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Stephan Wilske
Gleiss Lutz, Stuttgart
stephan.wilske@gleisslutz.com

Claudia Krapfl
Gleiss Lutz, Stuttgart
claudia.krapfl@gleisslutz.com

Can a party request reimbursement of costs incurred because the opposing party initiated proceedings in violation of a choice of court clause or an arbitration agreement? While this question is well settled in the affirmative in many common law jurisdictions, it was open to discussion in Germany until recently.

In a decision dated 17 October 2019¹ the German Federal Court of Justice allowed a party to recover damages in the form of reimbursement of legal costs because the opposing party had commenced proceedings in the United States despite the parties’ choice of court clause providing for Bonn (Germany) as the place of jurisdiction. The court found that if one party brings an action before a foreign court in violation of a choice of court clause, this party has to reimburse the other party for the costs incurred – if the court seized declares its lack of jurisdiction, but does not provide for reimbursement of costs. This new doctrine may also apply retroactively to cases where the costs were incurred prior to the decision of the Federal Court of Justice, depending on the statute of limitations.

This is a landmark decision that will change German litigation and arbitration practice. Arbitration practitioners should be aware that the new case law regarding choice of court clauses should in all likelihood also extend to arbitration agreements under German law. This is because according to the reasoning of the Federal Court of Justice, this case law is specifically meant to protect the derogating effect of a choice of court clause. Arbitration agreements contain an even stronger derogating effect, excluding any state court from deciding on the matter in dispute. As a matter of logical inference, the German Federal Court of Justice’s case law is thus expected to apply to arbitration agreements as well.

Background of the dispute

The dispute before the Federal Court of Justice was between two major telecommunication companies. The respondent was domiciled in Bonn (Germany) and the claimant was domiciled in Washington, DC (US). The parties had entered into an agreement which mutually required them to receive the other party’s data traffic and to provide the necessary transmission capacity. This agreement stipulated: ‘This Agreement shall be subject to the law of the Federal Republic of Germany. Bonn shall be the place of jurisdiction’.

Some years after the execution of the contract, the parties unsuccessfully negotiated an increase in transmission capacity for the claimant. In 2016, the claimant requested a US District Court to order the respondent to provide additional transmission capacity. The US District Court dismissed the claim for lack of jurisdiction, but did not order reimbursement of costs.

The claimant then further pursued its claim before the Bonn Regional Court. The respondent, in turn, filed a counterclaim in the amount of US$196,118.03 requesting reimbursement of the lawyers’ costs it had incurred defending itself in the proceedings in the US. The respondent argued that the claimant had breached its contractual obligations by filing a lawsuit with the US District Court, which did not have jurisdiction.

The Bonn Regional Court dismissed the claimant’s lawsuit but granted the counterclaim. The Cologne Court of Appeal, however, rejected the counterclaim upon appeal by the claimant. The respondent then appealed to the Federal Court of Justice.

Choice of court clause is substantive agreement on procedural aspects

The Federal Court of Justice reversed the Court of Appeal’s judgment and ruled that the respondent was entitled to reimbursement of its costs incurred in the proceedings before the US District Court.

First, the Federal Court of Justice established that a choice of court clause is a substantive agreement on procedural aspects under the applicable German law. It thereby departed from the previously prevailing view in legal literature that choice of court clauses has only procedural character and does not include substantive obligations.

Interpretation of choice of court clause leads to entitlement to reimbursement of costs

Second, the Federal Court of Justice held that by agreeing on a choice of court and a choice of law clause, the parties aimed at a maximum of foreseeability with regard to both substantive and procedural aspects. Moreover, since the parties to the dispute had engaged in an international transaction, they intended to achieve legal certainty, to make the economic risks associated with international litigation calculable and to prevent any subsequent forum shopping as well as any costly disputes on jurisdiction. According to the court, these goals can only be achieved if the aggrieved party is entitled to reimbursement of its costs, since the mere procedural effects of a choice of court clause neither legally nor factually exclude the possibility that either party files a lawsuit in another jurisdiction. Even if the court thus seized dismisses the lawsuit for lack of jurisdiction, the costs associated with this lawsuit are not always refunded, for example, if the American rule of costs applies. The only way to allow for reimbursement of these costs is to interpret the choice of court agreement to mean that non-compliance triggers damages.

Hence, the parties in this case were compelled to bring actions only in Bonn and if one party brings an action before any other court, this party has to reimburse the other party for the accruing costs. The Federal Court of Justice further corroborated this interpretation with the purpose of the agreement in this specific case, which not only provided for the choice of a German court but also for the choice of German law. With this synchronisation of forum and ius, the parties intended to preclude the possibility that courts outside Germany – for instance US courts – would need to apply German law.

Notably, the Federal Court of Justice made clear that it will apply this interpretation regardless of whether the choice of court clause is contained in an individually negotiated agreement or in standard terms and conditions.

Damages claim covers reasonable lawyers’ costs

The Federal Court of Justice therefore held that pursuant to section 280 (1) of the German Civil Code in conjunction with the choice of court clause, a party is entitled to claim reimbursement of the lawyers’ costs reasonably incurred in order to adequately defend itself in proceedings initiated abroad in violation of a choice of court clause. The court reasoned that this may well include lawyers’ costs related to both jurisdictional challenges and the merits of the dispute, if these costs are considered reasonable under the law applicable in the foreign jurisdiction. Applying German law standards, costs related to defending on the merits in addition to raising a jurisdictional objection would be reimbursable because of the duty of a lawyer to take all measures necessary to defend the client.

Reasoning extends to arbitration agreements

This is a landmark decision not only for parties to international litigation disputes with a contractual clause providing for the jurisdiction of a German court, but also for parties who have agreed on arbitration under German law. As a matter of logical inference, the German Federal Court of Justice’s case law is expected to apply to arbitration agreements as well. Arbitration agreements under German law have generally been qualified as substantive agreements.² Therefore, the reasoning applied by the Federal Court of Justice to choice of court agreements can be directly applied to arbitration agreements. Since concluding an arbitration agreement limits a party’s right to resort to a different forum, but cannot stop a party from applying to an invalid forum, it increases the effectiveness of an arbitration agreement to have the additional ‘sword’ of being liable for the costs associated with applying to an invalid forum. The task of granting damages in this regard will fall to the arbitral tribunal constituted on the basis of the arbitration agreement, and if German law applies, it can now rely on the case law of the Federal Court of Justice to support its decision.

Notes

1. BGH, decision dated 17 October 2019, Docket No III ZR 42/19, NJW 2020, 399.

2. On the legal nature of arbitration agreements see S Rützel, G Wegen &S Wilske, Commercial Dispute Resolution in Germany, 2nd edn (CH Beck 2016), pp 130, 131.

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