Home or away? EU Court undermines reliability of choice-of-jurisdiction clauses

Jurisdiction is an essential factor in determining the cost, duration and ultimate success of a lawsuit.

Litigating in a foreign language can slow down the process and many of the legal concepts and conventions applied in foreign courts might be unfamiliar.

Ultimately, choosing the ‘wrong’ jurisdiction can mean the difference between victory or defeat. For instance, this can be the case if a lawsuit is launched to suspend the statute of limitations: depending on the applicable law, a suspension might not take place if the suit is filed in the wrong jurisdiction.

So it is vital to be able to depend on choice-of-jurisdiction clauses to avoid some of the risks and obstacles involved with litigating in a foreign (and possibly unfavourable) jurisdiction.

The end of dependable choice-of-jurisdiction clauses?

Where should legal proceedings be held if an effective and relevant choice-of-jurisdiction clause exists?

The obvious answer appears to be: at the place determined in the choice-of court clause. However, this seems less certain in light of the Court of Justice of the EU’s (CJEU’s) November 2020 judgment in Ryanair v DelayFix (C-519/19) – at least when the claim based on a contract with a choice of jurisdiction clause is assigned to a third party.

Facts of the case

DelayFix, a company based in Poland that specialises in recovering air passengers’ claims, had launched proceedings in Poland against Ryanair, based in Ireland, to pay compensation under the EU regulation on air passenger rights.

A passenger on the relevant flight had assigned their claim to DelayFix. Ryanair’s general terms and conditions of carriage contained a clause stating that the agreement was subject to the jurisdiction of the Irish courts. Relying on this agreement, Ryanair argued that the Polish courts had no jurisdiction to hear the case.

Choice-of-jurisdiction clauses not fully reliable

The CJEU held that, according to art.25 of Regulation No.1215/2012, Ryanair could not rely on the choice-of-jurisdiction clause in relation to DelayFix. This would only be possible if the third party (in this case, DelayFix) had succeeded to the rights and obligations of the original contracting party (in this case, the claimant passenger).

This judgment opens up possibilities – or creates uncertainty, depending on the role of a party in prospective litigation.

On the one hand, it seems that choice-of-jurisdiction clauses cannot be relied upon in all circumstances. This is of major practical importance, especially with the recent trend of claims being assigned and pooled – especially by special purpose vehicles or debt collectors – for the purposes of mass claims.

On the other hand, the binding effect of an inconvenient choice-of-jurisdiction clause might not be as strong as expected, which means that litigating in an unfamiliar jurisdiction could be avoided.

Consequences for business

According to the CJEU, third parties can only be held to choice-of-jurisdiction clauses under certain circumstances (see section 1 below). This jurisprudence entails challenges and opportunities for the drafting of contracts (see section 2) and for the development of litigation strategies (see section 3).

1. Requirements for a choice-of-jurisdiction clause to be non-binding

According to the CJEU’s Ryanair judgment, a choice-of-jurisdiction clause can be non-binding under the following circumstances:

There must be an EU cross-border element in order for art.25 to be applicable, ie a purely national case is not sufficient. Bringing a claim before a court in a different EU member state should be enough to convert a national case to a cross-border one.

The third party must not be a successor to an original contracting party’s rights and obligations. The CJEU leaves this determination to the national courts. It can be expected that:

a universal succession as well as an assumption of debt are sufficient for the relevant party to be regarded as a successor to an original contracting party’s rights and obligations; but

neither a mere assumed joint liability nor an assignment is likely to suffice (at least not without further requirements being met).

In this regard, the applicable law to determine such succession should be the applicable national substantive law. However, the CJEU raises doubts regarding this seemingly obvious answer when stating that ‘the legislation of the Member State whose courts are designated in’ the choice-of-jurisdiction clause is relevant (para.63 of the judgment).

2. Consequences for the drafting of contracts

Since the Ryanair judgment allows for the strategic assignment of claims to circumvent choice-of-jurisdiction clauses, parties should think about options of making such clauses “assignment-proof”

This could possibly be done by drafting the clause so that it stipulates that:

claims must not be assigned;

the contract partner may only assign claims under the condition that the assignee accepts the choice-of-jurisdiction clause and must pay a contractual penalty if assigning a claim without such acceptance;

disputes will be resolved via arbitration rather than litigation; or

the forum for the dispute is outside the EU (eg England and Wales).

3. Litigation strategy

In many instances, creditors decide to assign (and possibly pool) their claims to group companies or third parties. The Ryanair-judgment may offer a further incentive for such assignment: A party could gain ‘home advantage’ for actively conducting litigation, if it is not bound by a choice-of-jurisdiction clause – depending on the circumstances of the individual case. Going forward, parties will likely (have to) take this effect of the Ryanair-judgment into account for their litigation strategy. This strategy could also be applied to only parts of a claim so as to spread the risk to different forums.