Can Parties Choose a Foreign Court in a Purely Domestic Transaction in the EU?

05 April 2024

Can the parties domiciled in the same EU Member State conclude a choice-of-court agreement conferring jurisdiction on the court of another EU Member State in a purely domestic transaction? Should the choice of a foreign court be considered as a sufficient international element, in itself, to trigger the application of the Brussels Ibis Regulation? The CJEU decided this long-standing debate between subjectivist and objectivist approaches to “internationality” in a recent judgment.

Two Slovak companies, Inkreal as creditor (“Creditor”) and Dúha reality as debtor (“Debtor”) concluded loan contracts, which included choice-of-court clauses. According to the choice-of-court clauses in the event of a dispute that cannot be resolved by negotiation, that dispute ‘shall be settled by a court of the Czech Republic having substantive and territorial jurisdiction’. (“Choice-of-court Agreement”).

Later dispute arose between the parties, however the circumstances of the case were linked to Slovakia, and apart from the choice-of-court clause, the dispute did not have any relation with any other state.

National procedure

As the Debtor had not repaid the loans, at the end of 2021, the Creditor brought an action before the Czech Supreme Court seeking, among others, the determination of a Czech court having territorial jurisdiction to rule on the merits, based on the Choice-of-court agreement.

According to the Creditor, the Choice-of-court agreement was valid, and it complied with the requirements of the Brussels Ia Regulation[1].

However, the Czech Supreme Court was uncertain whether the Brussels Ia Regulation is applicable to the present case, where the international element was limited to an agreement conferring jurisdiction on the courts of a Member State other than that in which the contracting parties are established.

In those circumstances, the Czech Supreme Court decided to stay the proceedings and to refer the question to the Court of Justice of the European Union (“CJEU”) for a preliminary ruling on whether the Brussels Ia Regulation shall be applied based solely on the fact that two parties with their seat in the same Member State agree on the jurisdiction of courts of another EU Member State?

Decision of the CJEU

The CJEU laid down that the wording of the Brussels Ia Regulation does not preclude the above agreement, but it is a settled case-law that in order for the Regulation to be applicable, the existence of an international element is required.

The Brussels Ia Regulation uses the terms ‘civil matters having cross-border implications’ and ‘cross-border litigation’, but it contains no definition of the international element, the existence of which is a precondition for the application of that regulation.

The Regulation creating the European order for payment procedure[2] defines the equivalent concept of ‘cross-border litigation’ as ‘one in which at least one of the parties is domiciled or habitually resident in a Member State other than the Member State of the court seised.

Based on the above, the CJEU stated that, first, the dispute in the main proceedings meets the definition of the concept of ‘cross-border litigation’ since the parties to that dispute are established in a Member State other than the Member State of the court which was seised based on the Choice-of-court agreement.

In addition, the Luxembourg court highlighted that in accordance with the principle of legal certainty, the national court seised in a dispute should be able readily to decide whether it has jurisdiction, without having to consider the substance of the case.

If the question of jurisdiction was determined not in accordance with the provisions of the Brussels Ibis Regulation but on the basis of the national rules of private international law of the Member States concerned, there would be an increased risk of conflicts of jurisdiction arising which would be undermine the legal certainty.

Moreover, according to the CJEU, the legal certainty would also be compromised if the Brussels Ibis Regulation was applicable only on condition that besides the choice of a foreign court by the parties, there should be additional objective elements capable of demonstrating the cross-border nature of the dispute concerned, the examination of  which would render the decision on jurisdiction more complex.

Finally, unlike Article 1 (2) of the Hague Convention of 30 June 2005 on Choice of Court Agreements, the Brussels Ia Regulation does not expressly exclude its applicability for choice of court agreements in wholly internal transactions.

Based on the above, the CJEU has come to the conclusion that the Choice-of-court agreement in the underlying case shall be governed by the Brussels Ibis Regulation regardless of the fact that the only international element is the stipulation of the foreign court by the parties.

Comment

Internationality is a basic concept of private international law, international civil procedural law, and international commercial arbitration, yet the exact meaning of this term is rarely defined by positive law.

Therefore, the question whether the international character of a choice-of-court agreements is an objective or subjective category under the Brussels Regime has been unanswered for more decades.

In the framework of the Brussels Regime, the academic debate goes back to the Jenard Report[3] and the Schlosser Report[4], the former representing the subjectivist approach, the latter the objectivist position.

According to the objectivist position, the mere stipulation of an EU Member State's court in a purely domestic situation should not lead to the application of the Brussels regime, since the underlying transaction of the parties should have the international elements, triggering the application of the Brussels Regime.

In contrast, according to the subjectivist view, the designation of a court of another EU Member State by parties domiciled in the same Member State shall be in itself a sufficient international element to apply the Brussels Ibis Regulation.

In the present decision, the CJEU accepted the subjectivist view, highlighting several arguments already cited in jurisprudence and case law.

The CJEU pointed out that the interpretation of Brussels Ia Regulation must be carried out in the light of the objectives of respecting the autonomy of the parties and enhancing the effectiveness of exclusive choice-of-court agreements.

In addition, based on the Kolassa case[5], the CJEU also laid down previously that the aim of legal certainty requires the national court to be able readily to decide whether it has jurisdiction, without having to consider the substance of the case. This approach also supports the subjectivist view, rendering unnecessary the detaied examination of the internationality of the transaction.

By adopting a subjectivist view, the CJEU has strengthened party autonomy regarding choice-of-court agreements allowing the parties to confer jurisdiction on another Member State, even if that contract has no other connection with that other Member State. Moreover, it also brings several practical advantages, which may ensure predictability in international civil and commercial litigation within the EU.