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Federal Court of Justice decision on formal requirements for an enforceable arbitration agreement
Practical Law UK Legal Update Case Report 4-507-1311 (Approx. 3 pages)
Federal Court of Justice decision on formal requirements for an enforceable arbitration agreement
by Practical Law
| Published on 04 Aug 2011 • Germany |
Stephan Wilske (Partner) and Claudia Krapfl (Associated Partner), Gleiss Lutz
In a decision dated 19 May 2011, but only recently published, the Federal Court of Justice explained that the formal requirements for arbitration agreements with consumers, contained in section 1031 paragraph 5 of the German Code of Civil Procedure, are mandatory. The court held that if the requirements within that section are not met and the defendant consumer purports to rely on the arbitration agreement, this will not cure the non-compliance with the formal requirements. Rather, the arbitration agreement is invalid and the state courts are competent to decide on the dispute.
Background
Section 1031 paragraph 5 of the German Code of Civil Procedure (Zivilprozessordnung, ZPO) reads as follows:
"Arbitration agreements to which a consumer is a party must be contained in a document which has been personally signed by the parties. The written form pursuant to sentence 1 may be substituted by electronic form pursuant to section 126a of the Civil Code ("Bürgerliches Gesetzbuch – BGB"). No agreements other than those referring to the arbitral proceedings may be contained in such a document or electronic document; this shall not apply in the case of a notarial certification."
Facts
The plaintiff brought an action in a local German court regarding fees due under a training contract for stage dance. The training contract contained an arbitration agreement. The defendant consumer raised an objection, arguing that the dispute fell within the arbitration agreement contained within the contract. The local German court held the arbitration agreement to be invalid and granted the claim. However, on appeal, a German regional court rejected the action as inadmissible on the basis that there was an arbitration agreement.
Decision
On appeal to the German Federal Court of Justice, on the points of law, the court held that the arbitration agreement was invalid because it did not fulfil the formal requirements of section 1031 paragraph 5 ZPO. The court explained that this section was meant to protect consumers, but was not merely to be observed upon objection of the consumer. The court held that if the requirements of the section are not fulfilled, the arbitration agreement will always be invalid.
This means that in cases such as this one, where the party that provided the arbitration agreement wishes to rely on its invalidity, and the consumer objects to court proceedings on the basis of the arbitration agreement, the courts must observe the violation of section 1031 paragraph 5 ZPO ex officio. This is because the formal requirements are also meant to provide legal certainty and define the limits of the jurisdiction of arbitral tribunals and courts as clearly as possible. The court saw this to be in the overriding public interest.