Richard Schmidt Anita Vereb November 29 2022 Can the enforcement of an arbitral award be frustrated by a jurisdiction clause? SMARTLEGAL Schmidt & Partners | Litigation - Hungary Richard Schmidt, Anita Vereb Litigation FactsFirst-instance courtDecisionCommentThe only thing more annoying than an award-debtor concealing their assets after successful arbitral proceedings is an award-debtor trying to further frustrate the award-enforcement by concluding a choice-of-court agreement. But does this kind of jurisdiction clause extend to the non-signatory award-creditor? This article analyses the recent decision of a Hungarian appellate court, delivered under the EU Brussels Ibis Regulation,(1) in which the court had to rule on the personal scope of a jurisdiction clause.FactsBy an agreement signed in 2007, defendant one, along with other companies, undertook a payment obligation towards the claimant which he failed to perform. Therefore, the claimant initiated an arbitration procedure.The Moscow Arbitration Court ordered defendant one to pay roughly €49 million and interest to the claimant. The claimant wanted to enforce the arbitration award in Hungary. He identified the 100% shares in a Hungarian limited liability company (LLC) owned by defendant one as seizable assets of the award-debtor in Hungary.Defendant one transferred his shares in the LLC to defendant two by a share purchase agreement signed in 2021 (the share purchase agreement). The share purchase agreement contained a choice-of-court clause, which conferred exclusive jurisdiction on the Court of Mainz to all disputes arising between defendant one and defendant two.First-instance courtThe claimant started litigation in Hungary against defendant one and defendant two in which he requested the court to declare the share purchase agreement to be ineffective towards him as its intent was to conceal assets.As the ground of jurisdiction, the claimant referred to article 7(1)(a) of the EU Brussels Ibis Regulation, according to which a person domiciled in a member state may be sued in another member state in matters relating to contracts, in the courts for the place of performance of the obligation in question.The defendants requested the termination of the procedure since, in their view, the Hungarian court did not have jurisdiction because of the choice-of-court agreement contained in the share purchase agreement.The first-instance court terminated the procedure based on the defendants' request. According to the decision, the legal dispute between the parties had to be considered as a matter relating to the contract between the defendants in the sense of article 7(1)(a) of the EU Brussels Ibis Regulation, in relation to which the defendants had agreed, in line with article 25(1) of the EU Brussels Ibis Regulation, that the German court would have exclusive jurisdiction. Therefore, the jurisdiction of the Hungarian court was excluded.In his appeal, the claimant requested the modification of the order on termination of the procedure and the establishment of the Hungarian court's jurisdiction.In the claimant's view, the choice-of-court agreement based on article 25(1) of the EU Brussels Ibis Regulation could only be interpreted in relation to the defendants, but it did not extend to a third party that was not party to the contract who asserted claims against the defendants and to the claim of establishment of the ineffectiveness of the collateral agreement. Indeed, the claimant's claim did not arise from the share purchase agreement, but from the arbitration award being the basis of the pending enforcement procedure.According to the claimant, the transfer of the shares of the LLC was completed by the registration in the Hungarian company registry. Thus, the place of performance was Hungary, which meant that article 7(1)(a) of the EU Brussels Ibis Regulation could be the basis of the alternative jurisdiction of the Hungarian court.The claimant further claimed that the Hungarian court also had jurisdiction based on the principles of closest connection and foreseeability. In fact, the claimant started the enforcement procedure against defendant one in Hungary and, if he won the trial, he would also have to initiate an enforcement procedure against defendant two in Hungary.Moreover, for the claimant, it was foreseeable and predictable that he would be able to bring a claim in Hungary in relation to the disposal of the shares of a Hungarian LLC by a collateral agreement.DecisionEffect of choice-of-court agreementThe second-instance court first examined whether the action brought by the claimant should be considered as a matter relating to the contract between the defendants.As explained by the Court of Justice of the European Union (CJEU)(2) a legal dispute will be considered as a matter relating to a contract if there is an obligation freely assumed by one party towards the other.Given that, according to the CJEU, the special grounds of jurisdiction will be interpreted such that an averagely well-informed defendant could reasonably foresee the courts in which they may be sued, the ground of jurisdiction relating to contracts cannot be applied if the defendant assumed no obligation towards the claimant. This ground of jurisdiction may only be applicable to the legal disputes between the parties of the contract with the proviso that the provision also applies if the original contracting party has been succeeded.Based on the above, the second-instance court concluded that, for the purpose of the jurisdiction, the defendants' share purchase agreement was not relevant. In fact, the claimant had not been party to that contract and the defendants had assumed no obligation towards him, meaning that the share purchase agreement did not provide a basis for the court to classify the legal dispute as a "matter relating to contract". Therefore, the choice-of-court agreement in the contract between the defendants was also irrelevant, and the jurisdiction of the Hungarian court could not be excluded based on this clause.Jurisdiction of Hungarian courtHaving established that the jurisdiction stipulated in the collateral agreement did not extend to the claimant, the second-instance court considered the question of whether the Hungarian court could have jurisdiction over the dispute. This required the clarification of whether the case was "a matter relating to contract" and whether the place of performance of the obligation in question was in Hungary.The basis of the claimant's action was that he had a claim based on:the contract concluded with defendant one; anddefendant one as a debtor had concealed assets.According to the judgment of the CJEU in the Feniks case(3) the actio pauliana, once it is brought on the basis of the creditor's rights created upon the conclusion of a contract, falls within "matters relating to a contract". Consequently, the claimant who holds the claim derived from the contract may bring their action before the courts in "the place of performance of the obligation in question".According to the second-instance court, the place of performance is the place in which the assets satisfying the claimant's claim are located. The claimant brought enforcement proceedings in Hungary to enforce the claim arising from the contract, and the enforceable asset was the business share of the Hungarian-based company. Both the claimant and the defendants could reasonably expect that, if assets had been concealed, the related claim may be enforceable before the courts of the member state in which the concealment of assets took place and the enforcement was frustrated.According to the second-instance court, the place of performance of the obligation in question was in Hungary. Thus, the Hungarian court could hear the present case.Comment The main question addressed by the decision is whether the personal scope of the jurisdiction clause contained by the collateral agreement concluded by the defendants extends to the claimant as a third party.Based on the principle of "a treaty binds the parties and only the parties; it does not create obligations for a third person", (pacta tertii nec nocent nec prosunt) a jurisdiction clause, which is itself a contract, can only be invoked by those party to it. However, as a general rule, it has no legal effect on third parties.(4)However, in the practice of the CJEU, some exceptional cases have appeared where a choice-of-court agreement extends to third parties who have not signed it.When does a choice-of-court agreement extend to third parties based on the CJEU's practice?One such case is, as the CJEU has explained in the Powell Duffryn case, that the choice-of-court clause contained in the statutes will bind not only the founders of the company, but also all new members, and even those who voted against the clause. This is because, by becoming a shareholder, a person agrees to be subject to all the provisions contained in the statutes or approved by the organs of the company in accordance with the national law governing it.(5)The CJEU also had to rule on several occasions on the question of whether a jurisdiction clause in a bill of lading is valid between the carrier and a third party, the holder of the bill of lading. According to the case law of the CJEU, the original choice-of-court agreement extends to the third party in two cases:based on the principles laid down in the Tilly Russ case, if, under the applicable national law, by acquiring the bill of lading, the third party validly succeeded to the rights and obligations of the party that had already agreed to the clause;(6) oraccording to the Coreck Maritime case, if there is no such subrogation under the national law, the clause in the bill of lading can be invoked if the third party has accepted the clause in accordance with the requirements of the EU Brussels Ibis Regulation.(7)Further, in accordance with practice of the CJEU, where the choice-of-court agreement extends also to the person who has not signed it, contracts are entered into for the benefit of a third party.In the Gerling case, a case dealing with an insurance contract, the CJEU concluded that if the insurer and the policy holder enter into a choice-of-court agreement in accordance with the provisions of the regulation and the insurer has clearly accepted the clause in favour of the insured person, the clause will be considered as valid, meaning that the insured person may rely upon it.(8)However, in the judgment in the Société financière et industrielle du Peloux case,(9) the CJEU ruled that the choice-of-court clause cannot be relied on against a beneficiary under that contract who has not expressly subscribed to that clause and is domiciled in a member state other than that of the policy holder and the insurer.In the Refcomp case,(10) the CJEU had to rule on the question of the personal scope of a choice-of-court agreement in the context of contractual chains. In this case, the CEJU established the principle that the choice-of-court clause contained by the contract between the manufacturer and the buyer only extends to the sub-buyer who did not originally sign it, should it be proved that they consented to the clause.It can be seen from the above that, according to the CJEU, the scope of a choice-of-court clause may extend to a third-party non-signatory in two main situations – namely, in case of:legal succession; anda contract for the benefit of a third party in the interest of the beneficiary.First- and second-instance decision in light of CJEU's practice Given that in the present case there was neither legal succession nor a contract for the benefit of a third party, the first-instance court erred in finding that the jurisdiction of the Hungarian court was excluded because of the choice-of-court agreement contained in the contract between the defendants.Accepting the first-instance court's position would open the way to an abusive exercise of rights. The essence of a collateral agreement is the collusion of the contracting parties to make it impossible to satisfy the creditor's claim. Allowing the colluding parties to influence the court that could sue them would effectively render the legal instrument of the actio pauliana meaningless.In contrast to the first-instance order, the Pécs Regional Court of Appeal correctly considered, in the light of the practice of the CJEU, that the choice-of-court clause contained by the contract between the defendants did not extend to the claimant as a third party, thus it could not exclude the jurisdiction of the Hungarian courts.The other question is whether the Hungarian courts have jurisdiction based on article 7(1)(a) of the regulation, taking into consideration the principles laid down by the CJEU in the Feniks case.(11) Unfortunately, the place of performance of the payment obligation undertaken by defendant one in the agreement concluded in 2007 is not known, thus it is difficult to take a clear position on the issue.However, the fact that the Hungarian courts will hear the case is supported by not only the principles of legal certainty and foreseeability developed by the CJEU in the application of the regulation, but also by the fact that the case concerns a right registered in the Hungarian company registry (ie, a public register kept in Hungary) over which the Hungarian courts have exclusive jurisdiction in accordance with article 24 of the EU Brussels Ibis Regulation.The scope of a choice-of-court agreement under the EU Brussels Ibis Regulation can be extended to non-signatory third parties only in exceptional cases. Therefore, the enforcement of an arbitral award cannot be frustrated in Hungary by the award debtor by concluding a contract that contains a jurisdiction clause in favour of foreign courts, for the purpose of alienating its assets.For further information on this topic please contact Richard Schmidt or Anita Vereb 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) Regulation (EU) No. 1215/2012 of the European parliament and of the council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.(2) See C-26/91, C-419/11, C-47/14, C-334/00.(3) See C-337/17.(4) Rauscher Europäisches Zivilprozess- und Kollisionsrecht EuZPR/EuIPR, Verlag Dr Otto Schmidt.(5) Andrew Dickinson, Eva Lein, The Brussels I Regulation Recast, Oxford University Press.(6) Partenreederei Tilly Russ and Ernest Russ v NV Haven- & Vervoerbedrijf Nova and NV Goeminne Hout 71/83.(7) Coreck Maritime GmbH v Handelsveem BV and other C-387/98., Köblös Adél: A joghatósági megállapodás, Doktori Értekezés, 2008.(8) See Köblös Adél: A joghatósági megállapodás, Doktori Értekezés, 2008. Gerling Konzern Speziale Kreditversicherungs-AG and others v Amministrazione del Tesoro dello Stato 201/82.(9) Société financière et industrielle du Peloux v Axa Belgium and others C-112/03.(10) Refcomp SpA v Axa Corporate Solutions Assurance SA and others C‑543/10.(11) See C-337/17.