GERMAN COURT CONFIRMS THRESHOLD FOR VALIDITY OF ARBITRATION AGREEMENTS

Introduction

In a decision dated 6 February 2020 (“Decision”), the German Federal Court of Justice (Bundesgerichtshof, “BGH”) confirmed the long-standing pro-arbitration friendly case law of German courts that the threshold of a valid arbitration agreement is low (BGH, 6.2.2020, I ZB 44/19). In this case it was held that the parties’ intentions to arbitrate could be clearly and unambiguously derived from the forum selection clause and that the failure to execute a separate arbitration agreement containing further details of agreed procedure did not invalidate the parties’ intent.

Details of the case

The arbitration clause in dispute read – translated to English and in an abbreviated form – as follows:

“Any disputes arising out of this contract, its execution and interpretation shall be decided by an arbitral tribunal excluding the state courts. The parties will conclude a separate arbitration agreement in this regard.”

The parties never concluded the separate arbitration agreement. The question therefore arose whether the arbitration clause in the main contract was invalid. The substantive validity of the arbitration clause was governed by German law.

The court of first instance decided that the arbitration clause was valid. It ruled that the parties’ agreement to arbitrate had to be distinguished from a letter of intent to conclude an arbitration agreement. It further ruled that a valid agreement to arbitrate does not require the parties to conclude a separate/additional agreement in which the rules applicable to the arbitration would be agreed upon, as regards e.g. the number of arbitrators or the constitution of the tribunal.

This decision was appealed to the Federal Court of Justice which dismissed the appeal as inadmissible. The Federal Court ruled that the court of first instance had applied the correct requirements and principles to assess the validity of an arbitration clause as follows:

First: German courts will apply the general rules of contract interpretation pursuant to sections 133 and 157 of the German civil code (Bürgerliches Gesetzbuch, “BGB”) to determine the parties’ intentions.

Second: The parties’ intentions to be bound by arbitration and to exclude the jurisdiction of the state courts must be able to be clearly derived from the wording of the clause.

Third: the Federal Court of Justice stressed that this conclusion is always a case-by-case decision, and that therefore the circumstances of each case are decisive and abstract rules would not apply.

Requirements for the validity of arbitration agreements under German arbitration law

The decision does not only highlight the difference between an optional arbitration clause and a binding one, but also the difference between mandatory and non-mandatory requirements of valid arbitration agreements under German arbitration law.

The German arbitration law – based on the UNCITRAL Model Law on International Commercial Arbitration of 1985 –  is part of the German code of civil procedure (Zivilprozssordnung, “ZPO”) and is contained in sections 1025 to 1066 thereof.

The two substantive mandatory requirements of an arbitration agreement are set out in section 1029(1) of the ZPO:

An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

The first requirement of a “defined legal relationship” only precludes the validity of arbitration agreements providing that all future disputes between the parties – without any reference to a specific relationship (e.g. a specific contract or framework agreement) – will be resolved by arbitration.

The fulfilment of the second requirement – like in the case at hand – often raises problems: the parties’ agreement to submit all or certain disputes to arbitration. It is essential that it can be clearly and unambiguously derived from the arbitration agreement that the parties’ intention was to exclude the state courts as a dispute resolution forum, and to have any disputes resolved by arbitration.

The parties’ failure to agree in their arbitration agreement on non-mandatory issues like e.g. the set of arbitration (institutional or ad hoc) rules, place of arbitration, number of arbitrators and/or procedure for the constitution of the arbitral tribunal, will not in principle invalidate the arbitration agreement.

Court decisions confirm pro-arbitration friendly approach in Germany

The Federal Court of Justice’s ruling confirms the long standing approach of lower German courts to uphold arbitration clauses.

The regional higher courts of Munich and Karlsruhe also had to decide on the validity of arbitration clauses which provided for an arbitral tribunal to decide on any disputes arising from a contract. In both clauses the jurisdiction of the state courts was explicitly excluded. In both cases, the parties had, however, agreed that they would conclude a separate agreement determining, inter alia, the rules for the constitution of the tribunal and the procedure. They never concluded these separate agreements. Both courts upheld the arbitration clauses as the parties’ intentions to be bound by arbitration could be clearly derived from these clauses. Further, the courts ruled that the constitution of the tribunal or rules regarding the procedure are non-mandatory requirements of an arbitration clause. If the parties do not agree on these requirements, the default rules of German arbitration law, such as e.g. sections 1035 or 1042 of the ZPO will apply (OLG Munich, 6.8.2015, 34 Sch 3/15, BeckRS 2016, 4080; OLG Karlsruhe, 28.2.2012, NJOZ 2012, 809).

However, there are limits to this arbitration-friendly approach. If the parties agree on a forum selection clause in favour of the state courts and merely state their wish to agree also on arbitration, courts may declare that the parties’ intentions to be bound by arbitration are not clear (e.g. OLG Munich, 13.7.2017, BeckRS 2017, 117774).

German courts also apply the rules of contract interpretation pursuant to sections 133 and 157 BGB if the parties have not unambiguously designated the arbitration institution in their arbitration clause. The regional court of Berlin had to decide on the validity of a clause which referred to the rules “ […] of the German Chamber of Commerce […]”). In Germany, several “German Chambers of Commerce” exist. The court, however, upheld the clause as the parties’ intentions to arbitrate and to exclude the state courts as dispute-resolution forum could be clearly derived from the arbitration clause (“[a]ny dispute […] shall be finally settled by arbitration. […] The award shall be final and binding on the Parties.”) (KG Berlin, 3.9.2012, SchiedsVZ 2012, 337). The court determined the parties’ intentions as to which arbitration institution was agreed upon in accordance with sections 133 and 157 of the BGB. Based on the circumstances of the case it held that the rules of the DIS (Deutsche Institution für Schiedsgerichtsbarkei e.V.) were applicable.

Comment

A valid arbitration agreement according to section 1029(1) ZPO requires that the parties’ intentions to arbitrate and to exclude the jurisdiction of the state courts can be clearly and unambiguously derived from the agreement. Nonetheless, the decision on the validity of an arbitration clause is subject to the specific circumstances of the case. Therefore, in order to avoid time- and cost-consuming disputes on the validity of an arbitration clause, it is highly advisable to use model arbitration clauses of institutions or for ad hoc arbitration. In addition, the parties should agree on the place of arbitration, number of arbitrators and language of the arbitration in the arbitration clause.

For more information,please contact Mathias Wittinghofer, Partner, Catrice Gayer, Associate, or your usual Herbert Smith Freehills contact.