Case of the Week: Litigating in the Shadow of Brexit

BrexitThis week, yet another Brexit deadline expired without additional clarity as to when and on what terms Brexit will occur. This creates uncertainties, which affect business relations with British parties, and impact, amongst many other fields, civil litigation. So in this week’s Case of the Week, we present the three cases I know of in which German courts had to decide on Brexit-related issues. The cases deal with security for costs, the validity of choice of court agreements and with freezing orders in a Brexit context. 

Security of Costs

The district court (Landgericht) Düsseldorf had to decide an application of a German defendant sued by a party domiciled in the UK to make an order for security for costs. Pursuant to Section 110 German Code of Civil Procedure (ZPO)plaintiffs who do not have their habitual place of abode in a member state of the European Union or in a signatory state of the Agreement on the European Economic Area shall provide security for costs of the proceedings should the defendant so demand”. The defendant argued that it was clear that the United Kingdom would leave the European Union prior to the proceedings having been terminated (back then, the relevant deadline was 29 March 2019). Therefore, it was obvious that the requirements of Section 110 ZPO would be satisfied prior to the end of the proceedings. An international treaty as envisaged by Section 110 para 2 ZPO that would ensure the enforcement of a German cost order in the United Kingdom was not in the making. The Düsseldorf court did not grant the application and did not make an order for security for costs, and rightly so in my opinion. Section 111 ZPO explicitly provides that security for costs can be requested at any time during the course of the proceedings if an obligation arises because of a change of circumstance. Therefore, the German defendant was not left unprotected.

Validity of Choice of Court Agreement

The district court Koblenz was faced with a very fundamental challenge, namely with a request to set aside an agreement on the jurisdiction of the English courts. The plaintiff, based in the United States, and the German defendant in a 2013 contract had agreed on the exclusive jurisdiction of the courts in England and Wales and on English law as the governing law of the contract. The US plaintiff now approached the German courts in injunctive proceedings and argued that the basis on which the parties had entered into had fallen away (Wegfall der Geschäftsgrundlage, Section 313 German Code of Civil Procedure, BGB), since Brexit rendered the enforcement of an English judgment in Germany much more difficult. Section 313 BGB does give the courts powers to adjust a contract, provided that “circumstances which became the basis of contract have significantly changed since the contract was entered into and the parties would not have entered into the contract or would have entered into it with different contents if they had foreseen this change.” The Koblenz district court denied the request and argued that the plaintiff had not shown any real threat of the enforcement being more difficult. In addition, it held was not obvious that the United Kingdom would “rescind its ratification of the Brussels Regulation, nor that “German authorities would cease to recognise British decisions”.

In my opinion, the district court Koblenz failed to acknowledge the underlying legal mechanics of Brexit: Upon expiry of the two-year period under Article 50 TEU, or any extension thereof, the Brussels Convention ceases to apply automatically by operation of law. The Koblenz court should have taken this as a starting point. On that basis, it would have had to establish whether the parties indeed would not have agreed on English law and the jurisdiction of the English courts, had they foreseen a Brexit scenario. If it was satisfied that this was the case, in a second step the court would then need to establish, under Section 313 BGB, whether the result was such that “one of the parties cannot reasonably be expected to uphold the contract without alteration” (Section 3131 BGB).

The facts recorded in the Koblenz judgment are insufficient to reach a conclusion on this. There may be factual circumstances which would the adjustment of a choice of court agreement because of Brexit (or of other contractual provisions, for that matter). In any event, however, I am not sure whether an adaptation of the contract would necessarily result in the jurisdiction of the German courts, as the US plaintiff wanted. Apparently, the US and the German party had agreed on England as a neutral jurisdiction. It is therefore conceivable that a court would, in these circumstances, stipulate by way of adaptation of the contract again a neutral venue in a third country.

Freezing Order

Finally, there is the judgment of the Court of Appeals, (Oberlandesgericht) Frankfurt, which I had already covered in an earlier post (as has Benedikt Windau at zpoblog). In short, the German claimant in the Frankfurt proceedings had applied for a freezing order against a defendant domiciled in England on the basis that under Section 917 ZPO, it is sufficient reason for a freezing order if “the judgment would have to be enforced abroad and reciprocity has not been granted”. Of course, as long as the United Kingdom is an EU member state, there is reciprocity. Upon Brexit, however, the Brussels Convention will fall away, and there will be no reciprocity in a no deal scenario. The Frankfurt Court of Appeals dismissed this argument (but granted the freezing order on other grounds). It argued that the fact that the withdrawal agreement had failed in the House of Commons on several occasions notwithstanding, it was still unlikely that the United Kingdom would exit without a deal. Any such deal would in all likelihood provide for reciprocity.

As set out above, I believe that this is the wrong starting point, as the court fails to give sufficient weight to the fact that the Brussels Convention will fall away upon a Brexit. The United Kingdom has made the Article 50 TEU declaration without having entered into a withdrawal agreement beforehand, and as such, the default position by automatic operation of law is the no deal scenario. Then, in my view, the requirements of Section 917 ZPO are met, and the freezing order should have been granted.

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Benedikt Windau and I have co-authored a piece on “Litigating in the Shadow of Brexit” for Frankfurter Allgemeine Zeitung (in German) and this blog post draws on our joint work.

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