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Requirements for arbitration clauses in partnership agreements

Arbitration proceedings are popular for shareholder disputes because, unlike proceedings before state courts, arbitration proceedings do not take place in public. However, arbitration clauses in partnership agreements of stock corporations (AGs) and limited liability companies (GmbHs) must meet special requirements. According to a recent decision of the German Federal Court of Justice (Bundesgerichtshof - "BGH"), these requirements also apply to partnerships (OHG or KG) under certain conditions.

Arbitration clauses for corporations

In its decisions "Arbitrability I - III", the BGH developed principles for arbitration clauses in the articles of association of corporations, i.e. in particular GmbHs and AGs, which come into play if the arbitration clause also covers disputes over defects in resolutions. Disputes over defects in resolutions include all disputes over the validity of shareholders' resolutions or resolutions of other corporate bodies.

For such arbitration clauses to be effective, several requirements must be met, namely (a) each shareholder must be informed of the initiation and progress of the arbitration proceedings and therefore have the opportunity to join the proceedings, (b) each shareholder must be able to participate in the selection and appointment of the arbitrators, and (c) all resolution defect disputes concerning the same facts must be concentrated before one arbitral tribunal. If these minimum requirements are not met, the clause is immoral and therefore void. The idea behind this is that all shareholders must have the opportunity to participate in arbitration decisions that are binding for them.

Arbitration clauses for partnerships

Already in the "Arbitrability III" decision of April 6, 2017, the BGH had stated in one sentence that the minimum requirements established for corporations "should in principle also apply to partnerships, unless a deviation is warranted." This generalized statement led to an outcry in literature. Critics complained that the legal concepts of the law on defects in resolutions differed completely between corporations and partnerships and that the need for protection of the shareholders, which the Federal Court of Justice uses to justify the consequence of invalidity under Section 138 of the German Civil Code, did not exist at all in partnerships. This is because, in the case of a partnership, the partners are in any case parties to an action for a defect in a resolution and - unlike in the case of corporations - not the company. A transfer of the principles of corporations to partnerships is at most conceivable if the partnership agreement of a partnership exceptionally replicates the resolution defect law of corporations.

Now the BGH has clarified that it is only in precisely these cases that the minimum requirements it has developed for arbitration clauses also apply to partnerships. There is no reason to do so if the partnership agreement either does not regulate the contestation of resolutions at all or regulates it in accordance with the statutory concept. Arbitration clauses in partnership agreements therefore only have to meet the minimum requirements if they contain provisions on the contestation of resolutions that correspond to the law on defective resolutions in corporations. In practice, this is only the case for a small number of partnerships.

In the future, things will look different. This is because a fundamental reform of partnership law will come into force on January 1, 2024. According to this reform, the action to contest a resolution against the company, which has so far only been provided for in the case of corporations, will also become the statutory rule for partnerships. By then at the latest, the minimum requirements for arbitration clauses should in principle also apply to partnerships in the same way.

It remains unclear whether a comprehensive arbitration clause in the partnership agreement which does not meet the minimum requirements is only invalid with regard to disputes over defects in resolutions or as a whole. In the case of partnerships, the BGH now expressly assumes only the partial invalidity of such an arbitration clause. The arbitration clause therefore remains effective for all shareholder disputes that are not disputes over defects in resolutions. Whether this also applies to corporations is at least questionable. In contrast to the subjective interpretation generally required in the case of partnerships, the articles of association of corporations are generally to be interpreted objectively. The BGH could therefore come to   a different interpretation result even if the wording of the articles of association is identical or similar.

Conclusion

In conclusion, it is advisable to adapt arbitration clauses in partnership agreements to the minimum requirements developed by the BGH. This applies not only to corporations, but now also expressly to partnerships. The differentiation made by the BGH is likely to become obsolete anyway when the new partnership law comes into force on January 1, 2024, so it makes sense to take the "Arbitration IV" decision as an opportunity to take action now.

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