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10 March 2020
Can a party commence litigation in Hungary despite a jurisdictional agreement in favour of a court of a non-EU state which is optional for one of the parties? The Supreme Court recently answered this question in a case which highlights the negative effects of such asymmetric choice-of-court agreements.
A Hungarian attorney at law (the defendant) and two professional fiduciary asset managers from Liechtenstein (the claimants) entered into a service agreement, under which the claimants had to provide various asset management services for the defendant.
The contract was governed by the law of Liechtenstein and provided that any legal disputes would be brought before the court of Vaduz. However, the claimants had the option of seeking the performance of the contract before the courts of the defendant's domicile.
The defendant failed to pay the service charges and the claimants sued him in Hungary.
In their letter of action, the claimants made a detailed statement as to why, in their opinion, the Hungarian courts had jurisdiction to hear the dispute. Given that the defendant had not been served the letter of action until four days before the first court hearing, he made a submission to the court requesting that:
The first-instance court found the claim to be lawful and ordered the defendant to pay the sum by holding that based on the optional choice-of-court agreement, the claimants could commence litigation in Hungary. Further, the court found that by requesting the dismissal of the action, the defendant had consented to the Hungarian courts' jurisdiction.
The second-instance court took a different position, holding that based on the former Private International Law Code – which applied in the present case(1) – the parties had chosen the court of Liechtenstein to settle disputes, which, absent an agreement by the parties to the contrary, meant that these courts had exclusive jurisdiction. The claimants' additional option of seeking the performance of the contract was not considered to be a choice-of-court provision.
As regards the submission made by the defendant before the first hearing, the second-instance court did not consider it to constitute his consent to jurisdiction. Therefore, given that the exclusive jurisdiction of the Liechtenstein courts excluded the jurisdiction of the Hungarian courts, the second-instance court terminated the Hungarian litigation.
The claimants filed a request for review with the Supreme Court, which analysed the choice-of-court agreement and, contrary to the second-instance court, concluded that it was not an exclusive jurisdictional agreement.
The Supreme Court went further by concluding that given that the jurisdiction of the Hungarian courts was not excluded because of the non-exclusive character of the jurisdictional clause, their jurisdiction depended on the defendant's behaviour in the litigation in accordance with the former Code of Civil Procedure, which applied in the present case.(2) Under the code, where a defendant fails to attend the first hearing or raises an objection against the Hungarian courts' jurisdiction, the litigation will be terminated.
However, in this case, the defendant had acted to the contrary – namely, he had submitted a defence to the merits of the case and had failed to object against the Hungarian courts' jurisdiction, despite being a lawyer. Further, the claimants had made their detailed statement regarding the Hungarian courts' jurisdiction in their letter of action.
Based on the above, the Supreme Court held that the submission made by the defendant before the first hearing amounted to his consent to the Hungarian courts' jurisdiction. Consequently, the Supreme Court quashed the second-instance decision and upheld the first-instance decision.
Exclusive jurisdictional clauses are treated uniformly by most major international legal sources, such as the EU Brussels Regulation (1215/2012) and the Hague Convention on Choice-of-Court Agreements 2005. The positive effect of such clauses is that they establish the jurisdiction of the chosen courts; however, the negative effect is that they exclude the jurisdiction of all other courts.
The positive effects of non-exclusive jurisdictional agreements (eg, the unilateral optional agreement in the present case) is undisputed. However, there is a divergence in thinking among various countries in relation to their negative effects.
The UK courts tend to respect party autonomy to the maximum extent. Based on UK case law, in case of a unilateral optional jurisdictional agreement, the option holder can commence litigation according to its option, while the other party is bound by the jurisdictional clause.
As a notable example, in Continental Bank, the Court of Appeal for England and Wales ruled that where borrowers submitted to the jurisdiction of the UK courts, while the bank reserved the right to proceed before the courts of any other country, the jurisdictional clause was not exclusive for the bank, only the borrowers. Thus, it precluded the borrowers from suing the bank in Greece.(3)
At the other end of the scale, France considers unilateral optional jurisdictional clauses to be invalid. In its landmark decision delivered in Rotschild, the Court of Cassation held that where parties concluded an exclusive jurisdictional agreement in favour of the Luxembourg courts, but the bank had the option of starting proceedings in front of the courts where the clients were domiciled or in front of any other court, such a clause had a potestative character and infringed the principles of legal certainty and foreseeability.(4)
The case analysed above was the first published decision of the Hungarian Supreme Court to consider the effects of a unilateral optional jurisdictional clause. Even though the judgment was based on the former Private International Code, it is valid for future cases as the relevant provision in the new code has not changed.(5)
The Supreme Court's decision appears to be halfway between the UK and French approach.
On the one hand, the Supreme Court did not consider the jurisdictional clause to be invalid, as the French Court of Cassation did in Rotschild. At the same time, it is true that the clause in the Hungarian case did not confer as broad an option on the claimants as that in the French case.
On the other hand, the Supreme Court did not interpret the optional jurisdictional clause as preventing the option holder from commencing litigation before courts other than those stipulated in the clause.
Although unilateral optional choice-of-court clauses are not deprived of any legal effect in Hungary, their effect is limited.
The question which remains unanswered is whether this type of unilateral optional jurisdictional clause has a negative effect for the non-option holder which prevents it from commencing litigation before other courts. The Supreme Court will hopefully have the chance to decide that question in the near future.
For further information on this topic please contact Richard Schmidt at SMARTLEGAL Schmidt & Partners by telephone (+36 1 490 09 49) or email (email@example.com). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.
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