Damages for breach of choice-of-court agreement - Litigation Committee newsletter article, April 2020

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A landmark ruling by the German Federal Supreme Court

Matthias Schlingmann
CMS Hasche Sigle, Hamburg
matthias.schlingmann@cms-hs.com

Evgenia Peiffer
CMS Hasche Sigle, Munich

evgenia.peiffer@cms-hs.com

Introduction

Choice-of-court agreements are of great importance in international contracts, especially when they stipulate the exclusive jurisdiction of the designated forum. Such clauses aim to create certainty about the competent forum as well as the applicable legal framework to potential disputes. Parties to exclusive jurisdiction agreements are in a better position to quantify the risks associated with their contracts and can more reliably assess the chances to succeed in court when a dispute arises. An exclusive choice-of-court clause further allows parties to designate a neutral forum and to thereby arrange for a level playing-field for future disputes.

Yet, once a dispute has arisen parties sometimes consider themselves no longer bound by a jurisdiction agreement and initiate court proceedings outside the designated forum. Such an action is often followed by a cost- and time-consuming dispute on which is the competent forum to hear the case. Even if the claim in the wrong forum is dismissed for lack of jurisdiction, the defendant might suffer financial loss as under some procedural laws (for instance under the American Rule on costs) a party has to bear their lawyer’s fees irrespective of the outcome of the proceedings. The question therefore arises as to whether a party sued in a wrong forum can claim compensation for the legal costs incurred in this forum based on the breach of the choice-of-court agreement.

In the past, courts in the United States,^[1] United Kingdom^[2] and Spain^[3] have repeatedly answered this question in the affirmative and awarded parties to forum-choice-agreements the costs incurred as a result of the battle on jurisdiction in the wrong forum. In contrast, the issue has been the subject of a longstanding controversy among legal scholars in Germany^[4] and it was only a few months ago that the German Federal Supreme Court (BGH) dealt with this topic for the first time.

The decision of the BGH of 17 October 2019 (III ZB 42/19)

The underlying dispute arose out of an internet peering agreement between a telecoms company seated in the US and a German telecoms provider. The agreement provided that it ‘shall be subject to the law of the Federal Republic of Germany’ and that ‘Bonn (Germany) shall be the place of jurisdiction.’

In 2016, the US company initiated a claim against the German company before a US district court based on the argument that it was entitled to further transmission capacities. The German company contested the jurisdiction of the US court by reference to the exclusive choice-of-court agreement in favour of Bonn. While the US district court declined jurisdiction and dismissed the claim, as a result of the American Rule on costs, it did not award the German company the lawyer's fees related to the US proceedings (approx. US$197,000).

The US company subsequently brought the same claim before the District Court of Bonn. The German company raised a counterclaim seeking compensation for the legal costs incurred in the US proceedings due to a breach of the jurisdiction clause. While the District Court of Bonn granted the counterclaim, its decision was overturned in the second instance by the Higher Regional Court of Cologne. Eventually, the BGH was seized to rule on whether a claim brought in breach of a choice-of-court agreement could give rise to damages.

At the outset, the BGH confirmed the jurisdiction of the German courts to hear the counterclaim by reference to Article 25 Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels Ia Regulation). Obviously, the BGH is of the view that the forum designated in a jurisdiction agreement is also competent to hear disputes arising out of a violation of this agreement.

The BGH further clarified that granting damages for breach of the jurisdiction agreement would not conflict with the decision of the US court to not award the successful defendant its lawyer’s fees. While the decision of the US court is based on the American Rule on costs and therefore on a solely procedural basis for reimbursement of costs, according to the BGH, it does not say anything about the entitlement of a party to request compensation for procedural costs due to a breach of contract.

By reference to the choice-of-law and jurisdiction clause in the internet peering agreement, the BGH further held that the parties have agreed on the applicability of German substantive and procedural law which was thus relevant for the decision on the counterclaim.

On that basis, the BGH went on to interpret the choice-of-court agreement in light of the parties’ interests. The BGH thereby emphasised that by entering into an exclusive choice-of-court agreement, parties to international contracts express their interest in creating legal certainty and seek to prevent subsequent forum shopping. According to the BGH, these aims mean that the parties to a jurisdiction clause are deemed to have committed themselves to bring future claims only before the designated forum.

The BGH further held that by choosing German substantive law, the parties acknowledged the general principle stipulated in the German Civil Code that a breach of a contractual duty can give rise to a claim for damages. In the BGH's view, the parties further accepted the rule of the German Civil Procedure Code that the losing party has to bear all reasonable costs of the proceedings.

In light of the parties’ interests and the applicable principles of German law, the BGH rejected the argument of the Higher Regional Court of Cologne which considered that choice-of-court agreements merely had a procedural effect (ie, that they only establish the jurisdiction of a court and/or derogate from the jurisdiction of otherwise competent courts) and did not entail an obligation to refrain from claims outside the designated forum.

The BGH finally clarified that the risk of being subsequently confronted with a claim for damages does not unduly restrict the contract-breaker’s constitutional right of access to justice. In the BGH’s view, the risk for a party to be ordered to reimburse the costs of a counter-party in a dispute where the latter has prevailed is inherent in every legal action as a result of the ‘loser-pays-principle’ underlying the German Civil Procedure Code.

To summarise, the BGH has held that a party to an exclusive jurisdiction agreement who has initiated proceedings outside the designated courts may become liable for the legal costs incurred by the defendant for the battle on jurisdiction in the wrong forum.

Conclusion and unanswered questions

The decision of the BGH is to be welcomed as it protects the interests and expectations of parties to exclusive choice-of-court agreements. At the same time, it leaves interesting questions open:

1. Would a party sued in a breach of a jurisdiction clause be entitled to damages if the wrong forum refuses to enforce the choice-of-court agreement and renders a decision on the merits?
2. Are damages for breach of a jurisdiction clause compatible with the principle of mutual trust underlying the Brussels Ia Regulation?
3. Does the Hague Convention on Choice of Court Agreements of 30 June 2005 impose any restrictions on a contractual claim for damages?
4. What are the chances that a court ruling awarding damages for breach of a jurisdiction clause is enforced abroad?
5. Does the violation of an arbitration clause also give rise to damages?

The future will show how courts in Germany and abroad will deal with these issues.

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