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SUPREME COURT RULED: LIMITED EFFECT OF OPTIONAL JURISDICTIONAL CLAUSES IN HUNGARY?

26 February 2020

Can anyone start 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? This question, raising the issue of negative effects of such asymmetric choice-of-court agreements was answered by the Hungarian Supreme Court in its recent judgment that we analyse in this article.

1. Facts

A Hungarian attorney-at-law, as client (“Defendant”) and two professional fiduciary asset managers from Liechtenstein (“Claimants”) entered into a service agreement, based on which Claimants had to provide various asset management services for the Defendant.

The contract was governed by the law of Lichtenstein, and it provided that any legal disputes shall be brought in front of the court of Vaduz, however, Claimants had the option to “seek performance of the contract” in front of the courts where the Defendant is domiciled.

Since Defendant failed to pay the service charges, Claimants sued him in Hungary.

2. First instance decision

In its letter of action Claimant made a detailed statement, precising in his opinion, why Hungarian courts have jurisdiction to hear the dispute. Given that the letter of action has been served on the Defendant only 4 (four) days prior to the first court hearing, the latter made a submission to the court, in which firstly he requested the adjournment of the hearing, secondly he asked the court to hold the hearing in his absence, and dismiss the action of Claimants.

The court of first instance found the claim lawful and ordered Defendant to pay the sum, by holding that on the one hand, based on the above optional choice-of-court agreement, Claimants could start litigation in Hungary, but on the other hand, by requesting the dismissal of the action, Defendant consented to the jurisdiction of Hungarian courts.

3. Second instance judgment

The court of second instance took a different position, holding that based on the former Private International Law Code, applicable in the present case,[1] the parties have chosen the court of Lichtenstein, which, absent contrary agreement by the parties, shall mean that this court shall have exclusive jurisdiction. The additional option of Claimants to “seek performance of the contract” shall not be considered as a choice-of-court provision.

When it comes to the submission of Defendant made before the first hearing, the court of second instance have not considered it as a consent to jurisdiction. Therefore, given that the exclusive jurisdiction of the court of Liechtenstein excludes the jurisdiction of Hungarian courts, the Hungarian litigation was terminated by the court of second instance.

4. Decision of Supreme Court

The Claimants filed a request of review to the Supreme Court, which at the first place analysed the choice-of-court agreement of the parties and, contrary to the finding of the court of second instance, it concluded that it is not an exclusive jurisdictional agreement.

The Supreme Court went on further, by concluding that given that the jurisdiction of Hungarian courts is not excluded because of the non-exclusive character of the above jurisdictional clause, the jurisdiction of the Hungarian courts depends on the defendant’s behaviour in the litigation in accordance with the former Code of Civil Procedure, applicable in the case at hand[2]. In case of Code of Civil Procedure, in case the defendant fails to attend the first hearing, or raises an objection against the jurisdiction of Hungarian courts, then the litigation shall be terminated.

However, in this case the Defendant acted to the contrary: he submitted a defence to the merits, and failed to object against the jurisdiction of Hungarian courts, despite that he was a lawyer, and the Claimants made their detailed statement in relation with the jurisdiction of Hungarian courts in their letter of action.

Based on the above, the Supreme Court held that the submission of Defendant prior to the first hearing amounted to a consent to jurisdiction, establishing the jurisdiction of Hungarian courts. Consequently, the Supreme Court quashed the second instance decision, and upheld the first instance judgment.

5. Unilateral Optional Jurisdictional Clauses in international practice

Exclusive jurisdictional clauses are treated uniformly by most important international legal sources, like the Brussels Regulation[3] and the Hague Convention[4]. The positive effect of this clauses that they establish the jurisdiction of the chosen courts, while their negative effect is that they exclude jurisdiction of all other courts.

When it  comes to non-exclusive jurisdictional agreements, like an unilateral optional agreement as in the case above, their positive effect is not disputed, but there is a divergence among the different countries in relation to their negative effect.

In England, courts tend to respect party-autonomy to the maximum extent, and based on English case law, in case of an unilateral optional jurisdictional agreement, the option-holder party is free to start the litigation according to his option, while the other party is bound by the jurisdictional clause.

As a notable example, the English Court of Appeal ruled in Continental Bank case, where the borrowers submitted to the jurisdiction of English courts, while the bank reserved the right to proceed in front of the courts of any other country, that the jurisdictional clause was not exclusive for the bank, only for the borrowers, and its negative effect precluded the latter to sue the bank in Greece.[5]

At the other end of the scale, France considers unilateral optional jurisdictional clauses invalid.

In a landmark decision delivered in the case Rotschild, where the parties concluded an exclusive jurisdictional agreement in favour of the courts of Luxmbourg, but the bank had the option to start proceedings in front of the courts where the client domiciled, or in front of any other court,  the French Cour de Cassation held that such a clause had a so-called potestative character, infringing the principle of legal certainty and foreseeability.[6]

6. The Hungarian approach

The case analysed above was the first published decision of the Hungarian Supreme Court, where the effects of a unilateral optional jurisdictional clause were in issue. Even if the judgment was brought on the basis of the former Private Intenational Code, its holding is valid for future cases since the legal provision in the New Private International Code has not changed.[7]

It seems that the approach of the Hungarian Supreme court is on halfway between the English and French approach.

On the one hand, the Hungarian Supreme Court have not considered the jurisdictional clause invalid, like the French Supreme Court did. In this respect, it must be noted that the clause in the Hungarian case at hand has not conferred as broad option for the Claimants, as the clause did in the French case cited above.

On the other hand, the Hungarian Supreme Court has not given the optional jurisdictional clause such a negative effect, which would have prevented the option-holder party from starting litigation in front of courts other than the those stipulated in the clause.

In sum, unilateral optional choice-of-court clauses are not deprived from any legal effect in Hungary, but their effect is limited.

The question which remained unanswered is whether this type of unilateral optional jurisdictional clause has a negative effect for the non-option holder party, preventing him from starting litigation in front of other courts? We hope that the Hungarian Supreme Court soon will have the chance to decide that question.

 

[1] Law Decree No. 13 of 1979 on private international law, Sections 62/F-H

[2] Act III of 1952 on the Code of Civil Procedure, Section 157/A

[3] Regulation (EU) No 1215/2012

[4] Convention of 30 June 2005 on Choice of Court Agreements

[5] Continental Bank NA v. Aeakos Compania Naviera SA and Others [1994] 1 WLR 588

[6] Affaire Rotschild - Arrêt n° 983 du 26 septembre 2012 (11-26.022) - Cour de cassation - Première chambre civile

[7] Law Decree No. 13. of 1979 on Private International Law, section  62/F. (2) ;Act XXVIII. of 2017 on Private International Law, section 99 (7);