Background
The dispute arose from a claim for the fulfillment of two loan agreements in which both the lender and borrower have their seat in Slovakia. Both loan agreements contain an identical choice of forum clause stating that any dispute shall be resolved in proceedings before the Czech courts.
Just like in domestic matters, parties to an international agreement can, under certain conditions, designate a court that can hear their disputes. European procedural rules, in principle, require a cross-border element for their application, in other words, a connecting factor that makes the case ‘international.’
The Czech court is questioning the European Court of Justice (ECJ) whether a choice of forum for the courts of a member state other than the one where both parties are established, constitutes a relevant cross-border element that activates the European rules. If this is the case, the choice of the Czech court would be valid as all other validity requirements have been met.
The ECJ answers this question affirmatively. According to the ECJ, a forum clause in which parties established in one member state designate the courts of another member state as competent, provides a sufficient international connecting factor. This rule applies even if the agreement has no other connection to that other ‘chosen’ member state. Neither the parties nor the agreement had any ties to the state of the chosen Czech court.
What are the implications of this decision for your business?
This means that two companies based in Belgium are free to designate the courts of another EU member state as competent to hear potential disputes, even if there is no connecting factor with that ‘chosen’ member state.
- For example: two companies from Hasselt can enter into a sales agreement that includes a choice of forum for the German courts. There does not need to be any connection to Germany, such as the place of delivery, location of goods, location of bank accounts, etc.
Moreover, the chosen court has exclusive jurisdiction, unless the parties agree otherwise. In the case of a non-exclusive choice of forum, a claimant may choose to bring the case in the forum that he finds most suitable, without excluding other forums. However, such a non-exclusive choice of forum must be expressly stipulated.
- Note: This rule does not apply to consumer, employment, and insurance agreements, where forum choice clauses, with certain strict exceptions, are only permissible after the dispute has arisen.
Does this also apply for the law applicable to the agreement?
Yes this is possible and has long been accepted.
Parties based in the same member state can freely choose the law of another EU-member state, or even of a third country, without needing any connection to the parties or the agreement.
- For example: two companies based in Hasselt could perfectly decide to apply German or Texan law to their agreement.
However, there are limits. Certain corrective mechanisms prevent potential abuse or overly opportunistic choices.
If all the relevant elements of the contract (e.g., place of business, performance or delivery) are tied to a different member state than the one whose law is chosen, the mandatory provisions of the first member state will still apply.
- For example: For purely “Belgian” agreements the chosen foreign law applies only to the extent that it does not conflict with mandatory Belgian rules. If two companies based in Hasselt opt for German law, the Belgian mandatory rules relating to penalty clauses or unfair contract terms for example still apply.
A similar restriction exists for intra-EU cases: if all the elements are situated within the EU, choosing the law of a third country cannot override mandatory provisions of EU law.
- For example, when the law of the state of Texas is chosen in the context of an agency contract between two parties domiciled in the EU, the Belgian party does not lose the protection of the European agency directive as implemented here.
Furthermore, additional restrictions on the choice of law apply to certain types of contracts involving parties considered to be weaker, such as consumer contracts.
In some cases, special mandatory rules (overriding mandatory provisions) must also be considered, which can override and take precedence over a chosen law. However, in the contractual context, few such rules exist and the Supreme Court’s jurisprudence is very strict in this regard.
While corrective mechanisms exist, the ECJ favors party autonomy in contractual matters. However, this ruling has been criticized in some academic literature for creating potential legal uncertainty. While the competent court is clear, enforcing a foreign judgment, for instance, in Belgium might face practical challenges, such as differences in service of process or enforcement procedures.
Would you like assistance in determining the most suitable choice of forum and law for your situation? Feel free to reach out. Our team of experts, well-connected in international networks of lawyers, is ready to assist you.