Landmark ruling of Germany's Constitutional Court: Arbitration Clause Violates Access to Justice

In a long-awaited landmark ruling in a case concerning the German ice-skating champion Claudia Pechstein, the German Federal Constitutional Court (Bundesverfassungsgericht) has found that the mandatory arbitration clause of the Court of Arbitration for Sport ("CAS") violated the athlete's constitutional right of access to justice pursuant to Art. 2(1) in conjunction with Art. 20(3) of the German federal constitution (Grundgesetz "GG").

Because the relevant CAS arbitration rules did not provide the right to have a public hearing, the Constitutional Court overturned the decision of the German Federal Court of Justice on the basis that it had not attributed sufficient weight to Ms. Pechstein's fundamental right of access to justice. The Constitutional Court also held that the German Federal Supreme Court's ruling fell short of complying with the procedural guarantees required by Art. 6 of the European Convention on Human Rights. Accordingly, the arbitration clause was held to be null and void.

This decision is important because whilst it demonstrates that the German courts are pro-arbitration, it nonetheless confirms that they will step in where necessary to safeguard the administration of justice.

The Facts

The ruling of the German Constitutional Court represents the latest episode in the Pechstein saga, which has lasted for over a decade now. In 2009, during the Ice-Skating world championship in Norway, the International Skating Union ("ISU") established that Pechstein's blood parameters were irregular. The ISU's disciplinary commission found the athlete guilty of illegal blood doping and banned her from professional competitions for two years. As a consequence, the National Olympic Committee for Germany excluded her from all organized practice and, most importantly, from the 2010 Winter Olympics in Vancouver.

As part of Ms. Pechstein's registration for the world championship in 2009, she had submitted to the exclusive jurisdiction of the CAS by entering into an arbitration agreement. The athlete therefore instituted CAS arbitration proceedings to challenge the decisions banning her from professional ice-skating events and from the Olympics. During the course of the arbitration, Ms. Pechstein requested that the oral hearing be public. However, since the arbitration rules in force at that time did not provide for the possibility of conducting the hearing in public, Ms. Pechstein's request was rejected.

On 25 November 2009, the CAS dismissed Ms. Pechstein's complaint, finding that her blood parameters could only be explained by doping. Shortly thereafter, on 7 December 2009, the athlete secured an expert opinion confirming that her blood parameters resulted from a hereditary anomaly of her blood. Ms. Pechstein therefore filed a complaint with the Swiss Federal Supreme Court. Her complaint was dismissed on 28 September 2010 on the grounds that she had not presented any valid reason for the tardiness of the expert opinion.

Having lost in Switzerland, Ms. Pechstein filed a court action with the regional court in Munich.

Previous German decisions

Ms. Pechstein requested a declaration that the two-year ban was unlawful and sought monetary compensation for the damages arising from her exclusion from various international competitions. The court of first instance rejected her complaint. Whilst the first instance decision with respect to the declaration was upheld on appeal, the higher regional court of Munich ruled that the remainder of the claim was admissible because the arbitration agreement was invalid, as it failed to strike a fair balance between the legitimate interests of the professional athlete on the one hand and of the sports associations on the other. Following an appeal on points of law, the German Federal Supreme Court (Bundesgerichtshof) vacated this decision and dismissed the claim altogether. It ruled that the claim was inadmissible in view of the arbitration agreement. Further, it reasoned that the arbitration agreement had been validly executed as it does not constitute an abuse of market power to make participation in international sports competitions conditional on the execution of an arbitration agreement, not least because the CAS arbitration rules provide for sufficient procedural safeguards to protect the professional athlete's rights.

In the meantime, besides having instituted litigation in Germany, Ms. Pechstein had also filed a complaint with the European Court of Human Rights against the rulings of the Swiss courts. In a ruling of 2 October 2018, it held that the arbitration agreement did not violate Ms. Pechstein's rights arising from Art. 6 European Convention on Human Rights ("ECHR"), as the CAS arbitration rules catered for all procedural guarantees required by Art. 6 ECHR, and the athlete had failed to establish that the CAS lacked independence or impartiality due to the manner it was constituted. While Ms. Pechstein's complaint was ultimately unsuccessful, the court nonetheless did find that her procedural rights arising from Art. 6 ECHR had been infringed by denying her an oral hearing in public.

The Ruling of the German Federal Constitutional Court

In her complaint, Ms. Pechstein argued that the German judiciary had denied her the constitutional right of access to justice pursuant to Art. 2(1) in conjunction with Art. 20(3) GG. The German Federal Constitutional Court upheld the argument in that the German Federal Supreme Court's ruling failed to give due regard to Ms. Pechstein's right to have a public hearing on matters concerning her professional existence.

In weighing Ms. Pechstein's constitutional right to have access to justice against the principle of freedom of contract and the autonomy of sports associations, the Constitutional Court concluded the athlete's rights had been violated by the decision of the German Federal Supreme Court.

As a first step of its analysis, the Constitutional Court highlighted the critical importance of effective access to justice in promoting the rule of law. However, the court reasoned that agreeing to arbitration is not inconsistent with principle of access to justice. Rather, choosing arbitration to resolve a dispute is a corollary of the principle of freedom of contracts, which the German constitution guarantees in Art. 2(1) and 12(1) GG.

Having established these points, with respect to the field of sports, the Constitutional Court observed that private autonomy is not unlimited. The right to opt-out of the state court system is qualified by the fundamental right of access to justice. According to the court, the state permits its citizens to choose a private form of binding dispute settlement to the extent that such mechanism still provides for effective access to justice and lives up to the minimum standard of procedural safeguards. Whether or not this minimum standard is satisfied must be assessed when applying the laws governing the set-aside or the recognition and enforcement of awards, and the validity of an arbitration agreement. Moreover, in a case where there is an imbalance of power between the parties of the arbitration agreement, it is for the law to ensure that the fundamental rights of the weaker party are duly protected.

The Constitutional Court also held that the German Federal Supreme Court's ruling fell short of complying with the procedural guarantees required by Art. 6 ECHR. Whilst the German Federal Court of Justice took into account that Ms. Pechstein was factually obliged to enter into the CAS arbitration agreement in order to exercise her profession as a professional athlete, and the arbitration proceeding therefore had to comply with Art 6 ECHR, it failed to acknowledge that the European Court of Human Rights had found that the arbitration procedure violated Ms. Pechstein's rights pursuant to Art. 6 ECHR by failing to provide for a public hearing.

As a result of the violation of Ms Pechstein's fundamental right of access to justice and her rights arising from Art. 6 ECHR, the Constitutional Court held that the arbitration agreement was null and void. The Constitutional Court remanded the case to the higher regional court of Munich for further consideration.

Comment

In accepting, in principle, arbitration as a means to resolve disputes concerning the constitutional right to exercise a professional athlete's profession, the German Federal Constitutional Court has confirmed that the German legal system remains pro-arbitration. However,  where there is a risk that one party's superior bargaining powers may create a barrier to the administration of justice, ,the law must step in to restore the equilibrium of the bargain.

Given that the CAS rules currently in force already foresee the possibility of holding oral hearings in public, the practical impact of this decision on future sports arbitration is not clear.

However, situations which are characterized by a structural imbalance of the bargaining power among the parties also feature outside the world of sports arbitration. It remains to be seen if the German Federal Constitutional Court's ruling in the Pechstein case might serve as a foothold to challenge the validity of an arbitration clause in other contexts, in particular by parties who may have had no choice but to accept an arbitration agreement.

For more information, please contact Patricia Nacimiento, Partner, Alessandro Covi, Senior Advisor, Syliva Schenk, External Advisor, or your usual Herbert Smith Freehills contact.