Federal Supreme Court: Sedelmayer vs. Russia – No Set-off with Tax Claims

stock-photo-15986220-sign-quot-bundesgerichtshof-quotThis decision published by the Federal Supreme Court (Bundesgerichtshof) a couple of days ago on its website appears to be the latest instalment in the on-going saga of Franz Sedelmayer’s quest to enforce an investment treaty award  against Russia. Of course, the Federal Supreme Court sticks to Germany’s practise of anonymous court reporting. The facts reported in the decision are so unique, however, that it cannot be anything else but the Sedelmayer case.

Franz Sedelmayer was awared damages under the German-Russian Investment treaty in an arbitration seated in Stockholm in 1998, and has spent more than 15 years enforceing it. The details have been reported extensively, see for example, this piece in the New York Times.

In this instalment of the saga, Sedelmayer was trying to enforce Swedish cost orders in his favour. Russia’s challenges in the Swedish courts against the award had been dismissed and the Stockholm Tingsrätt awarded Sedelmayer costs in the amount of SEK 1,641,692 und USD 138,898. The District Court (Landgericht) Köln had declared these cost orders enforceable in Germany pursuant to the Brussels Regulation and the corresponding provisions of German law (Sections 9, 14 AVAG).

Russia, on its part, commenced an action raising objections against the enforcement (Vollstreckungsabwehrklage) pursuant to Section 767 German Code of Civil Procedure (ZPO). Russia based its objection on a set-off against the cost orders with a damages claim in the amount of USD 65.612.140, stating that these damages had arisen in relation to unpaid taxes. A respective judgment had been issued by a district court in Saint Petersburg.

The lower instance courts had dismissed Russia’s action. The Court of Appeals (Oberlandesgericht) Köln had argued that the German courts lacked jurisdiction to deal with the set-off. Even though the matter was formally a civil law matter, given that the damages claim was recorded in a judgment of a civil law court, the claim was clearly arising under Russian tax law, and hence, it was in substance a claim under public Russian law, arising from an act of jure imperii.

The lack of jurisdiction would not be per se an obstacle to a German court dealing with the set-off if the claim that is being set off had been confirmed in a full and final judgment. However, this would only apply if the counterclaim were capable of recognition in Germany pursuant to Section 328 ZPO, the provision on recognition and enforcement of foreign judgments outside the scope of a treaty.

The Federal Supreme Court did agree. In its order, it set out that it is well-settled law that the characterisation of a claim as either arising under civil law or public law is for the lex fori to decide. Russia’s lawyers had argued that Russian law should govern this characterisation. The Federal Supreme Court points to its established case law to the contrary, the rationale being that it is for German domestic law only to decide whether a foreign law claim shall be enforceable domestically. Something different would only apply within the scope of the treaty. Here, the law of the country of origin can be applied to ensure a consistent interpretation of the treaty across all member states.

Finally, in an obiter dictum, the Federal Supreme Court records that it agrees with the characterisation of the claim as being public law in nature. In short, foreign states dressing up tax claims as civil law claims, whatever their motives may be, will have no joy enforcing these in Germany.

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