Richard Schmidt Peter Gritta January 10 2023 Can an inapplicable choice-of-court clause be regarded as a tacit jurisdiction agreement? SMARTLEGAL Schmidt & Partners | Litigation - Hungary Richard Schmidt, Peter Gritta Litigation FactsFirst-instance courtSecond-instance courtSupreme CourtCommentCan a valid, but inapplicable choice-of-court clause, be regarded as a "tacit" jurisdiction agreement? Is it sufficient to establish the jurisdiction of the courts of a member state under the Brussels I Regulation? This article addresses these questions based on a judgment that the Hungarian Supreme Court delivered in a cross-border dispute between a Hungarian claimant and a Romanian defendant.FactsIn 2011, a company seated in Szolnok, Hungary, (the claimant) entered into a contract as a supplier with a company based in Romania (the defendant). As per this contract, the claimant was to deliver machines and other equipment for a wastewater treatment plant being built in Romania and was to install the delivered equipment.In the contract, the parties stipulated Hungarian law as the applicable law. The contract contained the following clause (the choice-of-court clause):disputes that may arise shall be settled by mutual negotiations between the parties, keeping in mind the mutual interests, failing which, the parties stipulate the competence of the Municipal Court of Szolnok.The settlement between the parties was only partially successful. The defendant paid the claimant's advance invoice, but only partially paid the next two sub-invoices and completely refused to pay the final invoice.According to the defendant, the claimant had only partially fulfilled its contractual obligations as it had not performed the on-site installation of the machines delivered to Romania. However, according to the claimant, the contract had been duly performed; therefore, the defendant had to pay the full price for the services under the contract.First-instance courtThe claimant filed a lawsuit against the defendant before the Regional Court of Szolnok. In its claim, the claimant requested that the first-instance court oblige the defendant to pay the claimant 45 million forints on the title of purchase price and its interests under the contract.The defendant primarily objected to the jurisdiction of the first-instance court, arguing that the Hungarian courts did not have jurisdiction over the lawsuit. In its defence concerning the merits of the case, the defendant requested the rejection of the claim as the claimant had only partially fulfilled its contractual obligations; therefore, the defendant set its expenses against the claimant's claim in the litigation.The first-instance court conducted an extensive evidentiary procedure, during which it personally heard the defendant's manager regarding the circumstances of the conclusion of the contract and the choice-of-court clause.In its judgment, the first-instance court obliged the defendant in accordance with the claimant's request. Based on the judgment that the first-instance court had jurisdiction to adjudge the case, the first-instance court established during the substantive investigation that the claimant had performed its obligations under the contract, thus it was entitled to the compensation set out in the contract.Second-instance courtFollowing the claimant's appeal, the second-instance court upheld the judgment of the first-instance court on its merits.Due to the defendant's objection to jurisdiction, the second-instance court primarily investigated whether a Hungarian court could hear the case, given that the parties had stipulated in the contract the territorial competence of the Municipal Court of Szolnok (currently, the Szolnok District Court). However, district courts do not have subject-matter competence to hear cases with a claim value of more than 30 million forints, as such cases fall under the competence of the regional courts.According to the second-instance court, the parties' choice-of-court clause "reflects the will to stipulate the jurisdiction of Hungarian courts". Thus, by designating a Hungarian court as the territorially competent court, the parties also expressed their will to stipulate the jurisdiction of the whole Hungarian court system.Based on the evidence, the second-instance court established that the main purpose of the choice-of-court clause was to establish the jurisdiction of Hungarian courts, which was in favour of the claimant seated in Hungary, who gave the offer to the defendant seated in Romania.According to the second-instance court, since the value of the case exceeded 30 million forints, district courts did not have the competence to hear the case, but this did not annul the will of the parties regarding the stipulation of the jurisdiction of Hungarian courts. Furthermore, under the applicable Hungarian procedural rules, the seat of the claimant established the territorial competence of the first-instance court.When it came to the merits, the second-instance court upheld the first instance judgment.Supreme CourtIn its request for review, the defendant requested the termination of the lawsuit, the annulment of both judgments and the order of the first-instance court to conduct a new procedure and make a new decision.According to defendant, the final judgment violated the rules of the Hungarian Civil Procedure Code and the Brussels I Regulation. The stipulation of the competence of the Municipal Court of Szolnok in the contract could not be interpreted broadly (ie, the clause could not be extended to the Regional Court of Szolnok – thus, the choice-of-court clause would not have been applicable in the present case).The Supreme Court did not find the final judgment to be in violation of the law based on the reasons stated in the request for review.The Supreme Court emphasised that article 23 of the Brussels I Regulation, by the institution of the "agreement conferring jurisdiction", recognises the autonomy of the contracting parties. Article 23 of the Brussels I Regulation – within the framework of the Regulation – gives the parties the opportunity to freely decide, which court(s) of which member state should resolve the legal dispute that has arisen or may arise in connection with the parties' legal relationship.To this effect, if the jurisdiction of the court(s) of the member state that the parties have agreed upon can be determined beyond doubt from the jurisdiction clause, their agreement does not have to extend beyond this to the definition of the specific court of the member state designated as having jurisdiction (ie, the court that has competence and jurisdiction in a local, territorial sense), since this is determined by the domestic procedural laws of the given state.According to the Supreme Court, by stipulating the territorial competence of the Municipal Court of Szolnok in the contract, the parties set forth that a Hungarian court, specifically a court based in that Hungarian city, had jurisdiction to adjudicate any disputes arising from the contract.Contrary to the defendant's request for review, this contractual provision could not be interpreted such that the choice-of-court clause applied only to lawsuits within the competence of the Municipal Court of Szolnok and could not be applied to lawsuits with a higher litigated amount, which belong to the competence of Regional Court of Szolnok. The parties themselves did not interpret their agreement in this way either, taking into account the oral testimony made by the defendant's manager in the lawsuit.The Supreme Court emphasised that the choice-of-court clause was sufficiently precise within the meaning of article 23 of the Brussels I Regulation, and its objective was to grant exclusive jurisdiction to courts belonging to the Hungarian judicial system, which also implies the application of the Hungarian procedural rules on subject-matter and territorial competence.The Supreme Court backed its justification by invoking the judgments of the Court of Justice of the European Union (CJEU) delivered among others in Coreck Maritime(1) and in Hőszig v Alstom Powers.(2)Based on these reasons, the Supreme Court upheld the second-instance judgment.(3)CommentGiven that the decision involves the interplay between the various levels of the judicial competence of the state, there is no unified international terminology in this matter. Thus, before analysing the judgment, it is worth recalling the three levels of judicial competence in a broader sense.Three levels of judicial competenceThe first level of judicial competence is the international competence, which addresses the question of whether the courts of a given country can hear a particular legal dispute at all. This judicial competence is referred to as "jurisdiction".The second level of judicial competence is the subject-matter competence, which determines which type of court, which has jurisdiction to hear the case, can hear the dispute.The third level of judicial competence is the territorial competence, which determines which court, among courts with the same subject-matter jurisdiction, will actually hear the case.While in civil and commercial matters the first level of judicial competence is regulated in the European Union by the Brussels Regime, the second and third level of judicial competence is governed basically by national law.Inapplicable choice-of-court clauseBased on the court practice of the former Code of Civil Procedure,(4) if the parties stipulate the territorial competence of a specific court that does not have subject-matter competence to hear the case based on the value of the case, the choice-of-court clause is not applicable.(5)In the case at hand, it was not disputed that, under the procedural rules, the choice-of-court clause was valid. However, it could not be applied to establish the territorial competence of the court of first instance, as the clause referred to the competence the Municipal Court of Szolnok.Since the chosen court did not have subject-matter competence to hear a case with a litigated amount higher than 30 million forints, the claimant started proceedings before the Regional Court of Szolnok.Therefore, the question was whether a choice-of-court clause, which could not be taken into account to establish territorial competence, can be taken into account to establish the international competence (ie, the jurisdiction) of the courts.Choice of court clause as tacit agreement on jurisdictionSince in civil and commercial matters the jurisdiction of the courts within the European Union is governed by the Brussels Regime, the question of whether a choice-of-court clause can be interpreted as a tacit jurisdiction agreement in favour of the courts had to be examined in light of the case law of the CJEU relative to article 23 of the Brussels I Regulation, which was applicable in the case.(6)Notably, the judgments of the CJEU, quoted by the Supreme Court, address different questions.In the Coreck Maritime judgment, the parties' contract stipulated that legal disputes be resolved "in the country, where the carrier has its principal place of business". When one of the parties challenged the clause because of the lack of clarity, the CJEU ruled that a jurisdiction clause is valid, even if it the competent court cannot be established based on its wording alone, if it includes those objective factors in a sufficiently precise manner, based on which the court can decide whether it has jurisdiction, taking into account the factual circumstances of the case.Similarly, in Hőszig v Altom Powers, where the choice-of-court clause in the general terms of conditions of the French buyer stipulated the "courts of Paris", the main issue was whether this clause had become part of the contract concluded with a Hungarian supplier in light of the Hungarian Civil Code on so-called "surprise clauses" in general terms, such that the latter invoked relying on Hungarian law as lex fori.However, in the present case, the court chosen by the parties could be identified based on the wording of the choice-of-court clause alone. Further, that clause was included in a contract negotiated individually.In the present case, the main issue was whether the stipulation of a given court that does not have subject-matter competence to hear the dispute can amount to a valid jurisdiction agreement in favour of the courts of the country in which the chosen court can be found under article 23 of the Brussels I Regulation. In short, can a valid, but inapplicable choice-of-court clause amount to a "tacit" jurisdiction agreement?Given that the governing principle underlying article 23 of the Brussels I Regulation is party autonomy, in order to address to above question the real intent of the parties had to be clarified first. Based on this, the Hungarian courts made the right decision when, instead of mechanically disregarding the choice-of-court clause, they conducted an extended evidentiary procedure regarding the whole contract negotiation process between the parties.As it became clear that the choice-of-court clause came into existence after a bargaining process between the parties, the courts believed that the choice-of-court clause could also be interpreted extensively to encompass the international competence of Hungarian courts.Even if the above decision slightly raises the issue of homeward trends and jurisdictional expansion, the general approach of the Hungarian courts, to explore the real intent of the parties concluding choice-of-court agreements, is in line with the spirit of the Brussels Regime and is welcomed.For further information on this topic please contact Richard Schmidt or Peter Gritta at SMARTLEGAL Schmidt & Partners by telephone (+36 1 490 09 49) or email ([email protected] or [email protected]). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.Endnotes(1) Case C-387/98 Coreck Maritime GmbH v Handelsveem BV and Others.(2) Case C-222/15 Hőszig Kft v Alstom Power Thermal Services.(3) Kúria Gfv.30382/2018/8.(4) Act III of 1952 on Civil Procedure.(5) Judicial decisions Pf I 25 590/1999 - BH2001 433 I of the Supreme Court).(6) Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.