Jurisdiction or arbitration clause: last but not least

​​​​Contracts to purchase a company all too often end up in a dispute in court. The classic “bones of contention” are the guarantees, the scope of the obligations of the vendor to publish information, which are not discussed and are often unknown, as well as disputed interpretations of the often very complex contractual arrangements that are frequently amended repeatedly, in a hurry, just prior to signing. Reason enough, therefore, to consider the possibility of a future legal dispute and to make provisions for this during the negotiation of the contract. This is normally done in the so-called “final provisions”, i.e. the last clause of the contract, but the potential impact of a well or poorly written final clause should never be underestimated.

The starting point 

If the parties do not set out arrangements in the purchase contract – or if they are unable to reach agreement on such arrangements – then the ordinary national (civil) courts are competent to settle any disputes. As a general rule in this case, a law suit has to be filed against the defending party before the district court that has jurisdiction over its place of business, unless a special place of jurisdiction intervenes. The ordinary legal recourse usually involves at least two instances. The regional court’s judgements can generally be appealed against in the higher regional court. If there are grounds for a further appeal, this can then be submitted to a third court at Federal level.

The international aspects

If no choice of jurisdiction is made, or only inadequately defined, this will have a negative impact, at the latest, if it turns out that the opposing party does not have a registered company office in Germany, or has moved it abroad since the purchase contract was signed. Also under international procedural law, the first principle is that, unless the contract specifies otherwise, a case must be submitted to the national court having jurisdiction over the defendant’s registered office. This has some very negative consequences for a (German) company filing a law suit: firstly, the writ of claim and all supporting documents need to be translated into the official language of the place of jurisdiction. Moreover, in some countries, when a claim is filed by an overseas party, collateral has to be deposited by the claimant to cover the potential costs for all stages of the proceedings. In addition, the duration of the procedure and the quality of the court decisions may vary enormously from one country to the next.

Possible approaches

It is therefore advisable to take steps to ensure that initiating and going through a law suit does not become an insurmountably high barrier.

If you wish to keep disputes under the jurisdiction of the ordinary national courts, at least the place of jurisdiction, i.e. the locally competent court, should be defined in the purchase contract. In this case, the language of the procedure and the rules of procedure are prescribed by law, and cannot be changed by the parties. If one of the parties has their registered office abroad, the place of jurisdiction should also be chosen taking into account the enforceability of a ruling. It is relatively simple to file a suit in a German court against a party that has their registered office in China. However, it is then almost impossible to enforce this judgement in China. If the party involved does not have any assets in Germany, the initially preferable choice of Germany as the place of jurisdiction can quickly become a dead-end.

Especially when buying a company, an alternative to any ordinary national court’s jurisdiction is the option to agree to assign jurisdiction to an arbitration organisation. This can have a series of benefits for the parties to arbitration. Arbitration proceedings may initially often be more expensive than a procedure in the public courts. However, the weight of the cost can shrink in relative terms, and even become favourable, if a case were to end up passing through several instances before the public courts. Arbitration generally only involves a single instance. Especially for complex disputes that cannot clearly be settled one way or the other, that is both a curse and a blessing.

In arbitration proceedings, the parties have much greater influence on how the procedure is structured: the number of arbitrators, the language used, the location of the proceedings, and the rules of procedure can generally be influenced by the selection of the arbitration institution. Arbitration has the additional benefit of not being public.

The wording of the arbitration clause

The arbitration clause needs to be worded with extreme care. As a starting point, you can adopt the recommended standard arbitration clause of the relevant institution, but this needs to be adapted to suit each individual case: in the case of disputes arising from circumstances covered by company law, this may involve applying supplementary arbitration arrangements (for example, at the German Institute for Arbitration or DIS) or restricting the obligation to reimburse legal costs for out-of-court proceedings.

When selecting the place of arbitration and the arbitration organisation, you should also be thinking about which legal provisions this choice implies: especially under Anglo-Saxon legal systems (e.g. ICC Arbitration Clause with London as the place of arbitration), a German party may find itself unexpectedly obliged to make legal disclosures, which simply do not exist under German procedural rules, and for which a German party would not normally be prepared.

The later enforceability of a decision also plays a role here that should not be underestimated: although most countries are members of the New York convention on the recognition and enforcement of foreign arbitral awards, also in this case the devil here is in the detail: depending on the arbitration institution selected, and the place of arbitration and enforcement, the chances of a successful enforcement vary enormously.

Conclusion

Agreements on the place of jurisdiction are typically covered in the so-called final provisions. This context is not appropriate for a matter of this importance. Even the most elegant liability and guarantee clauses are of no use if the claims cannot be implemented and enforced in practice. Therefore, the rule for the jurisdiction or arbitration clause is: last but not least.