Effective arbitration agreement despite exclusion of German law on General Terms and Conditions

The German control of General Terms and Conditions is often criticized as a “locational disadvantage” in the B2B sector. Respectively, companies try to escape its applicability. In cross-border transactions, such an escape can be achieved by choosing a different legal system as the applicable law. However, the question of whether German law can also be agreed selectively, i.e. without the strict German control of general terms and conditions, is controversial. The Federal Court of Justice had to answer this question - and shed (some) light on the matter.

Facts

The decision of the Federal Court of Justice (BGH) is based on the following facts: The parties concluded a contract for the provision of various work services. Among other things, the contract contained provisions on a contractual penalty in the event of a delay in delivery, arbitration proceedings in the event of disputes, the choice of German law as the applicable law and an exclusion of the German general terms and conditions control.

The applicant filed an arbitration claim for payment after the wages were not paid. In the (arbitration) counterclaim, the respondent asserted its own claims, including a contractual penalty to be paid by the applicant. The applicant considered the claim for a contractual penalty to be unjustified, as the contractual penalty violated the German law on general terms and conditions. However, as the arbitration tribunal was not required to carry out such a review of the general terms and conditions under the contract, the applicant claimed it was threatened with an unlawful claim, which would render the arbitration clause invalid due to a breach of German law.

For this reason, the applicant filed an application with the Court of Appeal in Berlin (KG Berlin) for a declaration that the arbitration proceedings were inadmissible. The applicant appealed to the BGH against the KG's decision to reject the application.

The decision of the BGH, decision of January 9, 2025 - I ZB 48/24

The BGH dismissed the appeal with reference to the following legal arguments:

Firstly, the conclusion of the arbitration agreement, which forms the basis for the initiation of arbitration proceedings and establishes the jurisdiction of the chosen arbitration tribunal, must be assessed in accordance with German law. Under German law, the arbitration clause had been validly agreed.

The clause excluding the application of German general terms and conditions law did not change this result. Even if this clause were ineffective under the German law on general terms and conditions, as it would prevent a review of general terms and conditions, this would have no influence on the separate arbitration agreement and thus the initiation of arbitration proceedings. The exclusion of German law on general terms and conditions is rather a question of the subsequent recognition and enforcement of an arbitral award, which is mandatory in Germany. In such a court proceeding, the respective state court has then to examine whether the exclusion of German law on general terms and conditions in the individual case leads to a violation of the ‘orde public’ - i.e. whether it violates fundamental principles of German law. However, the exclusion of German law on general terms and conditions per se is not such a violation, as such a violation only depends on whether the result of the arbitration award itself is unacceptable.

Practical tip

Practitioners have repeatedly been confronted with the rapid classification and strict examination of the content of general terms and conditions under German law. In many cases, the standard applied by the courts when reviewing pre-formulated clauses - even in the B2B sector - is considered to be not appropriate in practice. In many cases, the solution is to “escape” to more liberal legal systems, such as Swiss law. The fact that this often leads to submitting to an unfamiliar legal system has so far been accepted as a necessary evil.

In order to avoid losing one's home advantage in international commercial contracts, there have been considerations for a long time to agree on the choice of German law by arbitration agreement, while at the same time excluding the control of general terms and conditions. Arbitration proceedings offer a good alternative to state proceedings due to their confidentiality, flexibility and faster procedure (there is no appeal process) - especially in the case of high amounts in dispute, where the higher costs are put into perspective. In addition, the enforcement of arbitration awards is often easier internationally, as 172 countries have now signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and have thus committed to the recognition and enforcement of arbitration awards in their own countries. A further advantage is that the parties can in principle determine the “applicable legal provisions” themselves. However, the extent of this right of determination is highly disputed among legal experts. In this respect, the decision of the BGH reveals interesting tendencies:

On the one hand, the BGH confirms that an arbitration clause is an agreement to be considered separately, the effectiveness of which does not depend on other, separate contractual components (cf. on the requirements for an arbitration agreement already here). This is to be welcomed, but is not particularly surprising.

On the other hand, a slight tendency in favor of the permissibility of selective choice of law clauses can be seen: For example, the BGH states in its reasoning that the (state) court deciding on the recognition and enforcement of the arbitration award after the conclusion of arbitration proceedings only has to carry out a review of the result. The decisive factor here is whether the judgment in the individual case “can no longer be understood as an expression of contractual self-determination or whether a contractual provision leads to contractual consequences that are no longer acceptable.” Unfortunately, the BGH does not comment on the standard to be applied here. However, it would be unreasonable to measure individual clauses of a contract against the standard of German general terms and conditions control if the parties have precisely expressed that they do not wish to accept its applicability. Rather, it would be more logical to set the limit of what is permissible at a higher level in such cases. The following approach would be legally feasible: German law also sets limits for individual agreements - e.g. in the case of immoral contracts or clauses that violate the principle of good faith.

So where do we go from here? Anyone who contractually agrees arbitration clauses and selectively agrees German law without control of general terms and conditions has to continue to expect that the clause will be inadmissible in individual cases. There is then a risk that the law of a foreign country will be unintentionally applied to a cross-border contract. This risk would not exist in the case of exclusively national matters. However, it is unclear whether the considerations of the BGH can be transferred to national situations. It therefore remains the case that when drafting contracts, attention should be paid to which agreements are made in individual cases - at least if the willingness to take risks is less pronounced.