Germany's highest court awards damages for violation of a choice of court agreement

Out-Law Analysis | 21 Oct 2019 | 12:50 pm | 5 min. read

Businesses which agree to use German courts to resolve disputes have been provided with an effective remedy to stop opponents from forum shopping following a ruling by Germany's highest court.

The Federal Court of Justice has ruled that a party sued in a foreign court in breach of an exclusive choice of court agreement in favour of German courts will generally be able to recover the costs it incurred in defending the claim in a foreign forum.

The decision brings an end to a dispute between two global players in the telecommunication market, US Cogent Communications and German Deutsche Telekom AG, in connection with an 'internet peering agreement'. The agreement regulated the exchange of data traffic between the networks operated by the two companies at so-called peering points and its transfer to the customers. The agreement specifically provided for the application of German law and designated Bonn in Germany as the place of jurisdiction.

In 2016, after efforts to achieve a free increase in transmission capacity had failed, Cogent filed a complaint with a US district court in Virginia accusing Deutsche Telekom of failing to increase technical capacity at two peering points, leading to the congestion at interconnections between the two networks. In May 2016, the Virginia court dismissed the action, determining that the proper forum for the dispute was Bonn due to the forum selection clause in the agreement between the companies. However, due to the so-called American rule of costs, Deutsche Telekom was not able to recover its defence costs of approximately $200,000.

Cogent subsequently filed substantially the same claim before the Regional Court of Bonn. In those proceedings, Deutsche Telekom filed a counterclaim requesting reimbursement of its defence costs incurred in the US proceedings. The court rejected Cogent's claim and allowed Deutsche Telekom's counterclaim. Cogent was successful in appealing the decision on reimbursement of costs, but the Federal Court of Justice has now reversed the appeal court judgment and held that Deutsche Telekom is entitled to reimbursement of its US case defence costs.

The Federal Court of Justice first determined that the choice of forum clause in the agreement and its construction are subject to German law. This was for one of two reasons – because the parties had chosen German law as the law to govern their agreement, and because German law was also the law of the forum they had selected when selecting Bonn as the relevant jurisdiction for the agreement.

The court then confirmed that the jurisdiction clause was exclusive in favour of the courts in Bonn. Under Article 25 of the EU's Brussels I Regulation as well as Article 3 of the Choice of Court Convention of 2005 a choice of court agreement is deemed to be exclusive unless the parties have provided otherwise.

On this basis, the court held that under German law an exclusive choice of court agreement is not only a procedural agreement but also imposes substantial duties on the parties, namely not to bring proceedings in any other court than the chosen one. In case of a breach of this duty, the aggrieved party is entitled to seek damages. The court reasoned its ruling by relying on the rationale of a choice of court provision:

  • With the choice of law and court, the parties strive to make the future disputes more predictable, both it terms of substance and procedure;
  • The parties want to create legal certainty and to make the economic risks associated with litigation calculable;
  • By specifying a place of jurisdiction, the parties want to prevent forum shopping and to avoid costly disputes about jurisdiction;
  • By agreeing on German substantive law, the parties accepted the general principle of German substantive law that a party breaching on an obligation may be liable for damages, and;
  • By agreeing on jurisdiction of German courts, the parties accepted the general principle of German procedural law that costs of litigation generally follow the event.

    The Federal Court of Justice concluded that these goals can only be achieved effectively if the aggrieved party is entitled to reimbursement of its defence costs incurred in the proceedings brought in breach of the choice of court agreement.

    Practical implications and potential impact on arbitration

    The decision is in line with similar judgments of English courts, including in the Union Discount Co. v. Zoller case. It is important not only for German businesses, but for all parties that intentionally agreed on exclusive jurisdiction of German courts but ended up as respondents in a foreign forum. They have now an effective remedy to fight forum shopping, at least retrospectively. For Germany this is particularly important, because protective measures such as anti-suit injunctions commonly used in common law jurisdictions are virtually unknown in Germany.

    Even though the case concerned proceedings in a court outside the EU, the reasoning of the court suggests that this remedy would also be available where the claim is brought in another EU member state. The Brussels I Regulation only provides for procedural rules if a claim is simultaneously brought in the courts of different member states, but does not deal with the substantive obligations arising out of the choice of court agreement.

    With the general question being settled, future disputes are likely to revolve around the exact extent of the claim:

  • the Federal Court of Justice said it is for the lower, appellate court to determine the exact amount of reimbursable costs. In this respect, the court held that only costs that were necessary for the proper pursuit of the defence are reimbursable. This is a peculiarity of German procedural law and is not necessarily equal to the more common international standard of "reasonable costs". In this case, for instance, Deutsche Telekom argued, and the trial court accepted, that it is entitled to also recover the costs that were incurred in preparing the full legal arguments on the merits of the case raised before the US court since it could not know whether the US court was going to grant its jurisdictional objection.
  • damages for breach of an obligation are only available under German law if the breaching party acted culpably. Here, the question arises when this is the case. A party that brings a claim in breach of a choice of court agreement would usually seek legal advice before doing so. Under German law, culpable conduct of persons acting on behalf of a party is attributable to the party. But when is the lawyer's advice to bring the claim despite the jurisdiction clause culpable? In this respect, the decision of the trial court only states that Cogent did not demonstrate that it was impossible for its lawyers to see the risk that the US court could deny its jurisdiction.
  • the judgment contains a caveat in that the court held that the damage claim exists "at least to the extent that the court seized in breach of the choice of court agreement recognises the lack of jurisdiction". The question therefore arises as to what happens if the foreign court (incorrectly) assumes jurisdiction. Depending on the outcome of the case on the merits, the party may, if successful, try seeking reimbursement of its defence costs in the chosen forum or, if defeated, oppose enforcement of the judgment arguing that the foreign court, in fact, lacked jurisdiction.

The reasoning of the Federal Court of Justice also seems to support the prevailing view amongst German commentators that proceedings brought in state courts in breach of an arbitration agreement may generally entitle the aggrieved party to damages. However, the exact circumstances under which damages are payable, in particular when the resort to state courts may be deemed culpable, is still unsettled under German law.