⚖️ Federal Supreme Court of Germany held that sanctions and a no-claims clause do not justify requiring russian party to provide security for costs in violation of the Hague Convention

A Russian company, as buyer (claimant), and a German company, as seller (respondent), entered into a sales agreement for equipment in 2021. The agreement provided for three deliveries and contained an arbitration clause in favor of the ICAC at the Chamber of Commerce and Industry of the Russian Federation. The first two deliveries were duly performed; however, following the events of February 2022, the respondent failed to make the third delivery.

The claimant commenced arbitration under the ICAC Rules. The arbitral tribunal rendered an award in the claimant’s favor, ordering the respondent to pay more than EUR 186,000 plus interest.

The claimant subsequently applied to the Higher Regional Court of Stuttgart for recognition and enforcement of the award in Germany. The court held that, at that time, enforcement of the award would conflict with sanctions imposed on Russian persons and, consequently, with German public policy, and dismissed the application.

In the course of the proceedings, the respondent applied for an order requiring the claimant to provide security for costs by depositing funds with the court. Under German law, such security may be required from a party to proceedings that is not resident in an EU Member State in order to ensure the opposing party’s ability to recover legal costs. However, this rule does not apply where an international treaty provides otherwise.

The issue of security for costs in this case was governed by the 1954 Hague Convention on Civil Procedure (the Convention), to which both Russia and Germany are parties. Article 17 of the Convention prohibits requiring security solely on the ground of a party’s foreign nationality. The court therefore dismissed the respondent’s application.

Disagreeing with the refusal to recognize and enforce the arbitral award, the claimant appealed the first-instance decision to the Federal Supreme Court of Germany.

In the same proceedings before the Federal Supreme Court, the respondent again sought security for costs, relying on the following arguments:

👀Under EU sanctions regulations, courts within the EU are prohibited from granting claims brought by sanctioned persons (the “no-claims clause”);

👀The Convention was inapplicable pursuant to Article 62 of the Vienna Convention on the Law of Treaties (clausula rebus sic stantibus). The Convention should be regarded as having ceased to apply because of a fundamental change of circumstances, in particular the deterioration of Russian-German commercial relations and the alleged unwillingness of Russian courts to provide assistance in cross-border procedural matters.

The Federal Supreme Court rejected both arguments, holding that:

🔘The no-claims clause concerns substantive matters only and does not apply to procedural issues;

🔘The exemption from security for costs is based solely on the existence of an international-law obligation, rather than on the practical enforceability of future judgments;

🔘Neither Germany nor Russia has withdrawn from the Convention, and it therefore remains in force.

Accordingly, the Federal Supreme Court of Germany held that there were no grounds to require the Russian company to provide security for costs on the basis of its nationality.

📎The decision of the Federal Supreme Court of Germany is available at the link.

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