Case law Developments in PIL

CJEU Significantly Weakens Jurisdiction Clauses in Case of Assignment

By a judgment of 18 November 2020 in the case Ryanair v DelayFix, the CJEU has ruled that an assignee is not bound to a jurisdiction clause in the contract from which the assigned claim arose. While the ruling concerned the compensation claim of a passenger for a cancelled flight, it is cast in very general terms. It will therefore have far-reaching repercussions for all other cases of assignment of individual claims.

Facts

DelayFix, formerly Passenger Right, is a collection agency for the defence of air passenger rights. It started legal proceedings against Ryanair in Warsaw on the basis of compensation rights assigned to it by a Polish passenger after a cancelled flight. Ryanair contested the Warsaw court’s jurisdiction, relying on a choice-of-forum clause in its general terms and conditions in favour of Irish courts.

In the course of the proceedings, the Regional Court Warsaw submitted to the CJEU the question whether the jurisdiction clause is binding under Art 25 of the Brussels I bis Regulation or whether it is invalid under the Unfair Terms Directive.

Legal Issues

The CJEU split the question in two different issues: (1) Is the collection agency bound by the jurisdiction clause contained in the airline’s standard terms under the Brussels I bis Regulation? (2) Is the jurisdiction clause in the airline’s standard terms unfair within the meaning of the Unfair Terms Directive?

Third-party Effects of Jurisdiction Clauses

With regard to the first question, the CJEU issued a resounding “NO”. It stated at para 46 that

a jurisdiction clause incorporated in the contract of carriage between a passenger and that airline cannot, in principle, be enforced by the latter against a collection agency to which the passenger has assigned the claim.

An exception would exist only where the collection agency is the successor to all the initial contracting party’s rights and obligations (para 47). A case in point is the take-over of a contract, which is however not to be confounded with an ordinary assignment. The CJEU left it for the referring court to determine whether this exception applied in the present case.

The holding was to some extent predictable from earlier case law, see in particular the CJEU judgment in CDC Hydrogen Peroxide or in Refcomp. In these cases, the CJEU had stressed the relative effect of jurisdiction clauses and the freedom to agree on the competent court. The court had ruled that a third party who did not agree to the jurisdiction clause was bound to the latter only if it had succeeded to the original contracting party’s rights and obligations.

Nevertheless, the CJEU case law had identified several situations in which a third party is bound as a legal successor to a jurisdiction clause to which it had not agreed. It was ruled that such a binding effect would exist where a jurisdiction clause is included in the articles of association of a company (see the CJEU judgment in Powell Duffryn), in the prospectus of a bond (see the CJEU judgment in Profit Investment) or in a bill of lading (see e.g. the CJEU judgments in Russ and Coreck).

The literature had assumed that a legal succession would also exist in the event of an assignment and that the jurisdiction clause would therefore also extend to an assignee of a claim (see e.g. Magnus in Magnus and Mankowski (eds) ECPIL Art. 25 Brussels Ibis Regulation para 161; Stadler in Musielak and Voit (eds) ZPO Art. 25 Brussels Ibis Regulation para 4a). The CJEU now takes the opposite position: The assignee of a claim is not bound to a jurisdiction clause in the contract from which or in the context of which the claim arises.

Negative Effects for Agreements on the Jurisdiction of EU Member State Courts

The ramifications of this ruling are significant. For the first time, the CJEU has held that an assignee is not bound by a choice-of-forum agreement between the assignor and the debtor. As a result, the binding effect of jurisdiction clauses will be weakened. It suffices for a creditor to assign a claim to avoid an unpleasant jurisdiction clause in a contract. This behaviour cannot be excluded by a contractual prohibition of assignment because the latter is not always allowed. The ruling thus opens up manifold possibilities to circumvent jurisdiction agreements.

In this context, it must be remembered that the CJEU judgment covers only agreements on the jurisdiction of a Member State court. Jurisdiction agreements in favour of courts of third countries, such as the UK or Switzerland, will be governed by national law, which often considers the assignee to be bound. Arbitration clauses, which are considered binding on the assignee under most national laws, will also remain untouched. In sum, the CJEU has done a great disservice to EU Member State courts. It has given an incentive to choose third state courts and arbitral tribunals in their stead.

Unfairness of Jurisdiction Clauses

With regard to the second question, the CJEU referred to the national court to assess whether the jurisdiction clause in favour of Irish courts was unfair to the Polish passenger. This is understandable given that the Directive needs national transposition and national courts are competent apply the transposing legislation.

There are nevertheless two important takeaways from the CJEU’s judgment with regard to the assessment of unfairness.

First, the Court of Justice did not consider DelayFix – a business enterprise – as being precluded from invoking the unfairness of the clause under the Unfair Terms Directive, although the latter only covers contracts with consumers. The CJEU stresses that the scope of the Directive does not depend on the identity of the parties to the dispute but on the capacity of the parties to the agreement (para 53). Hence the validity of the clause must also be assessed in a subsequent proceeding between two businesses.

Second, the CJEU did not see the consumer protection provisions of the Brussels Ibis Regulation as an obstacle to a finding that the clause were unfair. One could have considered the protection under the Unfair Terms Directive superfluous given that the consumer is anyway protected by the jurisdiction of the courts at its domicile under Art 17 et seq. of the Brussels Ibis Regulation. That is however not the position of the CJEU. Instead, it asks the national court to assess the invalidity of the jurisdiction clause in an abstract manner, independently of the Brussels Ibis Regulation.

As a result, the Unfair Terms Directive may potentially apply to jurisdiction clause in a business-to-business relation. The protection afforded by the CJEU to the assignee seems unwarranted in light of the purpose of unfair terms control, which is targeted to consumers. The second part of the ruling will further weaken the binding force of jurisdiction clauses in B2B relations.

4 comments on “CJEU Significantly Weakens Jurisdiction Clauses in Case of Assignment

  1. Burkhard Hess

    Dear Matthias,

    Thanks for the post drawing attention to this recent decision.

    I would say, regarding the choice of court clause, that the Court simply takes up the former case law, which after CDC accepts that an assignee, being a third party to the contract, may be bound by it either because she accepts it or because she succeeds the assignor, in accordance with national substantive law (see paras 46, 47). Now, the question would be, which national substantive law are we talking about? I would have said, the one applicable to the assignment contract (how it should be determined would be a separate issue, considering the Rome I Regulation does not apply to choice of court agreements). The Court has a different answer, which comes a little bit ‘out of the blue’ in point 63 and in the dispositive: ‘under the legislation of the Member State whose courts are designated in that clause, that collection agency is the successor to all the initial contracting party’s rights and obligations’. Article 25 Brussels Ibis Regulation definitely does not impose the application of such law to this issue, but just to the validity of the clause.

    Regarding the unfairness of the clause, it is my understanding that the consumer’s section could not apply due to the nature of the contract – it is excluded by article 17 (3) JR for transportation contract – this exception should be given up de lege ferenda.

    Finally, the ECJ’s decision is not easy to reconcile with article 31 (2) JR which refers ) the assessment of the validity of the clause to the designated court (Ireland). It appears (para 50) that the ECJ leaves the decision with the derogated court (Poland).

    Overall, it would be good that the Court takes the issue up again at the next occasion.

    • Dear Burkhard,

      Many thanks for your reaction. You raise an interesting point: Which law applies to the question whether a a whole contract or just an individual claim has been assigned? I agree that this issue is far from clear and not resolved by the reference to the law of the chosen court under Art. 25 Brussels Ibis. I also agree that the application of this law by the CJEU comes ‘out of the blue’.

      I still think that the main takeaway of the decision is not the solution of a conflict-of-laws issue. Rather, the CJEU creates an autonomous rule of EU law according to which an assignee is not bound by a jurisdiction clause in the original contract. The role of national law is reduced to determining whether the assignment concerns the whole contract or merely an individual claim. Once that decision is made, it will be EU law and not national law that will decide whether the third party is bound or not.

      You are right to point to the exception of Art. 17(3) Brussels Ibis. What worries me is that the CJEU did not even explore the applicability of the consumer protection rules. It simply disregards the roles of the parties to the present proceedings and focuses on the contractual clauses as such. This is another stark contrast to its treatment of the assignment.

      In my mind, Art. 31(2) Brussels Ibis was not applied because the chosen Irish court had not been seised. Maybe Ryanair could have avoided the Warsaw proceeding including the preliminary reference by bringing an action for a negative declaration in Ireland. Whether such an action is admissible under Irish law is another matter.

      I agree that we have to hope for the next ruling on the issue.

  2. Caterina Benini

    Dear Professor Lehmann, I do not see with disfavour the ECJ’s much-awaited ruling on the third-party effects of choice of court agreements.

    Although its reasoning is not entirely crystal-clear (in particular, on the point of the applicable law as to the succession of the rights and obligations, as pointed out above by Professor Hess), the Court’s ruling on the non-automatic transmissibility of choice of court agreement upon the assignee is, in my view, the only way of taking the autonomy of choice of court agreements as enshrined under Article 25(5) of the Brussels I-bis Regulation seriously.

    If we follow the autonomy principle also the in context of the effectiveness of choice of court agreements vis-à-vis third parties (as the Court seems to do, although it does not mention it), an assignment of the claim deriving from the main contract cannot automatically entail the assignment of the choice of court agreement therein included. Rather, the transfer of the choice of court agreement could occur only if, pursuant to the law applicable to the choice of court clause itself, this specific agreement is the object of an assignment.

    The added value of this judgment to the current status of the art is, in my view, twofold: (i) it brings about clarity as to the relevance of the autonomy principle also for the transferability of choice of court agreements; (ii) it suggests that the law applicable to the choice of court agreement for the purposes of the succession within the choice of forum clause’s rights and obligations is to be determined based on the lex fori prorogati.

    Lastly, as to your concern that such ruling will induce parties to refer their dispute to arbitration rather than EU Member courts, I want to point out that in Italy the predominant approach as to arbitration agreements is that the assignee of claims does not automatically enter into the arbitration agreement contained in the contract from which the assigned claims arise. Such approach has also been followed for the assignment of contracts (for your reference, Cass. S.U. 17.12.1998 No 12616, subsequently confirmed by Cass. 22.12.2005 No 28497), but there has been some recent obiter dicta which go in the other direction. As to choice of court agreements in favour of courts of third states, there is no clear position.

  3. Dear Ms Benini,

    Many thanks for your thoughtful critique of my post. In my view, the autonomy of the jurisdiction clause is no end in itself. This doctrine has a certain purpose, which is to shield the jurisdiction clause from defects of the contract in which it is inserted. It is therefore not suitable to draw any further conclusions from it.

    My point was made from a policy rather than an ontological perspective. Is it a good policy to consider the assignee as not bound by a jurisdiction clause? I doubt this very much, as such clauses would quickly lose their binding effect. Also, one would disregard the freedom of the debtor in determining the competent court in the original contract. If the assignee does not like the court chosen, he can simply reject the assignment.

    Thank you for your information on the Italian judgments. As for the effect of assignment on arbitral clauses, it is worth mentioning that the Italian position seems to be at odds with those of other major arbitration jurisdictions, such as French or English law. Maybe that is a reason why some Italian authors call for a rethink.

    Best wishes,

    Matthias Lehmann

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