The German Federal Court of Justice (BGH), in its decision of 9 January 2025 (docket number I ZB 48/24[1]), dealt with two distinctive features of German arbitration law and German civil law, namely Section 1032(2) of the German Code of Civil Procedure (“ZPO“) and Sections 305 et seq. of the German Civil Code (“BGB”).
Section 1032(2) ZPO reads: “Prior to the composition of the arbitral tribunal, an application may be made to the court to declare whether or not arbitration is admissible.” Section 1032(2) ZPO is a particularity of German arbitration law. Germany has adopted the UNCITRAL Model Law 1985 with only a few amendments. Section 1032(2) ZPO is one of them. The policy behind the provision is to allow a party to obtain an early resolution from the state courts in Germany on the question of the validity of the arbitration agreement.
Sections 305 et seq. BGB contain Germany’s law on unfair terms and conditions. In essence, under German law, terms and conditions are invalid if they contain a provision that is not compatible with essential principles of the statutory provision from which it deviates or if the provision limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardized. To the regret of many commercial lawyers in Germany, the German courts apply these rules even in the B2B-context.
The German Federal Court of Justice answered two questions with regard to these rules: (i) Can a claimant that has initiated arbitration bring a motion pursuant to Section 1032(2) ZPO and request the declaration that arbitration is inadmissible? (ii) Would it render the arbitration agreement invalid if the parties to a contract agree on the applicability of German law, but under the exclusion of Sections 305 et seq. BGB, i.e, the rules on unfair terms and conditions?
Factual Background
In September 2020, the parties concluded a construction contract pursuant to which the claimant undertook to construct a part of a solar car port in the Netherlands. The construction contract included an arbitration agreement in favour of the German Arbitration Institute (DIS). The seat of arbitration was in Germany. What is more, the construction contract included a choice of law agreement in favour of German law, but expressly excluding the applicability of the German law on unfair terms and conditions (i.e. Sections 305 et seq. BGB).
In July 2022, the claimant initiated arbitration proceedings to claim payment for services rendered, while the respondent counterclaimed for damages due to defects, delays and penalties.
Before the arbitration tribunal was formed the claimant filed a motion for inadmissibility of the arbitration proceedings before a state court, i.e. the Higher Regional Court of Berlin (KG), pursuant to Section 1032(2) ZPO.
The claimant argued that the underlying construction contract contained certain provisions that violated German law on unfair terms and conditions, namely the provisions on penalties for delay. The claimant was concerned that the choice of law agreement would prevent the arbitral tribunal from reviewing the validity of the penalty clauses under the German law on general terms and conditions, potentially leading to the enforcement of an invalid contractual provision. Thus, the claimant contended that the arbitration clause itself was invalid due to the exclusion of the judicial review of general terms and conditions.
The Higher Regional Court of Berlin dismissed the claimant’s motion, leading to an appeal before the German Federal Court of Justice.
Decision of the court
The Federal Court of Justice considered the claimant’s motion admissible but without merit.
First, the Court held that the claimant’s motion to the state court for a declaration of the inadmissibility of the arbitration proceedings was admissible under Section 1032(2) ZPO. This provision allows parties to seek a determination from the state court on the admissibility of arbitration proceedings before the arbitration tribunal is constituted. The Court rejected the argument that the initiation of arbitration proceedings precluded the claimant from seeking a state court decision. The Court emphasized that the claimant’s actions did not constitute a waiver of their right to challenge the arbitration proceedings in state court.
Second, the Court found the claimant’s appeal and motion for a declaration of the inadmissibility of the arbitration proceedings to be without merit.
The Court determined that the applicable law to the arbitration agreement was German law. Since the parties did not choose a law governing the arbitration agreement, the Court applied German law as the law of the seat of arbitration.
The interesting question then was whether the arbitration clause could be invalid due to the exclusion of the judicial review of general terms and conditions in the choice of law agreement. The Court reiterated that an arbitration clause is generally independent of other contractual provisions such as the choice of law agreement. That means even if the agreement to exclude the applicability of the German law on unfair terms and conditions was invalid, this would not render the arbitration agreement invalid. It is up to the arbitral tribunal to review the validity of the choice of law agreement and to rule on the penalty claims brought by way of a counterclaim. The Court strictly separated the scope of its review of the arbitration agreement under Section 1032(2) ZPO from the arbitral tribunal’s jurisdiction to decide on the validity of the contractual provisions.
As a result the Court upheld the validity of the arbitration agreement and did not declare the arbitrations proceedings inadmissible.
Conclusion and Outlook
The Federal Court of Justice answered “Yes” and “No” to the two questions identified above. Yes, a claimant in the arbitration may still bring an application pursuant to Section 1032(2) ZPO to declare an arbitration inadmissible. No, the exclusion of the German law on unfair terms and conditions does not render an arbitration agreement invalid.
The question that the Federal Court of Justice has not answered is whether the choice of law agreement in the present case and the exclusion of the German law on unfair terms and conditions will be enforceable or whether this could lead to a violation of public policy so that an arbitral award would be unenforceable.
[1] Decision of 9 January 2025, I ZB 48/24, https://jusmundi.com/en/document/decision/de-claimant-v-respondent-beschluss-des-bundesgerichtshofs-i-zb-48-24-thursday-9th-january-2025.
