Case of the Week: Federal Supreme Court Rules on Damages for Violation of Choice of Court Agreement

US District Court Eastern District of VirginiaIn a judgment last week, the Federal Supreme Court (Bundesgerichtshof) has found a US party liable for damages for bringing an action against its German contractual counterparty in the US in violation of an agreement on the jurisdiction of the German courts. With this judgment, the Federal Supreme Court decided an issue that so far had been controversially debated in the German legal literature. Until this decision, it was not clear whether the violation of a choice of court agreement does not only have a procedural effect, but does also render the violating party liable for monetary damages. (Disclosure: This post is based on the Federal Supreme Court’s press release only, as the full judgment is not yet available. I will provide an update when the judgment comes out.)

The German tradition of anonymous court reporting notwithstanding, is clear that the case is Cogent Communications Inc., vs. Deutsche Telekom AG. The parties had concluded, in 2003, an internet peering agreement. This agreement provided that is was subject to the law of the Federal Republic of German and that Bonn was the place of jurisdiction.

This straight-forward wording notwithstanding, when a dispute arose between the parties about Cogent’s right to request internet connection point upgrades, Cogent in 2015 sued Deutsche Telekom in the US District Court for the Eastern District of Virginia. In 2016, the US Court dismissed the action pursuant to the doctrine of forum non conveniens, citing the choice of court agreement. Judge Brinkema said:

“So I think it’s a very simple way to resolve the motions [to dismiss] that are here, that I’m going to grant the motion to dismiss because this case does not belong here; it belongs in Germany. It’s not a dismissal on the merits, so you can certainly refile over there.”

Cogent duly refiled its action to Bonn. Deutsche Telekom issued a counterclaim for USD 196,118.03 in damages for the violation of the choice of court agreement, representing the attorney’s fees it incurred in the US proceedings. The District Court (Landgericht) Bonn dismissed Cogent’s action and granted Deutsche Telekom’s counterclaim.

On appeal, only Deutsche Telekom’s counterclaim remained at issue. The Court of Appeals (Oberlandesgericht) Köln reversed and dismissed the counterclaim. In its judgment, the Cologne court provided a thorough discussion of the German legal literature on the issue on which it had to rely, in the absence of German cases on the topic. The Cologne court opted for a narrow interpretation of a choice of court agreement. It held that the choice of court agreement only had a procedural effect, but not, in parallel to that, a substantive effect. Hence the choice of court agreement was not to be understood as a separate contractual obligation in its own right and a basis for monetary sanctions.

The Federal Supreme Court was not convinced and found to the contrary. The Court stated that the agreement on the jurisdiction of the Bonn court and the application of German law has to be construed as creating an obligation to bring actions in relation to the contract only in the Bonn courts. If a party violated this obligation, and if the foreign court denied its jurisdiction, that created a liability for legal costs incurred in defending the foreign action. In its press release, the Federal Supreme Court summarized its position as follows:

“With such an [choice of court] agreement, the parties have manifested their interest in allowing legal disputes to be planned from both a substantive and a procedural point of view. Contracting parties involved in international transactions in particular intend to use such an agreement to create legal certainty and render litigation risks, including the financial risks, quantifiable. By defining a specific court, they seek to select a specific place of jurisdiction and, in particular, to prevent subsequent forum shopping by a contracting party. In case the objective of avoiding disputes about jurisdiction and thus also unnecessary costs caused by invoking a court which does not have jurisdiction, is jeopardized by invoking a court in breach of the agreement, the objective can only be achieved if the party affected by the breach is granted a claim for reimbursement of costs.

 With the agreement as a whole governed by German law, the parties have recognised both the general principle  – resulting from Sec. 280 (1) German Civil Code (BGB) – that a breach of contractual obligations, including a breach of the choice of court agreement, may give rise to a claim for monetary damages, and the principle that one party to a civil dispute is obliged to reimburse the other party for the costs necessary for its legal defence.”

The Federal Supreme Court then goes on to discuss its established case law that bringing an action in a court of law to enforce alleged rights as a matter of principle cannot be regarded as a breach of contract triggering damages. The Federal Supreme Court makes it clear that it does not see an contradiction here: This general principle protects the constitutional right of free access to state courts. This access is not restricted in a manner that would cause constitutional concerns by a cost risk being imposed on the violating party, as “the obligation to reimburse costs [is] inherent in every filing of an action.”

To me, the Federal Supreme Court’s position is convincing – both from the point of view of construction of the contract, and from a policy perspective. From a construction point, I do not find it convincing to distinguish between procedural and substantive effects of a contractual provision. From a policy perspective, the Federal Supreme Court’s contractual interpretation provides for a sanction that hopefully deters frivolous lawsuits brought in particular in the US with a view to creating a nuisance value and a cost risk for the other side.

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