A recent decision by a German court has proven controversial among law practitioners, causing confusion and uncertainty along the way.
In the case at hand, a U.S. company headquartered in Virginia entered into an agency agreement with a sales representative in Germany. The agreement stipulated Virginia law as the governing law and federal court in Virginia as the exclusive forum for dispute resolution. When the Virginia company terminated the agreement, the German sales representative initiated a legal claim in district court in Heilbronn, Germany, where the Virginia company had a wholly owned German subsidiary. The district court accepted jurisdiction, despite the apparently valid choice of law and choice of forum provisions in the agreement.
The Virginia company appealed the decision to the appeals court in Stuttgart, which agreed with the lower district court, albeit on a different legal basis. The appeals court explained that the choice of law provision, coupled with the choice of forum provision, would likely lead to the exclusive application of Virginia law and exclude certain mandatory provisions under German law pertaining to severance payments due to a sales agent terminated without cause. The German "Supreme Court" (Germany’s highest court of general (civil and criminal) jurisdiction) declined to overrule the appeals court.
Departure from Previous Legal Position
The decisions from the district court, the appeals court and the German Supreme Court mark a departure from previously accepted and recognized positions pertaining to choice of law and forum provisions. Indeed, until now, valid choice of law and forum provisions in an agreement between a U.S. company and its German sales agent were generally recognized and enforceable in German courts. This does not mean that a choice of non-German law or forum (in this case, Virginia) allows the parties to avoid the application of mandatory German law on certain aspects of the sales agent relationship (in this case, the sales agent’s severance payment). Rather, the judge (or arbitrator) adjudicating the dispute between the U.S. company and the German sales agent typically would be aware of and apply relevant mandatory aspects of German law, regardless of the choice of law provision.
The recent German court decision suggests that German courts no longer feel confident that the judge (or arbitrator) adjudicating the conflict in a foreign jurisdiction applying foreign law would come to the correct conclusion regarding the award of mandatory (under German law) severance payments to a German sales agent. Rather than waiting to see if the relevant mandatory provisions were handled properly by the chosen Virginia courts, the German courts in the recent case decided to preempt the issue, assert their jurisdiction and ignore the parties’ choice of forum.
- Choice of law and choice of forum provisions in a sales agent agreement between a U.S. principal and a German agent may no longer be presumed to be valid and effective, especially if the provisions provide for the application of non-German law in a non-German forum.
- Commentators believe the German court decision will not have major implications for agreements related to matters other than sales agency arrangements, but that remains to be confirmed in future court decisions.
- It is possible that a choice of law provision is more likely to be deemed valid and enforceable if dispute resolution, such as binding arbitration, is specified to be conducted in Germany.
- It is unclear whether a choice of law provision specifying U.S. law, combined with a choice of forum provision specifying courts or arbitration in the United States, would be valid and enforceable if the agreement specifically requires that relevant mandatory aspects of German law be applied.
It is expected that this controversial court decision will generate a vibrant discussion within the German legal community, with an eventual flow of academic articles. We will continue to monitor developments and report on them, as appropriate.