Section 1031 of the German Code of Civil Procedure (Zivilprozessordnung, ZPO) deals with the required form of an arbitration agreement and provides, among other things, that the form requirement is fulfilled if the arbitration agreement is contained in a document transmitted from one party to the other party and – if no objection is raised in due time – the content of such document is considered to be part of the contract in accordance with common usage.

Article II of the New York Convention imposes an obligation on contracting states to recognise an arbitration agreement and defines the term "written agreement".

Article V of the New York Convention provides the grounds on which the recognition and enforcement of arbitral awards may be refused.

Article VII, paragraph 1 of the New York Convention provides that its provisions shall not "deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law of the treaties of the country where such award is sought to be relied upon."

The claimant applied for a foreign arbitral award to be declared enforceable in Germany. Under the award, the respondent was held liable to pay compensation on account of the non-fulfilment of a purchase agreement for the delivery of cotton. The arbitration agreement relied upon by the claimant was contained only in a confirmation letter between merchants.

The Higher Regional Court of Frankfurt approved the request since it held that there was a valid arbitration agreement and the other party could not prove any grounds for resisting enforcement, as specified in Article V of the New York Convention. It found that although it was accepted that the arbitration agreement between the parties did not meet the formal requirements of Article II of the New York Convention, the most-favoured-nation principle, within the meaning of Article VII paragraph 1 of the New York Convention, had to be considered. Therefore, the claimant could invoke the more lenient German formal requirements based on section 1031, paragraph 2 ZPO. As such, an arbitration agreement contained in a confirmation letter between merchants could fulfil the written form requirement, provided that the contents of the confirmation letter became binding according to prevailing practice. The respondent appealed the decision.

The Federal Court of Justice confirmed the decision of the Higher Regional Court of Frankfurt. It held that the most-favoured-nation principle, based on Article VII paragraph 1 of the New York Convention, made it possible to rely on the more favourable German law instead of the formal requirements of Article II of the New York Convention. The court noted, however, that section 1061 paragraph 1 ZPO provided that foreign arbitral awards were to be recognised and enforced solely on the basis of the New York Convention and not on the basis of the German domestic enforcement provisions. In the view of the court, this raised the question of whether the reference in Article VII of the New York Convention to the more favourable national law would, therefore, come to nothing in this regard. However, as this would render the most-favoured-nation principle based on Article VII paragraph 1 of the New York Convention meaningless, and would result in the enforcement of foreign awards being treated in a less favourable way, the court held that Article II of the New York Convention was to be interpreted as setting the maximum standard, which did not preclude any reliance on the more favourable German law.

The court noted that this interpretation was much more in line with the objective of the New York Convention, namely to foster the international recognition and enforcement of arbitral awards. Moreover, since 1958 many jurisdictions have eased the formal requirements for the validity of an arbitration agreement, as compared to Article II of the New York Convention.

The court also referred to a recommendation of the United Nations Commission on International Trade Law (UNCITRAL) regarding the interpretation of Articles II (paragraph 2) and VII (paragraph 1) of the New York Convention (General Assembly Resolution 61/33 dated 4 December 2006, Official Records Sixty-first session, Supplement No. 17 A/61/17, Annex II) and the revision of Article 7 of the UNCITRAL Model Law on International Commercial Arbitration with the aim of relaxing the formal requirements.

The court therefore concluded that international law suggested a broad interpretation of the most-favoured-nation principle, and that Article VII of the New York Convention allowed reliance on the more favourable national law.

As a consequence, the court held that as long as an arbitration agreement fulfilled the formal requirements of section 1031 ZPO – regardless of whether the arbitration agreement is valid under the law of the seat of the arbitration – Article V(1)(a) of the New York Convention cannot be invoked for the purpose of resisting enforcement.

This decision helpfully clarifies that a foreign award based on an arbitration agreement contained in a confirmation letter between merchants is enforceable in Germany, even though the formal requirements of Article II of the New York Convention are not met, and points to a trend in relaxing the formal requirements under Article II, as referred to in UNCITRAL's recommendations and the revision of its Model Law.