Richard Schmidt July 21 2020 Supreme Court rules on whether legal successors can be sued at place of performance of contract SMARTLEGAL Schmidt & Partners | Litigation - Hungary Richard Schmidt Litigation FactsFirst-instance decisionSecond-instance decisionSupreme Court decisionLegal analysis – jurisdiction in case of succession and subrogationBroad interpretation of exceptionDue to the protective measures of the EU Recast Brussels I Regulation (1215/2012), persons domiciled in an EU member state can be sued in another member state only in limited cases. One of these exceptions is the jurisdiction granted by the regulation to the courts of the place of the performance of a contract. However, does this exception apply in cases of legal succession or subrogation? The Supreme Court addressed this issue in a recent decision.FactsIn 2006 a private individual who had lived in Italy for years (the testator) was redomiciled in Hungary, where he underwent serious medical treatment. Due to his degrading health, the testator approached the claimant (also domiciled in Hungary) and offered to make the claimant his exclusive heir in exchange for his daily care and maintenance.The claimant accepted the offer and, based on this oral agreement, took care of the testator in Hungary until the testator's death. However, the testator's will appointed the defendant (domiciled in Italy) as his sole heir and bequeathed all of his assets thereto.The claimant began litigation in the Hungarian courts and asserted the costs incurred through the care and maintenance of the testator as a probate creditor claim against the defendant.(1)In the claimant's opinion, the Hungarian courts had jurisdiction to hear the case based on:the Rome IV Regulation on succession matters;(2) andthe special jurisdiction regulated by Article 7(1) of the EU Recast Brussels I Regulation.(3)Pursuant to Article 7(1), in matters relating to contracts, the courts of the place of the performance of the obligation in question have special jurisdiction.The defendant, domiciled in Italy, disputed the special jurisdiction of the Hungarian courts.First-instance decisionThe first-instance court held that the claimant's claim was not a succession claim, since it was a monetary claim against the defendant as successor because of the care and maintenance of the testator – for this reason, the Rome IV Regulation did not apply.Moreover, the first-instance court found that the EU Recast Brussels I Regulation's special jurisdiction rules did not apply either, since they must be interpreted narrowly. Therefore, the rules can be applied only in a legal dispute between the parties to a contract.According to the first-instance court, even if the claimant could prove that he had concluded a maintenance contract with the testator, this would be a personal contract which had been terminated because of the testator's death. Therefore, no legal succession could have taken place in the contractual relationship.The first-instance court emphasised that Article 7(1) of the EU Recast Brussels I Regulation can be invoked only in relation to a contract against a contracting party or its legal successor. However, in the case at hand – assuming that the claimant's claim was well established – the defendant would be liable to satisfy the debts of the estate not on a contractual basis, but rather on a different, statutory basis.Therefore, the first-instance court terminated the litigation because of the lack of jurisdiction.Second-instance decisionThe second-instance court shared the first-instance court's view in relation to the inapplicability of:the Rome IV Regulation; andthe special rules of jurisdiction, which in the second-instance court's opinion can be applied only in disputes between contracting parties or if a legal succession occurs in the parties' contractual relationship.However, given that there was no legal succession in the legal relationship between the claimant and the testator because of the personal nature of their contract, the second-instance court stressed that the claimant could not base the jurisdiction of the Hungarian courts on the fact that the defendant, as heir, had entered into its legal relationship with the testator, since the legal relationship had already ceased to exist because of the testator's death.Consequently, the second-instance court upheld the first-instance court's ruling.The claimant challenged the second-instance decision in the Supreme Court.Supreme Court decision The Supreme Court held that the general jurisdiction rule in Article 4(1) of the EU Recast Brussels I Regulation is based on the actor sequitur forum rei principle – namely, it is a general rule in the European Union that a defendant can be sued in the courts where it is domiciled.In relation to the special jurisdiction set out in Article 7(1) of the EU Recast Brussels I Regulation, the Supreme Court stressed that the concept of a 'contract' will be interpreted as an autonomous concept, independent from national law, and that, in the application of the regulation, every legal relationship in which one of the parties assumes an obligation freely towards the other will be a contract.The Supreme Court agreed that in the case of personal contracts, legal succession is excluded, since these types of contract terminate on the death of one of the parties – in the case at hand, the testator's.However, the legal literature accepted by the Supreme Court highlights that contractual obligations will cover not only primary obligations, but also secondary obligations (eg, the right to restitution or damages in the case of invalid contracts).(4)In the Supreme Court's view, such secondary legal obligations will be understood as forming part of the concept of a contract under the EU Recast Brussels I Regulation. Consequently, legal disputes arising out of unsettled relationships after a contract's termination will be covered by Article 7(1) of the regulation.The Supreme Court stressed that it generally shared the opinion of the lower courts in relation to the narrow interpretation of the rules of special jurisdiction, which can be applied only to legal relationships between contracting parties.However, the occurrence of legal succession in the position of an original contracting party – even without a freely assumed obligation, like in the case of inheritance – is an exception to this strict interpretation in the Supreme Court's view.Based on the above, if a contract terminates, the parties will settle accounts and the heir as general successor of one of the parties can enter into this legal relationship of settlement, which will be included in the concept of matters relating to contracts set out by Article 7(1) of the regulation.The Supreme Court established that the Hungarian courts had jurisdiction to hear the claim and ordered the first-instance court to proceed and try the case on the merits. The Supreme Court remarked that, in its opinion, the case was not so complex as to start a preliminary ruling procedure in front of the European Court of Justice (ECJ).Legal analysis – jurisdiction in case of succession and subrogationThe ECJ has always interpreted the phrase 'matters relating to a contract' in Article 7(1) of the EU Recast Brussels I Regulation as an autonomous concept of EU law.As a starting point, the ECJ defined the concept in a negative way, by stressing that Article 7(1) does not cover situations where there is no obligation assumed freely towards another.(5)However, based on case law, the freely assumed character of the obligation is missing if it is the law which creates the obligation in question.For this reason, the ECJ was reluctant to apply Article 7(1) in a case where third parties invoked it against the member of an undercapitalised company or in respect of an obligation imposed by law to pay for the debt of a company that was taken over in the event of a failure to disclose the takeover.(6)Similarly, in Refcomp the ECJ stated that the claim of a sub-buyer of goods against a manufacturer was not 'contractual' within the meaning of the regulation, even if French law characterised their relationship as contractual by creating a special rule which was uncommon in other member states.(7)When it comes to the identity of the parties to a contract and dispute, the transfer of the claim by way of succession or subrogation does not alter the contractual nature if such a transfer occurs voluntarily. However, the involuntary nature of the subrogation questions the existence of a freely assumed obligation.For this reason, in Frahuil, in which an Italian guarantor paid a debt on behalf of the French defendant, without knowledge of the latter, the ECJ held that it could start litigation in Italy as the place of performance only if the latter had authorised the conclusion of the guarantee contract.(8)Broad interpretation of exceptionApplying the above principles to the present case, the Supreme Court's decision is doubtful for the following reasons.It is undisputed that the personal contract between the claimant and the testator was terminated because of the testator's death. Therefore, the claimant invoked a right against the defendant which was available to him under the Hungarian succession law. Such a right prevents unjust enrichment to the detriment of a person who has performed a personal service for a late testator.The claim invoked by the claimant as probate creditor – the legal basis of which is the national succession law – cannot be characterised as a secondary contractual claim because there was never a contract between the claimant and the defendant.In addition, the legal situation of a person who becomes heir by the unilateral declaration of the testator is different to the situation of a person who freely and knowingly assumes an obligation.When it comes to the interpretation of the EU Recast Brussels I Regulation's jurisdiction rules, the ECJ has highlighted the principle of foreseeability on numerous occasions.As the special jurisdiction rules are exceptional, their broad interpretation can extend beyond the application of the regulation to situations other than those envisaged by the drafters and which are not foreseeable by the persons to whom they apply.Therefore, instead of interpreting an exception too broadly, the Hungarian Supreme Court should have referred the case to the ECJ for a preliminary ruling at least, allowing the EU court to have the final word on the matter.For further information on this topic please contact Richard Schmidt at SMARTLEGAL Schmidt & Partners by telephone (+36 1 490 09 49) or email ([email protected]). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.Endnotes(1) Section 677(1)(c) of the former Civil Code.(2) EU Regulation 650/2012 on jurisdiction, applicable law, recognition and enforcement of decisions and acceptance and enforcement of authentic instruments in matters of succession and on the creation of a European Certificate of Succession.(3) EU Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.(4) Th Rauscher [Hrsg], Europäisches Zivilprozeßrecht – Kommentar, Munich, 20062, [Rauscher, EuZPR (2006)], Article 5 of Brussel I VO Rn 30.(5) Case C-26/91 Jakob Handte & Co GmbH v Traitements Mécano-chimiques des Surfaces SA.(6) Andrew Dickinson and Eva Lein, The Brussels I Regulation Recast, Oxford University Press, 2015, p144.(7) Case C‑543/10 Refcomp SpA v Axa Corporate Solutions Assurance SA.(8) Case C-265/02 Frahuil SA v Assitalia SpA.