German Supreme Court strikes down choice of court agreement prorogating courts of Virginia

Civil law systems like the German one address jurisdictional questions through inflexible, statutorily-defined grounds of jurisdiction. Courts lack power to dismiss cases for forum non conveniens, and they have no discretion to accept jurisdiction when a valid choice-of-court agreement specifies a different forum. German legal scholars are particularly skeptical towards “flexible” common law jurisdictional doctrines such as forum non conveniens or the reasonableness test. Under German rules, German courts simply have no discretion to ask whether they, or whether another country’s courts, provide the more appropriate forum for a dispute.    

Civil law’s traditional dogmatism towards jurisdiction makes a recent German case all the more surprising. In a September 2012 decision, the German Supreme Court[1] refused to enforce a forum-selection agreement between an American company and its German sales agent that provided for exclusive jurisdiction in Virginia. Instead, the Court held that German courts retained jurisdiction over the dispute despite a valid and exclusive choice-of-court clause. The Court’s decision means that US companies doing business in the EU can no longer assume that German courts will honor their forum-selection agreements.

I. Background of the Case

In November 2005, an American company headquartered in western Virginia entered into an agency agreement with a German sales agent. Under the contract, the German agent was responsible for sales not only in Germany, but also throughout the EU. Both parties agreed to resolve all disputes exclusively in courts within the Western District of Virginia. Moreover, the contract contained a choice-of-law clause designating Virginia law as governing law.   

Importantly, the contract expressly excluded the agent’s German-law right to a post-termination indemnity. The German Commercial Code (GCC) provides sales agents with a right to demand a substantial settlement after the principal terminates the agency relationship that appears to exceed common law agents’ right to reasonable reimbursement.[2] Under German law, parties may not contractually exclude the agent’s right to post-termination indemnity.[3] 

In April 2009, the American principal terminated its German sales agent. The agent filed suit in the District Court of Heilbronn, Germany, for outstanding commissions, damages caused by terminating the agency, and for a post-termination indemnity.[4] When the American company moved to dismiss on the basis of the exclusive forum-selection clause, the German agent countered that the court had jurisdiction in spite of the clause under § 23 of the German Civil Procedure Code (GCPC). Under § 23 GCPC, a German court has personal jurisdiction and venue if the defendant owns assets located within the court’s geographical district.[5] Since the American company had founded a subsidiary in the District of Heilbronn, the agent argued that it owned assets (i.e. the subsidiary’s stock) located within the court’s § 23 GCPC jurisdiction. The court agreed and asserted jurisdiction over the American company.

What makes this case remarkable is that the court asserted jurisdiction despite a perfectly valid forum-selection agreement. § 38 GCPC permits parties to enter into choice-of-court agreements exclusively in favor of non-German courts. Nonetheless, the District Court in Heilbronn as well as the Higher Regional Court of Stuttgart (which heard the case on appeal)[6] refused to enforce the parties’ choice-of-court agreement. Whereas the court in Heilbronn saw its jurisdiction survive the forum-selection clause through § 23 GCPC’s asset-ownership provisions, the appeals court in Stuttgart asserted jurisdiction based on § 21 GCPC that provides general jurisdiction over a defendant anywhere it maintains a registered branch or office. When the American company petitioned the court in Stuttgart for permission to appeal to the German Supreme Court, the Stuttgart court denied its motion.[7] The German Supreme Court[8] then upheld the Stuttgart court’s denial of an appeal and remanded the case to the District Court in Heilbronn.

In favoring their own jurisdiction over the exclusive forum-selection clause, all three courts cited the same policy reason. The forum-selection clause had been coupled with a choice-of-law clause designating Virginia law as governing law. Virginia law contained no right to post-termination indemnity. As a result, the German agent would likely lose his right to claim post-termination indemnity from the American principal.

This was an unpalatable result for several reasons. § 89b GCC, which guarantees agents’ rights to a post-termination indemnity, is Germany’s implementing legislation for Articles 17 and 18 of European Council Directive 86/653/EEC on the Coordination of the Laws of the Member States Relating to Self-Employed Commercial Agents. In 2000, the European Court of Justice held in its famous Ingmar decision[9] that these rules were mandatory rules for purposes of private international law. As a result, principals in non-EU countries may not avoid their application through a choice-of-law clause. The ECJ justified the mandatory nature of commercial agent regulations by stating that Directive 86/653/EEC was not merely designed to protect commercial agents, but instead to ensure the freedom of establishment and the operation of undistorted competition in the internal EU market. Protecting these public policy objectives required prohibiting non-EU principals from contracting out of EU agent regulations whenever they hired sales agents within the EU. Thus, Articles 17 and 18 of Directive 86/653/EEC apply to contracts with EU sales agents even if the agency agreement specifies non-EU law as governing law.[10]

Admittedly, the ECJ in Ingmar was concerned only with a choice-of-law clause, whereas in this case the agency agreement contained a choice-of-law clause coupled with an exclusive forum selection agreement. And generally speaking, mandatory rules’ usual purpose is to override choice-of-law clauses that seek to circumvent national regulations. Through its September 2012 decision, the German Supreme Court has now applied mandatory rules’ “override effect” to choice-of-court agreements. Where the combined effect of an exclusive choice-of-court agreement and a choice-of-law clause is that a foreign court will likely not apply mandatory EU law, the need to enforce mandatory EU law overrides the policy of respecting choice-of-court agreements. As a result, the forum-selection agreement is unenforceable and EU courts may maintain jurisdiction over disputes between the EU agent and its foreign principal. In reaching this result, none of the German courts that looked at the case offered an adequate dogmatic rationale for their approach. It is not clear how mandatory provisions of substantive law can affect an agreement on the appropriate forum for a dispute. Moreover, neither the Higher Regional Court in Stuttgart nor the German Supreme Court saw a need to certify the question to the ECJ under Article 267 of the Treaty on the Functioning of the European Union.[11]

B. Prior Judicial Treatment of Mandatory Rules

This case is not the first time a European court has cited mandatory provisions as the reason for not enforcing a choice-of-court or arbitration agreement. The German Supreme Court has stated in several decisions that German courts may not relinquish jurisdiction over a dispute if they fear that a foreign court or arbitral tribunal will not apply mandatory rules.[12] Even more closely connected with the present case is a decision rendered by the Higher Regional Court of Munich in 2006.[13] There, a California company hired a German commercial agent. The contract stated that California law governed the agency agreement; it contained an exclusive forum-selection clause in favor of Santa Clara courts; and it also contained an arbitration clause. Sidestepping the question of whether a forum-selection clause was enforceable at all when standing next to an arbitration agreement[14], the court refused to enforce the forum-selection clause for the same reason the German courts cited in 2012: ceding jurisdiction to Santa Clara courts would permit the California company to eliminate the German agent’s right to post-termination indemnity and damages. Since these rights constituted mandatory EU rules under Directive 86/653/EEC as interpreted by Ingmar, they could not be contracted away in advance through a forum-selection clause. Thus, the forum-selection clause had to be invalidated in the interest of EU public policy.  

Not only German courts have reached this conclusion. In the English case Accentuate Ltd v Asgira Inc[15], a Canadian company (Asgira) appointed Accentuate to distribute its software in the UK. Their agreement named Ontario law as governing law and provided for disputes to be settled by arbitration in Toronto. After the agency relationship ended, Asgira commenced arbitration in Toronto pursuant to the contract. Accentuate nonetheless filed suit in the UK, arguing that the arbitration clause, combined with the choice-of-law clause, deprived it of its right to post-termination indemnity and therefore ran afoul of Directive 86/653/EEC’s mandatory nature.[16] Like the German Supreme Court would do two years later, the High Court in London agreed: an arbitration clause that submits disputes to a forum and a governing law that will fail to enforce mandatory EU law was null and void. As a result, the High Court affirmed English courts’ jurisdiction over the case. Furthermore, the Court declared that the Canadian arbitral award would be unenforceable on grounds of public policy.

These decisions have led to much criticism. Within German jurisprudence, the extent to which mandatory EU rules override valid forum-selection clauses remains highly controversial. Most scholars agree that EU regulations should not automatically invalidate otherwise proper forum-selection agreements; instead, the decision of whether to enforce a forum-selection clause should be dictated by the specific circumstances of the case. The issue presents a peculiar tension. On the one hand, refusing to enforce any forum-selection clause in cases involving mandatory EU rules severely restricts the arbitrability of disputes for no good reason and violates the principle of comitas. On the other hand, forcing parties to litigate in their chosen forum when a court knows that the foreign judgment is unenforceable violates their fundamental constitutional right to access to justice. Scholars agree that the only way to resolve these concerns is by performing a case-by-case assessment of the specific forum-selection or arbitration clause and the enforceability of the foreign judgment or award.

Within this case-by-case method, two distinct approaches have emerged. Under the first, courts resort to international private law rules—in Germany either Article 6 of the Introductory Act to the German Civil Code or Article 21 of the Rome I Regulation[17]—to answer the validity question.[18] Both provisions permit courts to refuse to apply foreign law if doing so would be manifestly incompatible with the public policy (ordre public) of the forum. Applied to forum-selection agreements, a court may refuse to enforce a forum-selection or arbitration clause if doing so would lead to an ordre public violation. Importantly, the constitutional right to access to justice is then considered a fundamental principle of public policy—and this right is violated when a party is forced to litigate in a forum whose judgments cannot be enforced. When it is uncertain that a foreign court will apply mandatory EU rules, it is also uncertain as to whether German courts will enforce its decision. There is a significant chance that parties will have to file a second suit in German courts, resulting in unreasonable costs and excessive delay. Thus, in general, forum-selection or arbitration agreements should be disregarded whenever there is a danger that the foreign forum will not enforce mandatory EU provisions. Only in exceptional circumstances should such agreements remain valid—for example, if a foreign court is known for applying mandatory EU rules.

Alternatively, some scholars argue that § 328 GCPC provides a better framework for reconciling forum-selection clauses and mandatory rules.[19] § 328(1)(4) GCP provides that a German court may not recognize or enforce a foreign judgment that violates Germany’s ordre public. Applied to the validity of forum-selection clauses, it results in the reverse of the first approach: forum-selection clauses are generally valid and parties must litigate in their chosen forum; only in exceptional cases may courts disregard the forum-selection clause in favor of their own jurisdiction.

This second approach aligns with the procedural nature of choice-of-court or arbitration agreements. Public policy exceptions under Art. 6 of the Introductory Act to the Civil Code or Art. 21 of the Rome I Regulation govern substantive law. In contrast, forum-selection clauses and arbitration agreements are procedural devices that, without more, leave the question of governing law to the conflict-of-laws rules of the chosen forum. Moreover, the second approach is more consistent with other ways in which German courts defer to foreign fora. In the context of lis pendens, German courts must examine whether a foreign judgment is likely to be enforceable before issuing a stay in favor of foreign proceedings. If this so-called “recognition prognosis” is positive, the court must treat the foreign suit as if it were a parallel proceeding in another German court.[20]  Although Germany usually follows a strict first-filed rule in determining which proceeding has priority, the stay analysis is a logical fit for determining whether a German court should cede jurisdiction in favor of a foreign court. In both the lis pendens and forum-selection agreement contexts, the court must forecast whether a foreign judgment or arbitral award will violate German ordre public under § 328(1)(4) GCPC. This will occur only when a foreign tribunal’s failure to apply mandatory EU rules violates fundamental principles of the European legal system. And not every failure to apply mandatory rules amounts to an ordre public violation—the ordre public exception is interpreted narrowly to encompass only serious violations of particularly fundamental legal principles. Thus, even if a foreign tribunal fails to apply mandatory EU law, its decision will not necessarily rise to the level of an ordre public exception under §328(1)(4) GCPC. In the case of EU sales agents working for American principals, no ordre public violation would occur so long as common law agency and contract remedies offer compensation roughly similar to EU indemnity rights.[21] Furthermore, the question of costs and duration of the proceedings is seen from another perspective. The first approach generally invalidates forum-selection clauses out of fear that EU residents will be forced to litigate in an expensive and burdensome foreign forum. However, § 89b GCC was passed only to guarantee a post-termination claim for indemnity to EU agents; it was not enacted to make sure EU agents never have to leave the EU to litigate their claims. In fact, by agreeing to exclusive forum-selection clauses in favor of US jurisdictions, EU agents expressly assume the risk that they might have to litigate abroad. They should remain bound to their commitment under the principle of pacta sunt servanda.[22]

In the end, both approaches differ on the surface but will only rarely lead to different results. What remains open is whether a court must determine that an ordre public violation is certain to result from foreign proceedings from a perspective ex ante[23], or whether a readily apparent danger of an ordre public violation is sufficient to invalidate a forum-selection agreement[24]. In the Author’s opinion, courts should compel parties to litigate in their chosen forum unless they can determine with certainty that an ordre public violation will result from the foreign proceedings. Such a rule would not leave EU parties without protection from ordre public violations. If an ordre public violation occurs, the foreign decision is without effect in Germany and the EU party can pursue remedies through a second suit in German courts.

III. Conclusions

Although the German Supreme Court might have reached the right decision, its judgment is not fully convincing. The relationship between mandatory EU rules and forum-selection clauses remains hazy and ill-defined. The Court also failed to provide any criteria for developing a case-by-case enforceability assessment for forum-selection and arbitration clauses.

In particular, the Court left one very important point open: In the Author’s opinion, whether EU courts should disregard a valid choice-of-court agreement if they fear that a foreign tribunal will not apply mandatory EU commercial agent regulations, was tailor-made for the ECJ since this is a question on the effet utile (practical effect) of Directive 86/653/EEC.[25] And it becomes even more important when one considers other EC Directives that could (one day) be considered mandatory, e.g. consumer protection provisions under 85/577/EEC[26], consumer credit protections under 87/102/EEC[27], or products liability regulations under 85/374/EEC[28]. One would hope that, in the future, the ECJ will set high standards for considering the rules contained in a Directive mandatory—which critics[29] of the Ingmar decision argue the ECJ did not do when faced with EU commercial agent regulations. The more mandatory rules exist within the EU, the more tension these rules will create in international litigation and arbitration.

According to most German legal scholars (including the Author), a forum-selection clause, in combination with a non-EU choice-of-law clause, must remain valid and binding unless a court determines with certainty that the foreign decision will be unenforceable due to ordre public violations under § 328(1)(4) GCPC. To make this determination, the court must forecast the law governing the case as well as the legal system at the foreign court or seat of arbitration. In doing so, the German judge must check whether the foreign legal system applies the Restatement (Second) of Conflict of Laws and, as a result, whether the foreign system would thus apply mandatory EU provisions.[30] Moreover, the German judge must take into account the manner in which applicable foreign law compensates an agent after termination and compare it to the agent’s remedies under § 89b of the German Commercial Code. If EU provisions are likely to be applied, or if an agent can expect to receive comparable compensation, the judge should enforce the forum-selection agreement.

Unfortunately, US companies cannot count on German courts to conduct such a detailed assessment of their forum-selection or arbitration clauses. When a forum-selection agreement is paired with a choice-of-law clause designating non-EU law, the more likely result is that German courts will invalidate the forum-selection clause and allow litigation to proceed in Germany. Invalidation becomes even more likely if the parties agree to exclude an agent’s right to post-termination indemnity. Until the ECJ sorts out the impact that mandatory EU rules have on forum-selection and arbitration agreements, US companies will not be able to fully eliminate the legal risks of EU lawsuits. In the meantime, US parties are well advised to carefully draft choice-of-law clauses expressly adopting § 89b GCC (or another EU member state’s implementing legislation for Articles 17 and 18 of Directive 86/653/EEC) as applicable, even if they ultimately choose non-EU law as governing law. They should treat any other mandatory EU regulations that could foreseeably affect their relationships with EU parties in the same manner.

Jennifer Antomo, who studied both in Mainz, Germany, and Athens, Greece, obtained her First Final State Examen (J.D. equivalent) in 2011 at University of Mainz. Currently, she is a Ph.D. candidate at Johannes Gutenberg University of Mainz, Germany.

[1] German Supreme Court, Sep. 5, 2012 – VII ZR 25/12 = 2013 Internationales Handelsrecht (IHR), 35. Available at: <>. See also Lars Eckhoff, 2012 Gesellschafts- und Wirtschaftsrecht (GWR), 486 and Patrick Ayad / Sebastian Schnell, 2012 Betriebsberater (BB), 3103.

[2] See German Commercial Code § 89b(2) (setting the “commercial agent’s average annual remuneration” as the basis for calculating his indemnity claim) and § 89b(1)(2) (stating that the agent’s post-termination settlement is limited to an amount that is equitable).

[3] See German Commercial Code § 89b(4): “The right [to a reasonable post-termination settlement] cannot be excluded in advance.”

[4] District Court Heilbronn, Aug. 16, 2011 – 21 O 33/10 KfH.

[5] § 23 GCPC is famous in Germany as the so-called “umbrella rule” – forget your umbrella in Germany, and you are forever subject to German courts’ jurisdiction.

[6] Higher Regional Court Stuttgart, Dec. 29, 2011 and 16 January 2012 = Internationales Handelsrecht (IHR) (2012), 163.

[7] For Americans, this procedure may seem strange, but it is in fact the Court of Appeals itself that determines whether a party has the right to appeal its decision to the next level. If it denies a motion to permit an appeal that denial – but only that denial, not the merits of the case – can be appealed to Germany’s Supreme Court; see § 522 GCPC.

[8] German Supreme Court, supra note 1.

[9] ECJ, Nov. 9, 2000, Ingmar GB Ltd v Eaton Leonard Technologies Inc., Case C-381/98, ECR 2000, I-9325, paragraph 20. See Wulf-Henning Roth, 369 Common Market Law Review 39 (2002) and Rick Verhagen, 51 Int’l & Comp. L.Q. 135 (2002).

[10] Cf. ECJ, supra note 5, paragraphs 20 et seqq.                                                 

[11] Moreover, the German Supreme Court determined that an ECJ ruling was not necessary for determining whether the choice-of-law clause was entirely invalid, or merely invalid in part. This was an important determination because partial invalidity would have only permitted German courts to hear the agent’s claim for post-termination indemnity, whereas entire invalidity allowed German courts to hear all the agent’s claims. In the end, the German Supreme Court held that invalidity was a question of German law, that the clause was partially invalid, but that its partial invalidity rendered it wholly void. As a result, German courts could properly hear all the agent’s claims against his American principal.

[12] Decisions of German Supreme Court: Jan. 1, 1961 – VII ZR 180/60; Dec. 12, 1970 – II ZR 39/70; May 5, 1983 – II ZR 135/82; March 12, 1984 – II ZR 10/83; June 15, 1987 – II ZR 124/86.

[13] Higher Regional Court Munich, May 17, 2006 , 7 U 1781/06 = 2006 Internationales Handelsrecht (IHR), 166.

[14] See for the problem of conflicting arbitration and forum selection clauses Simone Stebler, Association Suisse de l’Arbitrage (ASA Bull.) 1/2013, 27.

[15] Queen’s Bench Division, [2009] EWHC 2655 (QB). Cf. Stuart Dutson / Thierry Berger, International Arbitration Law Review, vol. 14 (2001), 73 and Hew R. Dundas, Arbitration, vol. 76 (1) (2010), 159.

[16] The case is also interesting in terms of arbitration, as it opens the question whether a party can litigate an issue in one state court, invoking the arbitral clause’s invalidity, and at the same time try to enforce the arbitral award in another court. The Canadian court, although Asigra was apparently acting contrary to the award by continuing the dispute in another court, decided that this did not amount to a policy reason for not enforcing the award; Accentuate Ltd v. Asigra Inc, 2010 ONSC 3364; 2011 ONCA 99 (CanLII).

[17] Regulation (EC) No 593/2008 of the European Parliament and the Council of 17 June 2008 on the law applicable to contractual obligations (Regulation Rome I) for contracts concluded after 17 December 2009 (see Art. 28).

[18] For this approach see Matthias Weller, Ordre-public-Kontrolle internationaler Gerichtsstandsvereinbarungen im autonomen Zuständigkeitsrecht (Mohr Siebeck 2005), p. 181 et seqq., 319 et seqq.

[19] Reinhold Geimer, Internationales Zivilprozessrecht (Otto Schmidt, 6th. ed. 2009), paragraph 1770; Giesela Rühl, 2007 Praxis des Internationalen Privat- und Verfahrensrechts (IPRax), 294, 298; David Quinke, 2007 Zeitschrift für Schiedsverfahren (SchiedsVZ), 246, 249 et seq.; Uwe Dathe, 2010 Neue Juristische Online Zeitschrift (NJOZ), 2196, 2197 et seq.

[20] In an analogy to § 261(3)(1) GCPC, the German lis pendens rule for parallel domestic proceedings. See German Supreme Court, March 20, 1964 – V ZR 34/62.

[21] Cf. Dathe, supra note 19, 2198: violation of ordre public in case the agent’s commission is below average (“Provisionsdumping”).

[22] Quinke, supra note 19, 251.

[23] See also Quinke, supra note 19, 248 et seq.; Rühl, supra note 19, 298; Ayad/Schnell, supra note 1, 3104; Higher Regional Court Stuttgart, supra note 6.

[24] See Higher Regional Court Munich, supra note 13.

[25] Cf. Quinke, supra note 19, 252.

[26] Council Directive 85/577/EEC of 20 December 1985 to protect the consumer in respect of contracts negotiated away from business premises. 

[27] Council Directive 87/102/EEC of 22 December 1986 for the approximation of the laws, regulations and administrative provisions of the Member States concerning consumer credit.

[28] Council Directive 85/374/EEC of 25 July 1985 on the approximation of the laws, regulations and administrative provisions of the Member States concerning liability for defective products.

[29] Roth, supra note 9, 378 ff.; Verhagen, supra note 9, 151 et seqq.; Rühl, supra note 19, 302; Dathe, supra note 19, 2197 et seq.; Robert Freitag / Stefan Leible, 2001 Recht der internationalen Wirtschaft (RIW), 287, 291 et seq.; Ralf Michaels / Hans-Georg Kamann, 2001 Europäisches Wirtschafts- und Steuerrecht (EWS), 301, 305.

[30] According to the doctrine of comparative impairment or public policy US courts might apply mandatory EU provisions; cf. Rühl, supra note 19, 298. EU courts apply non-EU mandatory provisions pursuant to Art. 9(3) of Regulation Rome I.