Germany, Russia/April 29 2024
Freshfields Bruckhaus Deringer – Boris Kasolowsky, Carsten Wendler, Leane Meyer and Hager Sameh
German arbitration law provides a rarely used remedy in the form of Section 1032(2) German Code of Civil Procedure (CCP). This provision allows parties to obtain a declaration that arbitration is the sole proper forum (thus excluding the jurisdiction of state courts) prior to the constitution of the arbitral tribunal. While German courts (unlike UK or US courts) refrain from issuing anti-suit injunctions against foreign state court proceedings due to comity considerations, the procedural mechanism in Section 1032(2) CCP provides a notable alternative. This mechanism can de facto yield a comparable result to anti-suit injunctions, safeguarding arbitration as the sole proper forum. Crucially, such proactive declaratory relief is unique to German arbitration law. It is neither available under the UNCITRAL Model Law nor provided for in leading non-Model Law jurisdictions such as Switzerland.
An only recently surfaced decision of the Berlin Higher Regional Court (the Berlin Court) dated 1 June 2023 (case no 12 SchH 5/22) shows that Section 1032(2) CCP can successfully be invoked in an extra-territorial context to bind a sanctioned Russian entity to an arbitration agreement, in breach of which it had initiated Russian state court proceedings. The decision is final as no appeal was lodged with the German Federal Court of Justice.
The key aspects of the decision
The underlying dispute arose out of the termination of an electrical supply and maintenance contract. The supplier and applicant in the Section 1032(2) CCP proceedings (a German company) terminated the contract with the defendant (a Russian entity) so as to comply with sanctions imposed on the Russian entity in connection with the war in Ukraine. The contract was governed by German law and contained an arbitration clause identifying Vienna as the seat of arbitration. In breach of the arbitration agreement, the Russian company brought claims against the German company before the Arbitral Court in Moscow (a type of state commercial court), asserting that the termination was invalid and demanding specific performance. To establish jurisdiction of the state courts despite the arbitration agreement, the Russian entity invoked Section 248.1 of the Russian Arbitral State Court Procedural Code. Under this provision, sanctioned Russians entities who allegedly face “obstacles to access to justice” before foreign arbitral tribunals are not bound by arbitration agreements and can bring claims before the Russian Arbitral State Courts. The Russian court subsequently issued an interim injunction against the German company. The Russian company applied to the Russian courts for an anti-suit injunction against the German company in parallel. This prompted the German company to seek a declaration from the Berlin Court that arbitration is the proper forum to resolve the dispute.
In its decision, the Berlin Court held that arbitration is the (sole) proper forum and that the jurisdiction of state courts is excluded. This ruling provides important guidance on (i) the extra-territorial reach of Section 1032(2) CCP, (ii) jurisdictional implications of parallel Russian state court proceedings, and (iii) the enforceability of arbitration agreements against sanctioned Russian parties. The decision also addressed interesting aspects of service in Russia, which we discuss in a separate blog post.
(i) Extra-territorial reach of Section 1032(2) CCP
A unique feature of Section 1032(2) CCP is its extra-territorial reach, which provides German courts with jurisdiction even where the seat of arbitration is outside of Germany. According to German statutory provisions, the Berlin Court has extra-territorial jurisdiction over foreign-seated arbitrations as a fallback where there are no other factors allowing for a finding of another higher regional court’s jurisdiction within Germany (Section 1062 (2), 1025 (2) CCP). In previous case law, some form of minimal territorial connection to Germany was occasionally regarded as a prerequisite for establishing such “fallback” jurisdiction. Although the Berlin Court did not explicitly mention this requirement in its recent decision, it appears to have loosely applied this criterion. Here, the seat of arbitration was Vienna. The only connection to Germany appears to have been the fact that the applicant is a company domiciled in Germany and that German law governs the contract. The Berlin Court ruled that the impact of the Russian proceedings on the financial situation of the company at its place of domicile in Germany was sufficient to establish jurisdiction.
(ii) Jurisdictional implications of parallel Russian state court proceedings
The Berlin Court held that it retained jurisdiction despite the Russian interim injunction against the termination of the contract and the pending application for a Russian anti-suit injunction. It relied on the fact that, under German statutory law, the Higher Regional Court has the competency to decide disputes concerning whether arbitration is the proper forum (cf. Section 1062(1) No 2, (2) CCP). This supports the decisive stance that the Berlin Court has adopted in disputes against sanctioned Russian entities. It is also in line with the limited case law that exists on this point. Both the Berlin Court (case no 12 Sch 1017/20) and the Munich Higher Regional Court (case no 34 SchH 18/13) have in the past affirmed their jurisdiction when seized with a Section 1032(2) CCP application even where parallel foreign court proceedings were pending.
(iii) Enforceability of arbitration agreements against sanctioned Russian party
The Berlin Court emphasized that “[a]s a matter of principle, the parties’ right of access to arbitration must be ensured despite sanctions”. Moreover, Section 248.1 of the Russian Arbitrazh State Court Procedural Code was found to be irrelevant: the Berlin Court decided that the Russian party had not substantiated its argument that the arbitration agreement was inoperable under Section 248.1 as it had not participated in the German court proceedings in the first place. These findings underline the Court’s decisive approach regarding the enforceability of arbitration agreements vis-à-vis Russian sanctioned parties.
Outlook
Overall, the decision sets an important precedent for other cases in which sanctioned Russian parties bring state court litigation before Russian courts in breach of arbitration agreements. This concerns a fairly large number of cases, given that Russian law allows sanctioned Russian companies to unilaterally withdraw from previously concluded arbitration agreements seated outside Russia.
In particular, the Berlin Court’s decision creates a new avenue for parties being threatened with or facing Russian state court proceedings in breach of the arbitration agreement to pursue. Declaratory relief under Section 1032(2) CCP may be an additional means of defence beside anti-suit injunctions available in Common law jurisdiction. Given the broad extra-territorial reach of Section 1032(2) CCP and the uniqueness of this extraordinary remedy, this option would then also be available for arbitrations seated outside Germany. All that would be required is a minimum territorial connection with Germany. In this context, the impact of Russian court proceedings on a company domiciled in Germany was considered sufficient. Other scenarios involving the risk of enforcement in Germany should also suffice.
