choice of law, but this was not added to the final text because, according to the majority opinion, it is included in the term 'the circumstances of the case'.(7)
However, it is still unclear whether the 'conduct of the parties' refers only to the conduct relative to the negotiation and conclusion of the contract or whether it can be interpreted so extensively to cover the conduct of the parties in a legal dispute, which could be also taken into account when determining the law applicable to the contract.
The Supreme Court's judgment answered the above question in the affirmative and its decision indicates a shift from the well-settled domestic case law concerning the conclusion of contracts by conduct.
The existing judicial practice relative to the conclusion of contracts by conduct mostly takes into account acts, such as receiving service, accepting performance, taking possession or commencing litigation.(8) In addition, the silence can be interpreted as conduct only in case it undoubtedly expresses the will of the party to enter into a contract.(9)
However, in the present case it is doubtful whether there was an express will to enter into the contract by the defendant, since the binding nature of the plaintiff's action as an offer is also doubtful.
The sole fact that the plaintiff submitted its action on the basis of Hungarian law may not amount to an 'offer' to apply Hungarian law to the contract, since, during litigation, plaintiffs can unilaterally modify the action. However, the binding nature is a key concept of an 'offer'.
At the same time, given the individual circumstance of the case, the Supreme Court's decision can be accepted, given that, if the court had allowed the party to come forward with a new legal argument before the second-instance court, which was contrary to the conduct in the first-instance procedure, this would significantly lengthen the civil procedure.
The application of the law of another country can easily mean that the whole evidentiary procedure of the first-instance procedure should be repeated, since, according to this law, completely different facts can be relevant.
In fact, the Supreme Court applied the venire contra factum proprium principle, under which the exercise of right, which is in contradiction to the previous conduct of the person, is unlawful.
Although, the Supreme Court's judgment was made in the former legal environment, the principles of the new Act on Civil Procedure, which entered into force on 1 January 2018, can be felt in the decision. The new law, which focuses on effective dispute resolution, significantly limits parties in modifying the claims, facts and legal arguments already submitted by them in litigation.
For further information on this topic please contact Richard Schmidt at SMARTLEGAL Schmidt & Partners by telephone (+36 1 490 09 49) or email (firstname.lastname@example.org). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.
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