CAN A 20-YEAR-OLD CHOICE OF COURT AGREEMENT BE ENFORCED IN HUNGARY?

15 September 2022

In business, it often happens that the parties enter into a contract with a choice of court agreement for eventual legal disputes and then, years or even decades later, the legal dispute occurs. What is the effect of changes that have occurred in legislation on the choice of court agreement? Will the applicability of the choice of court agreement be decided according to the rules in force at the time of the conclusion of the contract or those applicable when the lawsuit was initiated? A recent decision of the Hungarian Supreme Court allows for an analysis of these questions.(1)

1. Facts

The claimant is a company whose legal predecessor had, in 1998, entered into a contract titled "rental agreement" with the defendant, an individual, to use a holiday resort. In clause 12 of the contract, the parties stipulated the exclusive jurisdiction of the Keszthely Municipal Court (the choice of court agreement) for their legal disputes.

Based on the contract, the claimant demanded holiday resort use fees from the defendant for the years 2018-2020, and then initiated a payment order procedure against him in 2020. The payment order procedure turned into a lawsuit and the case was forwarded to the Pest Central District Court by the notary, since the defendant's place of residence was Budapest.

2. Lower courts

The Pest Central District Court, before the trial, established its lack of jurisdiction (more specifically, its territorial competence), terminated the lawsuit, and referred the case to the Keszthely District Court. According to the statement of reasons, the Keszthely District Court had exclusive jurisdiction to hear the case, based on the choice of court agreement in the contract.

The defendant appealed against the order, citing that the contract was a consumer contract between a business and a private individual. Thus, based on the rules on consumer contracts of the new Code of Civil Procedure(2) (CCP) in force at the time of the beginning of the lawsuit, the court of the defendant's domestic residence had exclusive jurisdiction,(3) which overruled the choice of court agreement.

The Budapest-Capital Regional Court rejected the appeal. It found that the contract was not a consumer contract, so, based on the order of the Pest Central District Court and in line with the choice of court agreement, the case was referred to the District Court of Keszthely.

After the change of venue, the Keszthely District Court also established its own lack of jurisdiction (territorial competence) and sent the documents of the case to the Supreme Court for the purpose of appointing the court that should hear the case.

In the justification of its decision, the Keszthely Court explained that the contract was considered a consumer contract, so based on the procedural rules applicable to consumer contracts, the court of the defendant's domestic residence – the Pest Central District Court – had exclusive competence to hear the case.

3. Decision

The Supreme Court eliminated the conflict of jurisdiction by appointing the Central District Court of Pest to hear the case, based on the following reasons.

The Court found that, in view of the starting date of the procedure (2020), the provisions of the new CCP applied.

According to the provisions of the new CCP regarding actions relating to property rights, the parties may agree to designate a specific court as the court of competent jurisdiction to settle any disputes. This court will have exclusive jurisdiction in this regard.(4)

The Court established that pursuant to the choice of court agreement in clause 12 of the contract, the parties agreed to the exclusive jurisdiction of the Keszthely Municipal Court (currently, the Keszthely District Court) to settle any disputes related to the contract.

The Court, at the same time, emphasised that the legal relationship is established between a company and a consumer, and so is classified as a consumer contract. The consequence of this is that, based on the rules of the new CCP regarding consumer contracts and despite the choice of court agreement in the contract, the court of the defendant's place of residence (ie, the Pest Central District Court) was exclusively entitled to adjudicate the case.

The Court highlighted that according to judicial practice, the applicability of the choice of court agreement in the lawsuit will be decided on the basis of the procedural rules in force at the time of the initiation of the lawsuit.

4. Comment

In this legal case, the choice of court agreement in the contract, which was enforceable under the old Code of Civil Procedure applicable at the time of the conclusion of the contract, could no longer be enforced when the lawsuit was filed 22 years later, due to the changed regulations of the new CCP.

The courts had to choose between the original choice of court agreement and the rule in the CCP stipulating exclusive jurisdiction in case of consumer contracts, meaning that, due to the legislative change that occurred in the period between the conclusion of the contract and the initiation of the lawsuit, there was a conflict between the old and new procedural regulations (temporal conflict).

Principles for resolving temporal conflict
Temporal conflict is resolved according to different principles depending on whether the rule in question is of a substantive or a procedural nature:

• In case of a temporal conflict of substantive rules, the rules that were in force when the fact or legal relationship arose generally apply, so the enforceability of substantive rules is usually not affected by subsequent changes in the substantive laws.
• However, if the procedural laws change between the conclusion of a relationship and the initiation of a lawsuit in connection with that relationship, the law in force at the time of initiation of the procedure will generally apply.

Dual nature of jurisdiction clauses
The described problem in connection with jurisdiction and choice of court agreement stems from the dual legal nature of these legal institutions, since:

• the agreement of the parties regarding court jurisdiction or competence stipulated in the contract is primarily considered a substantive legal issue (eg, existence, validity, effect of the agreement); and
• the jurisdiction and choice of court agreements exert their effects after the initiation of the lawsuit and influence the jurisdiction, which is undoubtedly a procedural matter.

The question is, therefore, according to which principle the temporal conflict is resolved in the case of jurisdiction or choice of court agreements, in domestic and EU judicial practice.

CJEU practice
Since choice of court agreements (regulating territorial competence) are, in many cases, also considered jurisdiction clauses, which in business to business relations are basically regulated by the Brussels Ia Regulation,(5) it is worth examining according to which principle the European Court of Justice (CJEU) resolves the temporal conflict in relation to jurisdiction clauses.

In this regard, the Brussels Ia Regulation does not contain a separate provision. However, the CJEU explained in the Sanicentral v Collin case(6) that the legal consequences of the jurisdiction agreement begin with the initiation of a lawsuit; therefore, the procedural questions in connection with the jurisdiction agreement must be judged according to the procedural rules that are in force at the time of the initiation of the lawsuit.

With the above statement, the CJEU took a stand in favour of the procedural nature of the jurisdiction clauses.

Domestic practice
It can be deduced from domestic judicial practice that, in the case of civil lawsuits, the courts derive the rules for the resolution of the temporal conflict from the procedural law applicable to the case. The applicable procedural regime is determined by the date of submission of the statement of claim pursuant to section 630(1) of the new CCP.

Hungarian judicial decisions also refer to the Act on Law-making,(7) according to which "the legal provision must be applied to procedural actions started after its entry into force".(8)

The Hungarian courts also adjudge the jurisdiction clause on the basis of the procedural regime already established in connection with the procedure (ie, the procedural rules in force at the time of the initiation of the lawsuit), which means that the court cannot apply different procedural rules (eg, the rules in force when the agreement was concluded) in relation to the jurisdiction agreement.(9)

Based on the above, it can be established that the domestic courts follow the principles laid down by the CJEU in relation to the resolution of temporal conflicts related to jurisdiction agreements.

Implications
Based on the above analysis, it can be established that the applicability of jurisdiction or choice of court agreements in a subsequent lawsuit will be decided based on the procedural rules in force at the time of the initiation of the lawsuit in Hungary.

This may result in the fact that the choice of court agreement, which was enforceable at the time of the conclusion of the contract, can no longer be enforced when filing a lawsuit years later, due to the changed procedural laws. Since the parties have no influence on the procedural laws, they must take into account that the jurisdiction and choice of court agreements may become inapplicable in the future.

However, business actors generally conclude jurisdiction and choice of court agreements precisely for the sake of legal certainty and predictability. Based on the above court practice, it is questionable how far such agreements can fulfil this goal in the long term.

There is also the question of whether the parties can avoid the "obsolescence" of their choice of court agreements by stipulating arbitration, the procedural rules of which are generally known to be more flexible.

Interestingly, in this particular case, had the same parties concluded an arbitral clause in 1998, it could be still enforceable in Hungary, because even if the new Arbitration Act,(10) that entered into force in 2018, rendered consumer disputes inarbitrable, this provision governs only arbitral clauses entered into afterwards, without having any retroactive effect.

 

Endnotes

(1) Judicial decision No. BH 2021.12.34.

(2) Act CXXX of 2016 on the Code of Civil Procedure (CCP).

(3) Article 26 (1) of the new CCP.

(4) Article 27 (1) of the new CCP.

(5) Regulation (European Union) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).

(6) Judgment of the Court of 13 November 1979. Sanicentral GmbH v René Collin. Reference for a preliminary ruling: Cour de cassation - France. Case 25/79.

(7) Act CXXX of 2010 on Law-Making.

(8) Section 15 (1) of the Act on Law-Making.

(9) Judicial decision No. BH 2021.12.34.

(10) Act LX of 2017 on Arbitration.