German Federal Supreme Court, Decision of 17 October 2019 – III ZB 42/19
In a landmark decision on 17 October 2019, the German Federal Supreme Court (BGH) decided for the first time that bringing a claim in breach of a choice-of-court agreement may entitle the defendant to damages.
The facts of the case
The dispute arose out of an internet peering agreement (Peering Agreement) between a US-based telecommunications company (US company) and a German telecommunications provider (German company). As to the applicable law and the competent courts, the agreement provided that it “shall be subject to the law of the Federal Republic of Germany. Bonn shall be the place of jurisdiction.”
In 2016, the US company brought a claim against the German company before a US district court arguing that it was entitled to further transmission capacities. The German company moved to dismiss the case for violation of the choice-of-court provision in the Peering Agreement. While the US district court declined jurisdiction and dismissed the claim, as a result of the American rule of costs, it did not order the US company to pay the costs and expenses of the German company related to the court proceedings.
The US company then brought the same claim before the competent District Court of Bonn (LG Bonn). The German company filed a counterclaim seeking recovery of its legal costs and expenses incurred in the US proceedings based on the breach of the choice-of-court clause. The LG Bonn dismissed the claim but granted the counterclaim. Its decision on the counterclaim was overturned by the Appellate Court of Cologne (OLG Cologne). Eventually, the BGH was seized to rule on the question whether the violation of a choice-of-court agreement could give rise to damages.
The decision of the BGH
The BGH interpreted the choice-of-court agreement in the Peering Agreement as requiring the parties to bring actions only in the designated forum and to reimburse the other party for any legal costs and expenses incurred by its defense against claims brought in a wrong forum.
The BGH emphasized that by concluding an exclusive choice-of-court agreement, parties are expressing their interest in creating legal certainty and making litigation risks predictable. In particular, they are seeking to prevent subsequent “forum shopping” by one of the parties.
In the BGH’s view, this purpose can only be fulfilled if a party has to bear the costs associated with any violation of this agreement. By agreeing on German law as the applicable law, the parties acknowledged the general principle resulting from the German Civil Code that a failure to comply with contractual obligations can give rise to a claim for compensation. They also accepted the rule of the German Code on Civil Procedure (ZPO) that the losing party has to bear all reasonable costs of the proceedings, including the other party’s fees up to the statutory amount, all reasonably incurred expenses and court fees. Based on these principles, the BGH rejected the argument of OLG Cologne and legal commentators that a choice-of-court agreement only has procedural effects (i.e. establishing the jurisdiction of the designated court and derogating from the jurisdiction of the otherwise competent courts) and cannot give rise to damage claims.
The BGH stressed that a violation of an exclusive choice-of-court agreement entails an obligation to pay damages at least if the foreign court declines its jurisdiction.
Furthermore, the BGH acknowledged that the right to damages as a result of the breach of a choice-of-agreement does not violate the constitutional right of access to justice. In the BGH’s view, the obligation to reimburse costs is inherent in every legal action due to the 'loser pays' rule underlying the ZPO and therefore does not restrict this constitutional right.
Finally, the BGH also touched upon the ECJ’s jurisprudence on the incompatibility of anti-suit injunctions with EU law [i.e. with Regulation (EU) 1215/2012 (Brussels Ia Regulation)]. According to the BGH, the principle of mutual trust between judicial authorities of the member states, which the ECJ had stressed in its West Tankers decision (ECLI:EU:C:2009:69), does not apply to third countries such as the US.
As a result, the BGH overturned the OLG Cologne’s decision and remanded the case to the appellate court, deeming it necessary to make further factual findings on the appropriateness of legal costs and expenses incurred by the German company.
The BGH has ended a longstanding dispute among German legal commentators and joins the ranks of English, Spanish and US courts, which have in the past already awarded damages for the costs of proceedings in breach of a choice-of-court agreement.
This decision is good news for companies that have been sued in the wrong forum. Numerous foreign legal systems do not by default require the losing party to reimburse the costs of the proceedings. The ruling ensures that the party prevailing in the wrong forum need not foot the bill for the costs of these proceedings.
Yet the ruling also raises new questions. It is premised on the following two facts: the invocation of a foreign court in a non-EU member state, and the foreign court’s decision to decline jurisdiction for violation of a choice-of-court agreement. It remains to be seen whether German courts would grant damages if any of these two factual parameters change. In particular, the interesting question arises whether a party can also claim damages if the foreign court wrongly affirmed its jurisdiction and ruled on the merits of the case. There are also good arguments to apply the BGH’s ruling to violations of arbitration agreements – another question that has yet to be resolved by the BGH.