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09 July 2013
On November 7 2012 the Commercial Law Division of the Federal Court of Justice ruled on a case (VIII ZR 108/12) in which the opposing parties had entered into an international sales contract containing the clause "delivered duty paid (DDP) Cologne (Germany)". The court decided that in such cases German jurisdiction is provided for claims seeking compensation for damages.
In German civil procedure law, international jurisdiction is considered a mandatory prerequisite for any decision. Therefore, the question that the Federal Court of Justice had to decide is important to each case with an international background, since the place of jurisdiction can have a serious impact for the parties involved.
The facts of the case are fairly simple and could be potentially regarded as a blueprint for a large number of similar cases in international trade.
The claimant, a limited liability company established under German law with its registered office in Germany, and the defendant, a South Korean limited company, had been engaged in ongoing business relations since 2003. The claimant manufactured fibre-optic cables and bought the necessary fibres from the defendant. It was understood that the parties' agreed on the DDP Cologne (Germany) clause.
After selling the manufactured fibre-optic cables, temperature-dependent failures were detected by the claimant's customers. These failures were linked to the defendant's delivered and defective fibres.
Consequently, the claimant initiated legal proceedings at the Cologne District Court and filed a motion for compensation for damages. The claimant considered international jurisdiction to be in Germany, since the contractual obligation to deliver the goods had to be performed in Germany due to the DDP Cologne clause. The defendant denied such jurisdiction by arguing that the contract did not refer directly to the international commerce terms (Incoterms), and thus the clause did not provide for a duty to deliver the goods in Germany. The parties' sole intent in incorporating the DDP Cologne clause was to allocate the risk and costs of the export and import. Without any direct reference to the Incoterms, the official comments of the International Chamber of Commerce could not serve as a means of interpretation.
The first instance court rejected the claim due to lack of jurisdiction. The Cologne Court of Appeal recognised the German international jurisdiction and annulled the first instance court's judgment. After filing for revision, the Federal Court of Justice approved the Cologne Court of Appeal decision.
Although based only on this simple situation, the legal consequences drawn by the Federal Court of Justice are crucial to all international sales contracts for non-German parties.
The main focus and first question assessed by the Federal Court of Justice was whether German international jurisdiction could be established by German civil procedure law, because the parties did not choose a forum or a law explicitly applicable to the contract.
The answer was determined by the applicable lex fori (ie, in this case Section 29 of the German Code of Civil Procedure). In order to establish jurisdiction, Section 29(1) requires the place of the respective performance to be located in Germany. Therefore, the Federal Court of Justice had to define the respective performance on which the claim was based and then its location.
The claim for compensation for damages was derived from the obligation to deliver flawless goods. So the place where the goods had to be delivered by the seller also determined the place of performance for the purposes of compensation for damages. Since the parties had agreed on the DDP Cologne clause, the Federal Court of Justice then assessed whether this clause provided for a place of performance for delivery of the goods, which had to be determined in accordance with the applicable lex causae. This mechanism seeks a balance between the opposing interests as regards place of jurisdiction in order to enable each party to enforce its respective claims in accordance with the contract-specific characteristics. Germany and South Korea had ratified the Hague Sales Convention and the Convention on the International Sale of Goods by the time the contract was concluded. Therefore, the convention was applicable to the contract and thus the respective lex causae.
The determining factor (ie, the agreed place of delivery for the fibres) had to be defined according to the convention's regulations. Only the respective contractual obligation on which the claim was based specified the relevant location; therefore, the contract did not determine just one place of performance.
Article 31 of the convention determines such a place of performance in principle, unless the contract does not state otherwise. The Federal Court of Justice detected such a contrary agreement in the DDP Cologne clause. This clause contained not only the seller's obligation to bear all the export and import related costs and risks, but also obliged the seller to bring the goods to the named destination (ie, Cologne). Therefore, jurisdiction had to be considered as established in Germany.
The defendant's argument that the DDP Cologne clause was intended only to define the allocation of risks and costs was rejected. The Federal Court of Justice stated that the clause should be interpreted according to the recommendations of the International Chamber of Commerce in order to determine the system of obligations under the respective clause, even without any reference thereto, due to its common use in international trade. An exemption can be made only if a contrary intent of the parties is detectable, which was not so in this case. It was also not essential whether the parties of the international sales contract were aware that the DDP Cologne clause established, only indirectly, international jurisdiction by determination of the place of performance.
The decision confirms German international jurisdiction for claims based on cases where a non-German seller has agreed to DDP with a destination in Germany, if – in accordance with the lex causae – the seller has an obligation to bring the goods. The Federal Court of Justice judgment is binding precedent for any German civil court in respect of claims deriving from the delivery of goods - such as compensation for damages.
Although this decision is based on the DDP clause - which, in comparison to the other Incoterms, transfers most obligations to the seller - it is to be expected that German courts will also recognise German jurisdiction in cases where a different clause of the D-group Incoterms with destinations in Germany is agreed between the parties. All D-group clauses are meant to establish the seller's obligation to bring the respective goods to the agreed destination.
Three different levers can be detected which may lead to a lawsuit in German courts:
A party negotiating an international sales contract must pay close attention to these aspects, especially since the Federal Court of Justice has not required a party's awareness of these legal effects. The second and third aspects in particular can lead to unpleasant surprises. In order to prevent such surprises, the parties should negotiate an explicit choice of forum. In cases where only the applicable law can be negotiated, a lawyer's legal opinion should be obtained in order to evaluate the possible effects of such a choice.
For further information please contact Oliver Behrendt or Marco G Remiorz at Dabelstein & Passehl by telephone (+49 40 31 77 97 0), fax (+49 40 31 77 97 77) or email (o.behrendt @da-pa.com or firstname.lastname@example.org).
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