From early this year a new law accords to states the jurisdiction over lawsuits, i.e. which country has the right to decide on cases having international elements. Nevertheless, it is still true that in international legal disputes one of the most important (and far from simple) issues is: which country’s court will decide the dispute and under which country’s laws.

Someone filing a lawsuit against a foreign party generally finds it reassuring if the dispute is decided by a court of his or her home country. This applies in particular if the opposing party or the transaction that is the subject of litigation is linked to a country with a culture very different from that of Hungary: your relative sense of security may fall if your dispute is decided by, say, a court in the Middle East or that of a former Soviet state.

Although it is the party initiating the lawsuit (the plaintiff) who gets to choose the country whose court the given dispute will be submitted to, his or her choice is limited. Furthermore, when selecting the court, the plaintiff needs to take account not only of Hungarian laws but also of Hungary’s international agreements, and if the dispute is between businesses from EU Member States, also the applicable EU regulations.

According to the general rules, in commercial disputes, litigation must take place where the defendant is registered. Therefore, it is of consequence who files the lawsuit in a dispute, as the party filing the lawsuit may suffer a disadvantage with regard to selecting the jurisdiction. However, both Hungarian law and the EU regulations contain several auxiliary rules applicable to the litigation of claims arising from contracts, most particularly that such disputes may also be submitted to a court at the place of performance of the contractual obligation.

But where is the place of performance?

Some contracts – either by nature or because of the way they are worded – clearly specify the place of performance. For instance, the place of performance is obvious if the contract is for the construction of a building or if the parties have agreed to the transfer of goods at a specific location.

In most cases, however, determining the place of performance is not that simple. For example, where is the place of performance of a consulting work where - although the agent sometimes meets the client in the client’s country - most of the time the agent carries out his activities in his own country, on his own computer, and sends the document created to the client by email? It is also not easy to determine the place of performance if, instead of an elaborate contract, there is only an offer and an acceptance between the parties, which do not clearly specify which INCOTERMS term the parties have agreed on, who will bear the risk of transport, and where the risk of loss or damage will be transferred from the seller to the buyer. In such situations it can make it particularly difficult to determine the place of performance if the seller and the buyer share the freight cost. In similar lawsuits the parties can spend months just arguing whether they are actually litigating at the right place – and all this can cost a lot in legal fees.

The governing law may also be unclear

To further complicate things, in international disputes, the uncertainty affects not only the court that has the right to judge the matter, but also the legal system governing the case. Moreover, the answer to one of these questions does not decide the other. The country where litigation is to take place is not determined by the same circumstances as the country whose laws are to govern the procedure. That is why you cannot rule out a situation where a given matter will eventually be submitted to a court in one party’s country, but that court will apply the laws of the other party’s country. For instance, it is possible that a Hungarian supplier may sue a Spanish customer in Spain, but under Hungarian law. Even more complicated disputes, involving a third country, are also conceivable. Apart from the fact that a Hungarian judge is not necessarily as qualified to apply Spanish law as his local colleague is, such matters are also characterised by a multitude of translation and other administration difficulties.

How can you avoid all this?

Similarly to the old rules, the new law also allows the parties (as do the EU regulations) to stipulate the governing law of their contract as well as the court having jurisdiction over disputes. It’s worth taking this opportunity immediately when entering into a contract. Although the parties may agree on the choice of governing law and jurisdiction later,even when the dispute arises but, at that point it will be much less likely for the already adverse and now angry parties to reach a compromise.

Also, it pays to be careful if at the time of entering into a contract one of the parties wants to attach its own general terms and conditions to the already negotiated contract. Such terms and conditions usually include provisions applicable to the choice of governing law and jurisdiction, and those provisions can be expected to protect the interests of the party attaching the general terms and conditions.