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CAN THE CHOICE OF COURT AMOUNT TO THE CHOICE OF LAW? – THE SUPREME COURT DECIDED

16 September 2020

Shall it be considered as the choice of the English law if the party first starts a litigation in England regarding to a Hungarian project? How much of a role do the procedural acts of the parties play in relation to the choice of law applicable to a contract? In this article we analyse the fresh judgement of the Supreme Court, in which, among others, the highest court addressed the issue of the tacit choice of law.

1. Facts

The Claimants and the Defendant 1 agreed in 2003 that they will cooperate in the construction of a real estate development project in Budapest. so that they shall bear the costs of the project in a ratio of 50-50% and they shall share the profit in the same ratio. The project was finished in 2008 and the Claimants received ca. USD 1 Million, however a settlement-related dispute has emerged between the parties.

The Claimants and the Defendants concluded an agreement (“Agreement”) in London in 2012 based on which Defendant 1 undertook to pay USD 423.000 and interests (section 8), further to transfer the title of certain real estates to a company to be declared by the Claimants (section 9). The payment obligation of Defendant 1 was guaranteed by Defendant 2 (section 10).

Defendants failed to comply with their obligations, thus the Claimants filed a claim before the Central London County Court. The English court ordered the Defendants to pay USD 423.000 to the Claimants and at the same time established that English courts do not have jurisdiction in relation to the claims filed because of the infringement of section 9 (transfer of the real estates) and 10 (guarantee undertaken by the Defendants) of the Agreement.

2. The first instance procedure

Subsequently, the Claimants started a litigation against the Defendants in Budapest and requested the court to order the Defendants to pay USD 1,5 Million and interests on the legal title damages, given that the latter failed to perform the Agreement.

A debate emerged between the parties about the applicable law in the litigation. The Claimants argued that the Hungarian law shall be applicable, and it is irrelevant that the London court assessed the contents of the Agreement not being the subject of the present litigation based on the English law.

The Defendants, on the contrary, claimed that the English law shall be applicable, since, on the one hand it shall be regarded as an explicit choice of law that the parties accepted the assessment of their legal dispute by the English court based on the English law and on the other, the applicability of the English law is substituted by the fact that the Parties had no information regarding the Hungarian law, thus applying the Hungarian law was contrary to their contractual will. Further, the Defendants argued that the Agreement was signed in London and was drafted in English.

The first instance court deemed unfounded the statement of the Defendants that the Parties have chosen the English law for their legal dispute. Based on the opinion of the first instance court, a choice of law shall be prior and explicit, and it is not possible the choose the governing law subsequently and in an implied manner. Hence, it does not follow from the fact that the parties have not disputed the application of the English law in the procedure before the London court, that they have chosen the English law for the legal dispute which is based on the Agreement concerned by this litigation.

In the first instance court’s opinion the legal dispute shall be assessed based on Hungarian law in accordance with Article 4 (1) c) of the Rome I Regulation[i], based on which a contract relating to a right in rem in immovable property shall be governed by the law of the country where the property is situated. Indeed, the obligation of the Defendants was the transfer of real estates located in Hungary.

Regarding the merits of the case, the first instance court ordered the Defendants to pay jointly and severally ca. EUR 1,11 Million to the Claimants.

3. The decision of the second instance court

The Defendants filed an appeal against the first instance judgement, so the second instance court reviewed the questions related to the applicable law.

The second instance court was on the view that the first instance court made a mistake when he concluded that it is not possible to choose the governing law subsequently and in an implied manner. The so-called implied or tacit choice as a method of choice of law has long been recognised by the international private law and in the application of the Rome I Regulation the tacit choice of a specific law can be established if the parties’ intent is clearly demonstrated by the terms of the contract or the circumstances of the case.

However, in the second instance court’s opinion, based on the circumstances relied upon by the Defendants it cannot by established with a higher degree of certainty as required under the Rome I Regulation, that it was the parties joint intent that the legal dispute shall be governed by the English law. The fact that the parties accepted the applicability of the English law before the London court cannot be considered as an explicit choice of law as it does not allow to conclude that the English law shall be applicable to the legal dispute arisen from sections 9-10 of the Agreement which was not concerned by the procedure in London.

In the view of the second instance court even the choice of the forum by the parties alone cannot be regarded as a tacit choice of law, a choice of court can only be considered as one factor in the decision. The implied choice of law of the parties can be established neither because the Agreement was concluded in England, nor based on the fact that certain terms (“partnership” or “guarantee”) imply the applicability of the English law since it is not the case that these legal instruments are only known in the English law.

Finally, the tacit choice of law is also not supported by the fact that the Parties had no substantive information regarding the Hungarian law.

The second instance court agreed with the first instance court that since the Agreement is a contract relating to a right in rem in immovable property, the Hungarian law shall be applicable to the case in accordance with Article 4 (1) c) of the Rome I Regulation. Based on the above the second instance court confirmed the first instance judgement.

4. The decision of the Supreme Court

The Defendants filed a request for judicial review in which they claimed that the courts wrongly concluded that the Hungarian law shall be applicable to the legal dispute.

In the view of the Supreme Court it was not disputed that there was no explicit choice of law in a written agreement, hence the Supreme Court also examined whether there was an implied choice of law.

Although in the opinion of Supreme Court the fact that the parties confer exclusive jurisdiction on the court of a given country may indicate a tacit choice of law, in the present case the fact that the English court assessed a part of the legal dispute based on the English substantive law, cannot mean in itself that an implied choice of law was agreed. This is supported also by the fact that in the procedure before the English court the Defendants disputed the jurisdiction of the English court which means that the procedure and the law applied in it was not based on the agreement of the Parties.

The Supreme Court concluded that the Defendants’ statement, that the usage of terms in the Agreement like “partnership” or “guarantee” imply the applicability of the English law, was unfounded. This is contradicted by the fact that none of the parties was a legal professional, the terms referred to by the Defendants are used during everyday business transactions and that the Defendants failed to indicate what legal instruments only known or known with a completely different specific meaning in the English law are connected to these terms in comparison with their legal qualification in the Hungarian law.

Given that in the opinion of the Supreme Court there was no implied choice of law, the question to be assessed in the case was the law applicable in the absence of choice.

The Supreme Court did not agree with the first- and second instance court that the law applicable to the case should be based on Article 4 (1) c) of the Rome I Regulation since the Defendants did not undertake in the Agreement to transfer clearly defined real estates.

Instead, the Supreme Court established the applicable law based on the principle of the characteristic performance as defined by Article 4 (2) of the Rome I Regulation.

In the Supreme Court’s standpoint, the Defendant 1 should have performed the Agreement by transferring real estates located in Hungary and this performance shall be considered as the characteristic one based on the Agreement. Thus, the applicable law in accordance with Article 4 (2) of the Rome I Regulation is the law of the country where the party required to effect the above characteristic performance, that is to say the Defendants, have their habitual residence, meaning that the Hungarian law shall apply.

Finally, the Supreme Court noted that his conclusion was the same if the applicable law should have been assessed based on the principle of the closest connection in accordance with Article 4 (3) of the Rome I Regulation.

In the view of the Supreme Court, ultimately, the lower courts acted correctly when they assessed the case based on the Hungarian law, thus he confirmed the second instance judgment.

5. The assessment of the decision of the Supreme Court

The connection between the choice of the forum and the choice of the law is an old problem of the international private law.

Based on the pragmatic approach of the Anglo-Saxon law, in case of contractual relationships the choice of law and the choice of forum are closely connected. On the one hand, in case of contractual relationships, the choice of the English law in itself provides a basis for the jurisdiction of English courts, and on the other, an arbitration agreement based on which the place of the dispute resolution shall be England, as noted by Judge Clarke J, is „a strong indication of the parties’ intention to choose English Law as the applicable law.”[ii] In the Anglo-Saxon law this approach applies in relation to jurisdiction clauses.

However, based on the principle of “Qui elegit iudex, eligit ius” originating from the Roman law, the choice of forum shall also be considered as a choice of law, nowadays the civil law legal systems do not consistently enforce this principle.

Hence, even though when adopting the Rome I Regulation, the Commission wanted to revive the above Roman law principle so that in case of the conclusion of a jurisdiction clause there should be a presumption that the parties also chose the lex fori of the chosen court of the Member State[iii], finally as a result of the compromise among the Member States, in accordance with Preamble 12 of the Regulation, the court shall only take into account a jurisdiction clause when assessing the choice of law by which the parties confer exclusive jurisdiction on the courts of a member States and this is to be considered only as one factor among the other circumstances of the case.[iv]

Given that in the present case the Claimants and the Defendants have not concluded an exclusive jurisdiction clause and in addition the Defendants disputed the jurisdiction of the English courts, in the light of the above, the Supreme Court was right to conclude that the procedure before the Central London County Court could not be considered as the choice of the English law.

As regards to the tacit choice of law, based on the Rome I Regulation, it shall be established with a reasonable certainty, that is why it is correct that the Supreme Court did not consider the choice of the English law as demonstrated by the circumstances of the case.

In this respect it is worth noting that in an earlier decision thoroughly analysed by us (LINK), in our opinion, the Supreme Court attributed excessive importance to the procedural acts of the parties in relation to the tacit choice of law. The present decision showing a more conservative approach, as we believe, is certainly welcomed.

In fact, contrary to an exclusive jurisdiction clause, which cannot be later unilaterally modified by the party, the parties may freely amend their procedural statements, like the Defendants did when they disputed the jurisdiction of the London court in the procedure in England and then in the Hungarian litigation they referred to the English procedure in order for the application of the English law. Therefore, the overvaluation of procedural acts in relation to the choice of law is not correct, and this time the Supreme Court also followed this approach.

Regarding the distinction between the law of the country where the property is situated and the characteristic performance as a connecting factor, it probably also played a role in the Supreme Court’s decision that he opted for the applicability of the latter, that the subject of the case was not directly an in rem right in immovable property, but damages, which in a jurisdiction context, was against the applicability of the lex situs as a connecting factor. Nevertheless, on the substance, the Supreme Court has come to the same conclusion based on the Article 4 (2) of the Rome I Regulation and decided for the applicability of the Hungarian law in accordance with the principle of the characteristic performance.

 

[i] REGULATION (EC) No 593/2008 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 17 June 2008on the law applicable to contractual obligations (Rome I)

[ii] Trevor C. Hartley: International Commercial Litigation Cambridge University Press 2015. 122-123; 639

[iii] Michael Mc PARLAND: The Rome I Regulation on the law applicable to contractual obligations. Oxford University Press 2015. 304

[iv] Rome I Regulation (12) An agreement between the parties to confer on one or more courts or tribunals of a Member State exclusive jurisdiction to determine disputes under the contract should be one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated