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German Federal Court of Justice decision on inoperativeness of pathological arbitration agreement
Practical Law UK Legal Update 1-508-8515 (Approx. 3 pages)
German Federal Court of Justice decision on inoperativeness of pathological arbitration agreement
by Practical Law
| Published on 06 Oct 2011 • Germany |
Stephan Wilske (Partner) and Claudia Krapfl (Associated Partner), Gleiss Lutz
In a decision dated 14 July 2011, but only recently published, the Federal Court of Justice confirmed that an arbitration agreement is not inoperative even if the parties erroneously agreed on an institutional arbitral tribunal which does not exist, as long as a supplementary interpretation of the contract demonstrates that the parties wanted to agree on arbitration.
Background
Section 1029 paragraph 1 of the German Code of Civil Procedure (Zivilprozessordnung, ZPO) reads as follows:
"(1) 'Arbitration agreement' is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not."
Section 1032 paragraph 1 ZPO reads as follows:
"(1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if the respondent raises an objection prior to the beginning of the oral hearing on the substance of the dispute, reject the action as inadmissible unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed."
Section 1040 paragraph 3 ZPO reads as follows:
"(3) If the arbitral tribunal considers that it has jurisdiction, it rules on a plea referred to in subsection 2 of this section in general by means of a preliminary ruling. In this case, any party may request, within one month after having received written notice of that ruling, the court to decide the matter. While such a request is pending, the arbitral tribunal may continue the arbitral proceedings and make an award."
Facts
The parties had concluded a contract on the sale of a law firm and had agreed that any dispute be decided by an "attorneys' arbitral tribunal", with the constitution of the arbitral tribunal and the conduct of the proceedings to be governed by the rules of the bar association of N.
A dispute arose between the parties and it turned out that there were no rules governing arbitration with the bar association of N. The claimant initiated ad hoc arbitration proceedings and appointed his arbitrator. Upon refusal of the respondents to appoint their arbitrator, the claimant applied to the Higher Regional Court of Cologne, which appointed an arbitrator on behalf of the respondents. These two arbitrators then agreed on a chairman.
The respondents argued that the arbitral tribunal did not have jurisdiction because the arbitration agreement was inoperative. In an interim decision, the arbitral tribunal confirmed its jurisdiction. The respondents thereafter requested the Higher Regional Court of Cologne to decide on the jurisdiction of the arbitral tribunal, under section 1040 paragraph 3 ZPO.
The Higher Regional Court of Cologne confirmed the jurisdiction of the arbitral tribunal, arguing that it was in line with the will of the parties to interpret the arbitration agreement to provide for ad hoc arbitration under the provisions of the ZPO.
The respondents appealed this decision to the Federal Court of Justice.
Decision
The Federal Court of Justice also confirmed the jurisdiction of the arbitral tribunal. The court explained that if parties erroneously agreed on an arbitral tribunal which does not exist, this does not immediately lead to the arbitration agreement being inoperative. Rather, arbitral tribunals and courts must review the arbitration agreement by way of supplementary contract interpretation, to establish whether there is a clear intention of the parties to have a dispute decided by arbitration. Since the Higher Regional Court of Cologne and the arbitral tribunal had reviewed the arbitration agreement in detail and had determined that it was in line with the will of the parties to resort to arbitration in case of any dispute, the arbitration agreement was held to be valid despite the fact that it referred to a non-existent institutional arbitral tribunal.
Comment
The decision by the Federal Court of Justice helpfully confirms that even if parties agree on a non-existent arbitral institution in their pathological arbitration agreement, this does not necessarily lead to the inoperativeness of the arbitration agreement. Rather, courts and arbitral tribunals must interpret the contract between the parties to determine whether the parties wanted to resort to arbitration.
The decision clearly shows that it is quite difficult for a respondent to object to arbitration on the basis that the arbitral institution agreed upon does not exist. German courts in such a situation are rather more likely to interpret the arbitration agreement to provide for ad hoc arbitration or arbitration with another institution, as long as it is possible to determine the will of the parties. In cases where this is not possible, however, courts will hold the arbitration agreement to be void for lack of certainty.