International: Pitfalls in Foreign Transactions: Jurisdiction and Arbitration Clauses

In cross-border legal disputes, the question of jurisdiction (i.e. the court / location at which a dispute is heard) is frequently a key factor in determining the success or failure of a dispute. In this regard, the often-cited "home advantage" counts: Not all courts are as efficient and impartial as those in countries like Germany. Therefore, at least our German clients who conduct business transactions abroad, would be well-advised to agree in their contractual relationships either on a place of jurisdiction in Germany, or, as a minimum, on an appropriate arbitration clause.

Jurisdiction Clauses

German companies should - and regularly do - insist on the inclusion of a place of jurisdiction in Germany in the contracts that they conclude with their foreign business partners. This offers sufficient protection to them in relation to business relationships concluded within the EU, as well as in relation to contracts concluded with business partners in Switzerland, Norway and Iceland. European law and treaties ensure that the judgments of German courts are recognised and enforced in these countries.

Agreeing on the jurisdiction of a German court does, however, also have a major disadvantage: The language of legal proceedings in Germany is and remains strictly - and only - German, with the consequence that, should legal action become necessary, all relevant documents must be presented to the courts in the German language (and thus translated to German in many instances). There are a number of further reasons militating against the institution of legal proceedings before German courts, the most important being the (non-) recognition of German judgments by a number of countries for purposes of enforcement. Germany has only entered into bilateral agreements on the mutual recognition of decisions with very few countries (e.g. Tunisia and Israel). The courts of countries, with which no such agreements have been entered into, usually only enforce German judgments if they can assume that the judgments of their courts would likewise be enforced in Germany. To date, this has not always been the case - even with such key industrial players as China or Russia. In the circumstances it is frequently unclear, whether securing a German judgment will be particularly helpful, especially if the foreign business and contract partner does not have any assets in Germany or the EU, in respect of which the judgment can be enforced. To avoid this risk, the use of an arbitration clause may be recommended in the aforesaid instances.

Arbitration Clauses

149 states, including almost all of the world's major economies, have signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"). This requires the participating countries to recognise and enforce judgments handed down by arbitration courts in any of the participating states. In business transactions concluded with parties outside Europe, arbitration clauses therefore normally offer the best assurance that claims against a foreign contracting party will be capable of enforcement in the latter's home country. This advantage does, however, usually come at a price, given that arbitration proceedings are often far more expensive than it would be to simply conduct proceedings before a (German) court.

Yet even arbitration clauses do not offer absolute peace of mind, given that certain major economies (such as Taiwan) have not signed the New York Convention. Other countries, in particular Arab countries, are signatories to the New York Convention, but reject the recognition of arbitral awards in certain circumstances, given that they do not consider them to be capable of being subject to arbitration. This applies, for example, in respect of commercial agency matters in Jordan. Furthermore, in the United Arab Emirates, although having signed the New York Convention, the Dubai Supreme Court rejected the enforcement of an arbitral award of an ICC arbitration court in Paris in a decision of 18 August 2013 (case no. 156/2013): The court held that, given that the debtor was not resident in Dubai, the Dubai courts had no jurisdiction to adjudicate the matter. As a result, the award could not be enforced in respect of the assets of the debtor (the Sudanese government) in Dubai.

Conclusion

Generally, it may nevertheless be said that at least our German clients would be well-advised to agree on arbitration proceedings with contract parties from outside the EU. The following matters should be addressed in detail in such a clause:

• The place of arbitration: This depends on the applicable law of procedure. Accordingly, the selection of a place of arbitration in Germany or continental Europe is recommended from the point of view of a German contracting party, while caution should be exercised as regards London or the USA;
• the language of the arbitration process;
• the number of arbitrators, unless same is to be determined by the relevant arbitration institution; and
• the applicable rules of arbitration: Differences between the different rules of arbitration (e.g. the rules of the ICC, AAA, DIS, or the Swiss Rules) do exist with respect to procedure and cost.

Barbara Mayer, Sven Ufe Tjarks