Sanctioned Russian parties breaching arbitration agreements (Part II): Landmark German court decision dispenses with the Hague Service Convention

In recent years, parties bringing court proceedings against Russian counterparties have faced severe obstacles when effecting service in Russia. In principle, the Hague Service Convention requires Russia to provide legal assistance in effecting the service of court documents via Russian authorities. However, Russian authorities take an average of 12 months or longer to execute requests for service – as noted by the German Foreign Office in 2020. This situation is exacerbated by political tensions over the war in Ukraine. In addition to protracted execution times, Russian authorities sometimes reject requests for service altogether due to (alleged) violations of Russian public policy. In this situation, the Hague Service Convention does not provide for any remedy.

In a recently surfaced decision of the Berlin Higher Regional Court (the Berlin Court) dated 1 June 2023 (case no 12 SchH 5/22), the Berlin Court paved the way for a practical solution.  It determined that where Russian authorities refuse service, Russian parties can be served via public notice in German courts. Due to the ongoing practical and policy obstacles, it can be expected that German courts may take an even more proactive stance on service via public notice on Russian parties in the future. This means providing efficient and effective alternatives from the outset when dealing with sanctioned Russian parties rather than waiting until the Russian authorities actually refuse service. This is also in line with the approach that English courts have recently taken in the context of disputes involving Russian parties, accepting alternative forms of service in derogation of the Hague Service Convention.

The facts underlying the decision

The dispute underlying the recent decision of the Berlin Court arose out of the termination of an electrical supply and maintenance contract. The supplier and applicant in the German court proceedings (a German company) terminated the contract with the defendant (a Russian entity) to comply with sanctions imposed on the Russian entity. In breach of the arbitration clause contained in the contract, the Russian company brought claims against the German company before the Arbitrazh Sate Court in Moscow and applied for a Russian anti-suit injunction. This prompted the German company to request a declaration from the Berlin Court that arbitration is the proper forum to resolve the dispute under Section 1032(2) German Code of Civil Procedure (CCP), which the Berlin Court granted. A detailed analysis of the specific aspects of the Section 1032 CCP proceedings is available in a parallel blog post.

The key aspects of the decision on service

As the defendant in the German proceedings is a Russian entity, service had to be effected in Russia. The Berlin Court attempted to serve the court documents through Russian authorities in accordance with the requirements of the Hague Service Convention. However, the Berlin Court encountered substantial obstacles. After several months, the Russian courts announced that they were refusing service of the documents. Other methods of service provided for in the Hague Service Convention, such as service by diplomatic, consular or postal channels, are not available due to Russia’s reservations to the Convention. 

The Berlin Court then decided to resolve this situation by ordering service of the German company’s petition by public notice, as provided for under German civil procedural law (Section 184 no. 3 CCP). Under this method of service, service was deemed to be effected after the Berlin Court’s order had been physically displayed on the Berlin Court’s notice board for one month. 

Outlook

The decision evidences the pragmatic and effective approach adopted by the Berlin Court. By resorting to service via public notice in the German courts, the Russian party was ultimately successfully served, notwithstanding the fact that service under the Hague Service Convention was not possible due to non-compliance by the Russian authorities.

Going forward, it appears likely that the Russian authorities will continue to refuse to cooperate in serving court documents where sanctioned Russian entities are involved. This is in line with Russia’s objective to assert jurisdiction over all disputes involving a sanctioned Russian entity and obstructing dispute resolution mechanisms outside of Russia by invoking a violation of public policy. Given these significant hurdles to service in Russia, it is expected that the approach of German courts will continue to evolve to ensure effective legal protection. 

Faced with similar challenges, English courts, for instance, have resorted to service via email. There are also initial indications that German courts are inclined to adopt an even more hands-on approach in cases involving sanctioned Russian entities. In a more recent case similarly involving a sanctioned Russian party, a German court decided to dispense with attempted service under the Hague Service Convention altogether. The court found that alternative service was required as service under the Hague Service Convention was unlikely to be successful within a reasonable time. In particular, the court pointed to the well-known refusal of service by the Russian courts of foreign court proceedings against sanctioned Russian entities. Thus, the court requested that the Russian party  appointed an authorised representative in Germany and effected service by public notice after the appointment failed to occur within the set time limit. In parallel, the court also served the court documents informally by post. This approach exemplifies how national courts are willing to find more pragmatic solutions to provide efficient legal protection where Russia fails to effect service within a reasonable time.