Jurisdiction Agreement Without Additional Foreign Elements
On February 8, 2024, the Court of Justice of the European Union (CJEU) ruled that two contractual parties residing in the same EU member state can agree to the jurisdiction of a court in another EU member state, even if the contract otherwise has no connection to that other member state (Case No.: C-566/22).
The choice of jurisdiction can be crucial in cross-border trade relations, as it can significantly influence the outcome of legal disputes between the contractual parties. If the trading partners contractually agree on the jurisdiction, care should be taken to ensure that the agreement is legally sound, according to the commercial law firm MTR Legal Rechtsanwälte, which advises its national and international clients in commercial law and litigation matters.
Parties Based in Slovakia
What was unusual about the case before the CJEU was that the contractual parties were based in Slovakia but had contractually agreed to a jurisdiction clause in favor of courts in the Czech Republic. Apart from this agreement, there was no connection to the neighboring country.
The parties had entered into two loan agreements in 2016 and 2017, with the lender later assigning its claims to a company also based in Slovakia. The assignment did not change the agreed jurisdiction clause.
When the borrower was unable to repay the loan, the company filed a lawsuit to recover the outstanding installments in the Supreme Court of the Czech Republic. The company argued that, based on the jurisdiction agreement, the Czech court was competent to determine the court responsible for this legal dispute. The company relied on Article 25 of the Brussels I Regulation (Recast).
Czech Courts to Decide
The regulation states that where a jurisdiction agreement has been made independently of the parties’ domicile, the courts of the chosen member state are competent to decide the disputes. However, this does not apply if the agreement is materially invalid under the law of the member state.
The Supreme Court of the Czech Republic had doubts about whether this regulation applies when the contracting parties are domiciled in the same EU member state and the only international element is the jurisdiction agreement that designates Czech courts to decide a dispute. Therefore, the court referred the matter to the CJEU.
The CJEU affirmed the competence of the Czech courts. It first noted that the wording of Article 25 of the Brussels I Regulation (Recast) does not preclude a jurisdiction agreement in which parties domiciled in the same member state agree to the jurisdiction of courts in another member state. However, the CJEU also emphasized that the context, meaning, and purpose of the rule should always be considered. Article 25 of the Brussels I Regulation (Recast) has consistently been interpreted as requiring a foreign element. How this foreign element is constituted is not further defined. While the preamble to Regulation No. 1215/2012 refers to “civil matters with cross-border implications” and “cross-border disputes,” it does not contain a definition of a foreign element on which the rule’s applicability depends, the CJEU explained.
Foreign Element Through Jurisdiction Agreement
In this case, it is considered a cross-border dispute because the parties agreed that the courts of another EU member state should have jurisdiction over legal disputes, according to the CJEU. This demonstrates the cross-border element of the original dispute. Additionally, the jurisdiction agreement should be regarded as valid in the interests of the parties’ freedom to contract and legal certainty.
Article 1(2) of the Hague Convention of June 30, 2005, on Choice of Court Agreements, which states that a matter is not international if the parties are domiciled in the same member state, does not stand in the way of this conclusion. The EU legislator deliberately chose not to include a corresponding provision in the regulation. This was done to maintain and further develop legal certainty in cross-border disputes, the CJEU concluded.
With this decision, the CJEU has also opened up new possibilities in contract drafting, which trading partners can benefit from.
MTR Legal Rechtsanwälte advises on contract law and litigation matters.
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