The Dangers of Reciprocal Jurisdiction Clauses

Jurisdiction clauses that provide that the plaintiff is to institute proceedings in the home country of the defendant usually preclude the defendant from asserting counterclaims as part of the same proceedings.

Jurisdiction clauses are often the result of a compromise, and are discussed and agreed upon at the very end of contract negotiations. Given that the question of the governing law is inextricably intertwined with that of jurisdiction, the matter should actually be clarified and resolved right at the outset of the negotiations, in order for the involved parties to be able to then assess the negotiated provisions in light of same. In this regard, it should be noted that compromises which might seem reasonable at first, such as, for instance, providing that the place of jurisdiction shall be "the location of the defendant", may in a worst case scenario preclude the defendant from being able to assert counterclaims as part of the same proceedings, and force it to institute a separate action.

A recent judgment of the Higher Regional Court of Schleswig-Holstein (judgment dated 1 November 2013, case number: 17 U 44/13) illustrates the difficulties a compromise can cause - depending on whose interests are at stake. The defendant wanted to set-off certain payments it owed with claims for defects and accordingly maintained that the plaintiff had not rendered proper performance in respect of the deliveries on which the invoices were based. These objections were rejected by the court given that, in its view, such claims would have to be asserted in the court having jurisdiction over the plaintiff - being a Chinese court.

At the latest when a contractual party is able to unproblematically prove its claim - which will usually be the case in the event of payment claims arising from product deliveries - reciprocal jurisdiction clauses can thus considerably impair a purchaser's negotiation and legal position in court.

It is therefore advisable to agree on a definite and unambiguous jurisdiction clause (right at the outset) and, if such agreement cannot be reached, to agree on a neutral venue. In reaching such an agreement, special consideration should be given to the fact that German judgments, as well as arbitration awards of arbitral tribunals, will not be enforceable in all countries.

Frank Jungfleisch, Sebastian Hoegl, LL.M. (Wellington)