International Contracts: Arbitration Agreement and CISG
Where no formal arbitration agreement is made, but arbitration clauses are integrated, for example, in general terms and conditions, it is important that the general terms and conditions are effectively included. In the case of international contracts, the so-called UN Convention on Contracts for the International Sale of Goods (“CISG”) must be observed in particular. The German Federal Court of Justice ("BGH") commented on these questions in its ruling of November 29, 2020.
Brief summary of the facts
The BGH decision was based on the following facts: A company based in Germany orders ground mace from a spice supplier based in the Netherlands. In the context of the orders, the seller (hereinafter: the defendant) sent the buyer (hereinafter: the plaintiff) confirmation letters in each case in which it referred, among other things, to the terms and conditions of the Dutch Spice Trade Association. These terms and conditions also contained an arbitration clause. The confirmation letters were not signed by the plaintiff. Nor were the association conditions (to which the letter referred) attached to such letters.
When the plaintiff sought recourse from the defendant before the district court for allegedly contaminated mace, the defendant invoked the arbitration agreement, objecting that the district court was not competent in this case as the parties agreed on an arbitration proceeding. The district court then dismissed the action. The Court of Appeal, on the other hand, held that the arbitration defense was unfounded. The defendant challenged this on appeal.
Brief summary of the reasons for the decision
The appeal was unsuccessful. The arbitration defense was unfounded due to the lack of an effective arbitration agreement. There is no signed arbitration agreement. Furthermore, the arbitration agreement was not otherwise effectively included in the contract, taking into account the so-called most-favored-nation principle. This states that an arbitration agreement can be effective despite non-compliance with the form (signed agreement) if it has been validly agreed in accordance with the national law or treaties of the country in which it is invoked. With reference to Section 1031 of the Code of Civil Procedure (ZPO), this was to be assessed according to substantive law. German law, including CISG ("United Nations Convention on Contracts for the International Sale of Goods" or UN Sales Convention), was applicable as substantive law in this case.
The BGH first commented on the disputed question of whether and to what extent the provisions of the CISG apply to arbitration agreements at all and affirmed their applicability. However, even under application of the CISG, the arbitration agreement had not been effectively included, in particular, the terms and conditions of the association had not been made available to the buyer, nor had the buyer had any duty to inquire.
Practical advice
In the above-mentioned ruling, the BGH dealt intensively with two elements which must regularly be taken into account when drafting international contracts: the effective inclusion of general terms and conditions (GTCs) in accordance with the provisions of the CISG and the agreement of arbitration clauses and thus the exclusion of ordinary jurisdiction.
On the inclusion of general terms and conditions under the CISG: As an international treaty, the CISG standardizes legal provisions that are authoritative for the international sale of goods. It applies to international sales of goods, provided that the parties have their respective registered offices in countries that are contracting states to the Convention. However, the CISG does not contain specific rules for the incorporation of standard terms and conditions into the contract. It must therefore be determined by interpretation whether the standard terms and conditions (including arbitration agreement, if applicable) have been effectively incorporated. In this regard, the negotiations of the parties, existing practices and international customs must be considered. It should be noted that German case law tends to impose strict requirements on the effective incorporation of GTCs in international contracts and, in particular, does not allow the possibility of reasonable notice under the German Civil Code (BGB) to suffice in cases of doubt. In order to ensure effective incorporation here, the GTC should (i) be sent and (ii) their receipt and validity confirmed by the other contracting party.
If the parties wish to exclude the CISG, it should also be noted that according to the prevailing view - and this is also confirmed by the BGH in the present ruling - the conclusion of the exclusion agreement is also governed by the CISG.
On arbitration agreements: By means of an arbitration agreement, the parties may stipulate that legal disputes between them shall be settled with binding effect by an arbitral tribunal determined by them. The jurisdiction of state courts is thus excluded. It is important that arbitration clauses are formulated clearly and unambiguously. In particular, the competent arbitral institution, the language of the proceedings and the place of arbitration should be specified.
Before concluding international contracts, not only the validity of the CISG as substantive applicable law but also the agreement of an arbitration clause should be examined and the respective advantages and disadvantages considered.
8th March 2021