## Facts

- In February 1985, the claimant (plaintiff), a Slovenian company, and the respondent (defendant) entered into a contract.
- Article XII of the contract contained an arbitration clause requiring disputes to be resolved before the Court of Arbitration for Foreign Trade of the Economic Chamber of the Socialist Federal Republic of Yugoslavia (SFRY) in Belgrade.
- By 1992, the dissolution of the SFRY had led to conflict among the former Yugoslav member states.
- During that period, communications between Ljubljana (Slovenia) and Belgrade (Serbia) were interrupted.
- In light of the situation, the claimant terminated the contract as a precaution.
- Instead of commencing arbitration before the SFRY Court of Arbitration in Belgrade, the claimant filed a lawsuit in Germany seeking damages for alleged contractual breaches.
- The claimant argued that the SFRY Court of Arbitration was not a competent tribunal for a Slovenian company and that it could not reasonably be expected to seek relief before an arbitral tribunal located in an indisputably hostile foreign state.
- The respondent objected that the court action was inadmissible because the arbitration agreement remained binding.
- The respondent also argued that negotiations between the European Community and the government in Belgrade made it likely the conflict would end, allowing the arbitral institution to resume operations.
- The lower court allowed the claimant’s lawsuit to proceed despite the arbitration clause.
- The respondent appealed to the Regional Court of Kassel (Landgericht Kassel), which issued a partial decision addressing whether the arbitration clause barred the German court proceedings.

## Issues

1. Whether the claimant’s damages action in Germany was inadmissible because Article XII required arbitration before the SFRY Court of Arbitration in Belgrade.
2. Whether the dissolution of the SFRY, the outbreak of conflict, and the interruption of communications rendered the agreed arbitral forum unavailable in practice, such that the German court could hear the case.
3. Whether, in the circumstances, the claimant could reasonably be required to pursue arbitration before an arbitral tribunal located in a state described as hostile to the claimant’s home state.

## Decision

- The Regional Court of Kassel treated the appeal as turning on the effect of the Article XII arbitration clause as a procedural bar to the court action.
- The court concluded that, given the breakup of the SFRY, the hostilities, and the disruption of communications between Ljubljana and Belgrade, the agreed arbitral route could not be treated as a workable means for resolving the dispute at that time.
- The court therefore declined to treat the arbitration clause as making the claimant’s German lawsuit inadmissible.
- The decision was partial in that it resolved the threshold question concerning the arbitration clause, not the merits of the damages claim.

## Legal Principles

- When a defendant invokes an arbitration agreement to defeat a court action, the court must consider whether the agreed arbitral mechanism can still function in a practical sense in the circumstances existing when the dispute is brought.
- An arbitration clause may be treated as inoperative for purposes of dismissing court proceedings where supervening events connected to political upheaval and conflict prevent the parties from realistically accessing the named arbitral forum.
- Practical barriers such as a breakdown of cross-border communications may be relevant to whether the agreed forum can be used.
- In assessing whether to enforce an arbitration clause, a court may consider whether it is reasonable to insist that a party pursue arbitration in a location described as a hostile foreign state, where the surrounding conditions materially obstruct recourse to the agreed tribunal.
- Where the agreed arbitral forum cannot be used in practice, a court may allow litigation to proceed despite the contractual arbitration clause.

## Conclusion

In Partial Decision of 2 April 1992, 1993 RIW 239 (1993), the Regional Court of Kassel held that a contract clause requiring arbitration before the SFRY Court of Arbitration in Belgrade did not bar a Slovenian company’s damages action in Germany, because the dissolution of Yugoslavia, the resulting conflict, and disrupted communications made resort to the named arbitral forum unrealistic at the relevant time.
