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06 October 2020
Does commencing litigation in England with regard to a Hungarian project amount to a choice of English law? How much of a role do the parties' procedural actions play in the choice of law applicable to a contract? This article analyses a recent Hungarian Supreme Court judgment which, among other things, addresses the issue of tacit choice of law.
In 2003 the claimants and the first defendant agreed to cooperate in the construction of a real estate development project in Budapest in order to split the project costs 50:50 and share the profit according to the same ratio. In 2008 the project was completed and the claimants received approximately $1 million. However, a settlement-related dispute emerged between the parties.
In 2012 the claimants and the defendants concluded an agreement in London, based on which the first defendant undertook to pay $423,000 plus interest (as per Section 8 of the agreement) and transfer the title of certain real estate to a company to be declared by the claimants (as per Section 9 of the agreement). The first defendant's payment obligation was guaranteed by the second defendant (as per Section 10 of the agreement).
The defendants failed to comply with their obligations; thus, the claimants filed a claim before the Central London County Court. The court ordered the defendants to pay $423,000 to the claimants and, at the same time, established that the English courts had no jurisdiction in relation to the claims filed because of the infringement of Section 9 (the transfer of the real estate) and Section 10 (the guarantee undertaken by the second defendant) of the agreement.
Subsequently, the claimants commenced litigation against the defendants in Budapest and requested that the court order the defendants to pay $1.5 million plus interest on the legal title damages, given that the defendants had failed to fulfil the agreement.
A debate emerged between the parties about which law applied to their relationship. The claimants argued that Hungarian law applied and that it was irrelevant that the English court had applied English law in respect of those parts of the agreement that were not the subject of the Hungarian litigation.
On the contrary, the defendants claimed that English law applied since the parties' acceptance of the English court's assessment of their legal dispute based on English law constituted an explicit choice of law. The applicability of English law could also be justified by the fact that the parties had no information regarding Hungarian law; thus, applying Hungarian law would be contrary to their contractual will. Further, the defendants argued that the agreement had been signed in London and was drafted in English.
The first-instance court deemed the defendants' statement that the parties had chosen English law for their legal dispute to be unfounded. Based on this opinion, it seems that a choice of law should be prior and explicit, and that it is not possible the choose the governing law subsequently and in an implied manner. Hence, the sole fact that the parties had not disputed the application of English law before an English court did not mean that they had chosen English law for the legal dispute at issue in this litigation, which concerned different parts of their agreement.
In the first-instance court's opinion, the legal dispute should be assessed based on Hungarian law in accordance with Article 4(1)(c) of the EU Rome I Regulation (593/2008),(1) according to which a contract relating to a right in rem in immovable property will be governed by the law of the country where the property is situated. In this case, the defendants' obligation was the transfer of real estate located in Hungary.
The first-instance court ordered the defendants to pay jointly and severally approximately €1.11 million to the claimants.
The defendants appealed the first-instance judgment. The second-instance court reviewed the questions relating to the applicable law.
The second-instance court believed that the first-instance court had erred when it concluded that it is not possible to choose the governing law subsequently and in an implied manner. An implied or tacit choice as a method of choice of law has long been recognised in international private law and, under the EU Rome I Regulation, the tacit choice of a specific law can be established if the parties' intent is clearly demonstrated by the contract's terms or the case's circumstances.
However, in the second-instance court's opinion, based on the circumstances relied upon by the defendants, it could not be established with a higher degree of certainty, as is required under the EU Rome I Regulation, that it was the parties' joint intent that the legal dispute be governed by English law. The fact that the parties had accepted the applicability of English law before the English court could not be considered an explicit choice of law as it did not mean that English law would also apply to a legal dispute arising from Sections 9 and 10 of the agreement, which were not the subject of the London procedure.
The second-instance court believed that even a choice of forum by the parties cannot, in itself, be regarded as a tacit choice of law; a choice of court is only one factor in such a decision. In this case, the parties' implied choice of law could not be established because the agreement was concluded in England nor because certain terms (ie, 'partnership' and 'guarantee') implied the applicability of English law, as these legal instruments are not exclusive to English law.
Finally, the argument of a tacit choice of law was undermined by the fact that the parties had no substantive information regarding Hungarian law.
The second-instance court agreed with the first-instance court that since the agreement was a contract relating to a right in rem in immovable property, Hungarian law applied in accordance with Article 4(1)(c) of the EU Rome I Regulation. Based on the above, the second-instance court confirmed the first-instance judgment.
The defendants filed a request for judicial review, in which they claimed that the courts had wrongly concluded that Hungarian law applied to the dispute.
The Supreme Court acknowledged that the parties did not dispute that there was no explicit choice of law in the written agreement; hence, the court also examined whether there was an implied choice of law.
The Supreme Court held that when parties confer exclusive jurisdiction on the court of a given country, this may indicate a tacit choice of law. However, in the present case, the fact that the English court had assessed part of the legal dispute based on English substantive law did not, in itself, mean that an implied choice of law was agreed. This was supported by the fact that in the procedure before the English court, the defendants had disputed the English court's jurisdiction, which meant that the procedure and the law applied was not based on the parties' agreement.
The Supreme Court concluded that the defendants' statement that the agreement's use of terms such as 'partnership' and 'guarantee' implied that the applicability of English law was unfounded. This was contradicted by the fact that none of the parties were legal professionals. The terms referred to by the defendants are used during everyday business transactions and the defendants failed to indicate which legal instruments have only one definition and which have a different meaning under English law compared with Hungarian law.
Given that it was the Supreme Court's opinion that there was no implied choice of law, the question remaining to be assessed was which law applied in the absence of choice.
The Supreme Court disagreed with the first and second-instance courts that the applicable law should be based on Article 4(1)(c) of the EU Rome I Regulation since the defendants did not undertake to transfer clearly defined real estate in the agreement.
Instead, the Supreme Court established the applicable law based on the principle of 'characteristic performance', as defined by Article 4(2) of the EU Rome I Regulation.
From the Supreme Court's standpoint, the first defendant should have enacted the agreement by transferring real estate located in Hungary, as this was the characteristic performance based on the agreement. Thus, the applicable law in accordance with Article 4(2) of the EU Rome I Regulation was the law of the country where the party was required to effect said characteristic performance – namely, where the defendants had their habitual residence. As such, Hungarian law applied.
Finally, the Supreme Court noted that its conclusion would have been the same if the applicable law had to be assessed based on the principle of closest connection in accordance with Article 4(3) of the EU Rome I Regulation.
Ultimately, the Supreme Court held that the lower courts had acted correctly when they assessed the case based on Hungarian law and thus confirmed the second-instance judgment.
The connection between the choice of forum and the choice of law is a longstanding problem under international private law.
Based on the pragmatic approach of common law, in cases of contractual relationships, the choice of law and the choice of forum are closely connected. On the one hand, the choice of English law in itself provides a basis for the jurisdiction of the English courts. On the other hand, an arbitration agreement which stipulates that the place of dispute resolution is England, as noted by Justice Clarke, is "a strong indication of the parties' intention to choose English Law as the applicable law".(2) In common law, this approach also applies to jurisdiction clauses.
Although under the principle of qui elegit iudex, eligit ius (originating from Roman law) a choice of forum is also considered a choice of law, civil law jurisdictions no longer consistently enforce this principle. When adopting the EU Rome I Regulation, the European Commission wanted to revive the above Roman law principle so that if parties conclude a jurisdiction clause, it should be presumed that they also chose the lex fori of the chosen court of the EU member state.(3) However, as a result of compromise among the member states, in accordance with Preamble 12 of the regulation, the courts will take a jurisdiction clause into account only when assessing the choice of law by which the parties confer exclusive jurisdiction on a member state's courts, and this is to be considered only one factor among the other circumstances of the case.(4)
Given that, in the present case, the claimants and the defendants had not concluded an exclusive jurisdiction clause and the defendants had disputed the English courts' jurisdiction, the Supreme Court was right to conclude that the procedure before the Central London County Court could not be considered a choice of English law.
Based on the EU Rome I Regulation, a tacit choice of law must be established with reasonable certainty; hence, the Supreme Court was correct not to consider the choice of English law, as demonstrated by the case's circumstances.
The Supreme Court's decision is a welcome, more conservative approach; previously, the court has attributed excessive importance to the procedural acts of the parties in relation to the tacit choice of law (for further details please see "Supreme Court judgment: choice of law by conduct in litigation?").
Contrary to an exclusive jurisdiction clause, which cannot be unilaterally modified, parties may freely amend their procedural statements, as the defendants did when they disputed the English court's jurisdiction in the procedure in England and in the Hungarian litigation when they referred to the English procedure with respect to the application of English law. Therefore, an overvaluation of procedural actions in relation to the choice of law was incorrect and, this time, the Supreme Court rightly avoided this conclusion.
As regards the distinction between the law of the country where the property is situated and the characteristic performance as a connecting factor, the Supreme Court likely opted for the applicability of the latter because the subject of the case was not directly a right in rem in immovable property, but rather damages which, in a jurisdictional context, could have rendered the applicability of the lex situs as a connecting factor unjustified. Nevertheless, on the facts of the case, the Supreme Court came to the same conclusion based on Article 4(2) of the EU Rome I Regulation and found Hungarian law to apply in accordance with the principle of the characteristic performance.
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 (firstname.lastname@example.org or email@example.com). The SMARTLEGAL Schmidt & Partners website can be accessed at smartlegal.hu.
An agreement between the parties to confer on one or more courts or tribunals of a Member State exclusive jurisdiction to determine disputes under the contract should be one of the factors to be taken into account in determining whether a choice of law has been clearly demonstrated.
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