Breach of Jurisdiction Agreements: Damages Under German Law

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This scenario likely comes before litigators and arbitration lawyers who work in the space of international law. An American client believes it may have a seven figure claim against a foreign contractual partner. That foreign contractual partner refuses to pay the claim. Not surprisingly, the U.S. company wants to enforce this claim, preferably through its “home court” in the American judicial system. The American company has more confidence in U.S. courts and the effort and cost is low, making an action before the foreign court of the foreign contracting party something to avoid at all costs.

 

This all seems practical and feasible until the lawyer looks at the contractual agreement between the parties to see if there is a provision regarding jurisdiction. What if the parties agreed that the place of jurisdiction is outside of the United States? Indeed, such clauses are quite common in international contracts. In practice, however, jurisdiction agreements do not necessarily prevent parties from bringing a lawsuit before a court other than the agreed upon tribunal. This is because a hoped-for advantage before a party’s homecourt outweighs the risk of a dismissal due to lack of jurisdiction, at least under U.S. procedural rules. This is because under the “American rule,” each party bears its own legal costs. But this is not the case under German law.

 

German Law and Jurisdiction

 

In Germany, the rule is “loser pays” under Sections 91 et. seq. of the German Code of Civil Procedure (ZPO). A recent decision by Germany’s Federal Court of Justice (BGH) in October 2019 ruled on the substantive legal consequences of jurisdiction agreements. Specifically, the BGH held that a lawsuit brought in violation of a jurisdiction agreement could justify a claim for damages. Not only does the BGH ruling apply to contracts between private parties, but it likely also applies to jurisdictional clauses contained in arbitration agreements.

 

The underlying case involved an American telecommunications company that sued a German telecommunications company, alleging breach of contract. The lawsuit was filed in the U.S. District Court in Washington, DC. The German company challenged the lawsuit based, in part, on the parties’ agreement to exclusive jurisdiction by German courts in Bonn, Germany. The U.S. District Court agreed with the German company, and dismissed the action due to lack of jurisdiction. By that time, however, fighting the lawsuit cost the German company $200,000.00. The American telecommunications company then filed suit in Bonn, Germany, and the German telecommunications company filed a counterclaim suing for attorneys fees and costs as damages due to the Washington, DC lawsuit.

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