Germany: Breach Of Jurisdiction Clause May Give Rise To Damages Claim

Non-compliance with a contract's jurisdiction clause may expose a claimant to a claim for damages in Germany. This has been decided by Germany's highest civil court, the German Federal Court of Justice (Bundesgerichtshof), in what can be considered a landmark decision. Where the parties agree on German law and opt for the exclusive jurisdiction of the German courts, commencing proceedings in a foreign jurisdiction may expose the claimant to liability for its opponent's legal expenses in fighting the claim in the foreign proceedings: German Federal Court of Justice, Decision of 17 October 2019,  III ZR 42/19.

This is broadly in line with the position taken by the English courts, which have also recognised the potential availability of damages for breach of an exclusive jurisdiction agreement, even where the non-designated court was in another EU Member State and the jurisdictional position was governed by the Brussels regulation regime (for example in Starlight Shipping Company v Allianz Marine & Aviation Versicherungs AG [2014] EWCA Civ 1010).

Dr Patricia Nacimiento, Dr Mathias Wittinghofer and Tilmann Hertel of our Frankfurt office consider the recent German decision below.

Background

A German and a US telecoms company had entered into a contract with the following clause on applicable law and jurisdiction: "This Agreement shall be subject to the law of the Federal Republic of Germany. Bonn shall be the place of jurisdiction". When a dispute arose, the US telecoms company commenced proceedings against its German counterparty in the US courts. Based on the jurisdiction clause cited above, the US courts dismissed the claim for lack of jurisdiction.

The US company then filed suit before the German court stipulated in the jurisdiction clause. In that litigation, the German party filed a counterclaim and sought damages of approximately USD 200,000 in respect of legal expenses it had incurred in defending the claim in the US. (In accordance with its own rules on costs, the US court had not made an order for costs when it dismissed the claim).

While the first instance court had granted the defendant's counterclaim and awarded damages in respect of costs, the court of appeals revoked  the judgment and dismissed the claim.

Decision

As can be taken from a press release issued by the Bundesgerichtshof, the highest civil court reinstated the decision of the first instance court and held that in principle the US company is liable for damages for breach of the jurisdiction clause. The case was referred back to the court of appeal to determine the exact amount to be reimbursed.

The Bundesgerichtshof's decision has to be seen against the background of the German rules on the reimbursement of legal costs in civil litigation. Under German law on civil procedure the general rule is that costs follow the event, ie. the prevailing party has a procedural claim for reimbursement of legal costs and expenses against the unsuccessful party. The legal costs are calculated based on the amount in dispute and follow a fixed statutory schedule. Any claims for reimbursement of legal expenses are thereby limited to the statutory fees (notably not hourly fees) plus reasonably incurred expenses.

The Bundesgerichtshof ruled that since the parties agreed on the jurisdiction of the German courts and the applicability of German law, their agreement has to be interpreted in a way that: (a) the parties are obliged to bring any claims arising from the contract before the German courts; and that (b) if a foreign court, like the US district court, dismisses a claim for lack of jurisdiction, the claimant party has to reimburse the other party's legal defence costs incurred before the foreign court.

By agreeing on the exclusive jurisdiction of the German courts, the parties aimed at avoiding any type of "forum shopping" which would result in lengthy jurisdictional disputes and incur unnecessary costs. In the view of the Bundesgerichtshof, this aim can only be effectively safeguarded if the party sued in the forum derogatum (in the present case in the US) has a claim for reimbursement of its legal fees and expenses. The Bundesgerichtshof further held that by agreeing on German law, the parties submitted to two general principles of German law: first, that a breach of contract may give rise to contractual claims for damages and second, that a party that prevails in a civil litigation has a claim for cost reimbursement against its counterparty. On that basis, the Bundesgerichtshof ruled in favour of the German party and ordered the US claimant to reimburse legal costs and expenses.

Comment

In terms of the implications of this decision, it is worth highlighting the following aspects:

  • It must be borne in mind that this case is only relevant where the parties agreed on German law and opted for the exclusive jurisdiction of the German courts.
  • The Bundesgerichtshof expressly only dealt with a claim that was brought before the US courts, which did not in the circumstances provide for reimbursement of legal costs. The extent to which this decision can and will be transposed to other jurisdictions, where costs awards may be available, remains to be seen.
  • Another issue is whether the German judgment will be enforceable in jurisdictions that do not apply the the "costs follow the event" rule, in particular in the US.
  • It is also not clear whether the position might be different where the country in which the proceedings were wrongly commenced was another EU or EEA member state and the jurisdictional dispute was governed by the Brussels or Lugano regimes.
  • The Bundesgerichthof's decision may have opened the Pandora's box in that potentially any party who can demonstrate that it was burdened with legal expenses due to a breach of a "German" choice of law and jurisdiction clause may bring a claim for damages before the German courts. The limitation period for such a claim generally is three years, starting from the end of the year in which the breach occurred (which presumably would be when the proceedings were commenced in the non-agreed jurisdiction).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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