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Blog » HUNGARY: CHOICE OF LAW BY CONDUCT IN LITIGATION? – JUDGMENT OF SUPREME COURT

HUNGARY: CHOICE OF LAW BY CONDUCT IN LITIGATION? – JUDGMENT OF SUPREME COURT

25 March 2020

Can the conduct of the parties during litigation amount to an implied choice-of-law agreement based on the Rome I Regulation? We analyse the fresh judgment of the Hungarian Supreme Court in this article.

1. Facts

The plaintiff, as a service provider seated in Serbia(“Plaintiff”) and the defendant, as a customer seated in Hungary (“Defendant”) concluded a contract for agency and business counselling in2012 (“Agency Contract”).

According to the Agency Contract, the Plaintiff had to advise the Defendant in selling of its business share  in a Serbian company (“Target company”), including the seeking of a prospective purchaser,  the assessment of the financial situation of the latter,  and the drafting of the necessary documents,  for a fixed fee.

Due to the activity of the Plaintiff, the Defendant concluded a contract for the transfer of the 70% of the business shares of the Target Company for a price of EUR 812.347 with a purchaser in the same year. Pursuant to the share purchase contract, the purchase price of the business share 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 have failed to pay the commission for the Plaintiff as in the meanwhile the Defendant and the purchaser agreed that the transfer of the business share was free of charge, in addition the Plaintiff did not complete his contractual tasks entirely.

2. First instance procedure

The Plaintiff, seated in Serbia initiated legal proceedings to recover its fee in Budapest, at the seat of the Defendant. Although, the Contract did not contain a 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 he 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 he contested the applicability of the Hungarian law. According to his standpoint, the legal dispute should have been decided under the Serbian law on the basis of the Rome I Regulation, considering that the service provider was seated in Serbia.[1]

3. Second instance procedure

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 is based on the Serbian law and not on the Hungarian Civil Code, which was clearly indicated in the statement of claim of the Plaintiff..

According to the second instance court, the assertion of rights by the Plaintiff on the basis of the Hungarian Civil Code on the one hand, and the statement of defence of the Defendant which also refers to this source of law on the other, together does not leave any doubt that choice of the applicable law (the Hungarian law) by the parties expressly occurred by making these declarations. The second instance court assessed the decision of the first instance court right on the merits, therefore it uphold the decision.

The Defendant submitted a request for review against the second instance decision. When it comes to the applicable law, he underlined that he neither made an explicit declaration on the acceptance of the application of the Hungarian law nor he referred to it by implied conduct. Furthermore, the Defendant highlighted that the in relation with the choice of law, the court should act on the basis of real intention of the parties, the occurrence of choice of law may not be decided on the basis of a hypothetic intention.

When it comes to the merit of the decision, Defendant submitted that the service of the Plaintiff was indivisible, however the latter did not take part in the preparation of the contract, did not check the financial situation of the purchaser, therefore the consequences of this partial breach of contract shall apply to the whole contract, consequently he is not entitled to remuneration.

4. Decision of the Supreme Court

The Supreme Court shared the view of the Defendant to that extent that pursuant to the Rome I Regulation, in the absence of choice of law, the Serbian law would be applicable. However, in the view of the Supreme Court, the parties have made an implied choice of law as the Rome I Regulation does not restrict the possibility of choosing law only on the date of the conclusion of the contract.

The Supreme Court emphasized by referring to legal literature, 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.[2]

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 from one part, and the detailed, substantive statement of defence without any objections submitted by the Defendant from the other,  as an implied choice of law by conduct of the parties.

Pursuant to the Supreme Court, the conduct of the Defendant that he contested the applicability of the Hungarian law in his appeal following the above can be interpreted as 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.

5. Choice of law under the Rome I regime

In the absence of an ECJ judgement 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 regime”.

Pursuant to the Rome Convention, adopted in 1980 which can be considered as the forerunner of the Rome I Regulation, the tacit choice had to be demonstrated with “reasonable certainty” “by the terms of the contract or the circumstances of the case.” [3]

The Rome I Regulation of 2008 provides that „the choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case.”[4] regarding the tacit choice of law. More scholars are of the view that in relation with the implied choice of law, the Regulation contains stricter conditions than the Convention.[5]

When it comes to the “circumstances of the case”, this term is identical both in the Convention and in the Regulation, however it is not clear 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 choice of law, but this was finally not added to the final text as according to the majority opinion it is included in the term of “the circumstances of the case”.[6]

However, it is still not clear, whether the “conduct of the parties” refers only to the conduct relative to the negotiation and conclusion of the contract, or 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?

6. Assessment of the decision of the Supreme Court

The judgment the Supreme Court at hand answered the above question in the affirmative,  and its decision indicates a shift from the well-settled case law relative to conclusion of contracts by conduct.

The existing judicial practice relative to conclusion of contracts by conduct considers mostly takes into account  acts, like receiving the service, accepting the performance, taking the possession or commencing litigation.[7] In addition, the silence can be interpreted as conduct only in case it undoubtedly expresses the will of the party to enter into contract.[8]

However, in the present case it is doubtful, whether we can speak about an undoubted will to enter into 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 the Hungarian law may not amount to an “offer” to apply the Hungarian law to the contract, since during the litigation, the Plaintiff can unilaterally modify the action. However, the binding nature is key concept of an offer.

At the same time, given the individual circumstance of the case, the decision of the Supreme Court can be accepted,  since it could considerably lengthen the civil procedure, if the court allowed the party to come forward with a new legal argument in front of the second instance court, contrary to his conduct in the first instance 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 principle of “venire contra factum proprium” known from the Roman law, under which the exercise of right, which is in contradiction to the previous conduct of the person is unlawful.

Although, the judgment of the Supreme Court was made in the former legal environment, the “wind” of the new Act on Civil Procedure, entered into force on 1st January 2018 can be felt in the decision. The new law, focusing on effective dispute resolution, significantly limits parties in modifying the claims, facts and legal arguments already submitted by them in the litigation.

 

[1] Article 4 (1) (b) of  Regulation (EC) No 593/2008 of the European Parliament and of the Council (hereinafter: Rome I Regulation)

[2] Mádl Ferenc -Vékás Lajos: Private International law, and law of international business relations, 2014, ELTE Eötvös Kiadó, Digital Library [414]; [416]

[3] 1980 Rome Convention on the law applicable to contractual obligations. Article 3 (1) “demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case”

[4] Rome I. Regulation Article 3. (1). „The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case.”

[5] M. McParland: The Rome Regulation on the Law Applicable To Contractual Relations. Oxford University Press. 2015. 302. A. Briggs: The Conflict of Laws. Oxford University Press, 2013. 232.

[6] McParland 315.

[7] Supreme court decisions under no. BH 2012.170.; BH 2002.436.; BH 2008.182.; BH 2003.282.;

[8] Supreme court decisions under no. BH+ 2011.4.157.; BH+ 2006.11.507