London or Berlin? Why Germany’s highest court dismissed the Air Berlin appeal

Air Berlin filed for insolvency on 15 August 2017 a few days after its main shareholder, Abu Dhabi's state-owned airline Etihad Airways, refused to pay out further loans to Air Berlin.

Was Etihad justified in stopping financial support for Air Berlin or was Etihad obliged to continue financing Air Berlin with loans? Etihad and the Air Berlin's administrator have been in a dispute over this matter in the courts in Germany and England for years. The administrator alleges that Etihad's actions have caused €500 million worth of damage to the creditors of Air Berlin, and that Etihad is obliged to pay this amount to the insolvency estate. Etihad alleges that the administrator's claim is unfounded.

They sued each other before English and German courts. The dispute is still unresolved because the English and German courts have to determine which courts have jurisdiction. Germany's highest court has decided that the German proceedings are stayed until the English courts have established their jurisdiction.

Etihad Airways, Air Berlin's main shareholder at the time with a 30% stake, had been financing the German airline for years and in April 2017 agreed to give Air Berlin a further loan of €350m. The loan agreement included a clause that the courts in England would have exclusive jurisdiction over disputes "to the benefit of the lender only", which meant Etihad. On the same date, Etihad gave a comfort letter to the German airline, stating that it would "provide the necessary support to Air Berlin to enable it to meet its financial obligations as they fall due for payment for the foreseeable future and in any event for 18 months from the date of this letter". There was no statement in the comfort letter with regards to a jurisdiction of the courts. On 9 August 2017, when a loan tranche of €50m became due, Etihad refused to pay and declared that Air Berlin would not receive any more financial support. A few days later, on 15 August 2017, Air Berlin filed for insolvency proceedings to be opened.

According to the administrator's estimates, Air Berlin’s total debt amounts to approximately €500m. The administrator claims that Etihad is liable to pay this amount, because it is in breach of its obligation towards Air Berlin under the comfort letter. He says as a consequence Ethiad is obliged to compensate the resulting damage - the entire estimated debts of Air Berlin.

The administrator's claim for damages against Etihad has been filed with the Berlin Regional Court in July 2018. Etihad has defended itself against the administrator's action and in January 2019 brought its own action before the High Court of Justice in London, seeking a declaratory relief that the administrator has no claims for damages under its agreements with Air Berlin. As the loan agreement provided for a rule on the jurisdiction of the English courts, the Berlin court stayed the German action in light of the parallel proceedings in London. The administrator appealed against the Berlin court's decision to stay the proceedings and recently, on 6 May, the BGH decided to dismiss the administrator's appeal.

English courts to decide the issue

The BGH ruled that the Berlin Regional Court was correct to stay the German proceedings. Since the contractual relationship between Etihad and Air Berlin provides for an agreement on the jurisdiction of the English courts, the English courts are the primarily competent courts to decide on this issue. This applies even if it is only an asymmetrical jurisdiction clause, establishing the jurisdiction of the English courts for the benefit of Etihad only.

The administrator could not rely on an exclusive jurisdiction of the German courts on the grounds of the insolvency proceedings having been opened in Germany. Instead, the BGH ruled that the administrator's claim was based on the contractual agreement between Etihad and Air Berlin and was therefore not an action deriving directly from the insolvency proceedings.

Instead, the court held that the provisions of the Brussels Recast Regulation apply to the respective disputes between Etihad and Air Berlin. The Regulation provides that Etihad's action in London - at the agreed place of jurisdiction for actions brought by Etihad - takes precedence over the administrator's action in Berlin. Although the administrator had filed the German action earlier, the German courts are obliged to respect Air Berlin's and Etihad's contractual arrangement on the jurisdiction of the courts of England. Therefore, the BGH upheld the Berlin Regional Court's decision to stay the German action.

The decision of the BGH shows that Etihad was successful in forcing the German courts to stay the administrator's action by filing a lawsuit in London. This type of action is known as a "reverse torpedo" lawsuit: A torpedo lawsuit is the term used to describe a preemptive declaratory action brought to delay a claim filed by the counterparty in another EU member state. Another motive for a torpedo action is to bring the case before a court which is seen as more favorable to one's cause. Etihad's claim is a "reverse torpedo" because its claim was brought before the court in London under the jurisdiction clause included in the loan agreement, in order to stay the administrator's action.

The decisions of the German courts are in line with the decisions of the High Court and the Court of Appeal in the English lawsuit brought by Etihad against the insolvency administrator.

Effects of Brexit

Both the administrator's and Etihad's action were initiated before Brexit. Until Brexit, the EU-wide rules on jurisdiction under the Brussels Recast Regulation applied in relation to the United Kingdom. The Withdrawal Agreement provides for a transitional period for precisely such cases as the one at hand: The rules of the Brussels Recast Regulation continue to apply to disputes with a connection to the United Kingdom if they were initiated before 31 December 2020. Therefore, according to the BGH, Brexit is not an obstacle to London as a place of jurisdiction in the case of Ethiad and Air Berlin.

Jurisdiction clauses in cross border contracts

In the Air Berlin case, the Brussels Recast Regulation still applies due to the regulations in the Withdrawal Agreement between the UK and the EU. This made it easier for the courts to decide which courts have jurisdiction over disputes that started during the transition period.

However, when negotiating choice of court clauses relating to the UK, businesses should be aware that the Brussels Recast Regulation no longer applies since 31 December 2020. Instead, the Hague Convention on Choice of Court will apply to jurisdiction agreements between the EU and the UK as of 1 January 2021, following the UK's accession to the convention.

However, the Hague Convention only covers jurisdiction clauses for the benefit of both contracting parties. For this reason, businesses should consider whether in cross border contracts between companies in the EU and the UK, the usage of exclusive jurisdiction clauses applying to both contracting parties may be preferable to the more common asymmetrical clauses in order to enjoy the advantages of easier recognition and enforcement of judgments under the Hague Convention in all EU member states and the UK.

Co-written by Sandra Gröschel