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Munich Higher Regional Court implements pathological arbitration clause
Practical Law UK Legal Update 9-520-7128 (Approx. 4 pages)
Munich Higher Regional Court implements pathological arbitration clause
by Practical Law
| Published on 01 Aug 2012 • Germany |
Stephan Wilske (Partner) and Stephan T. Meyer (Associated Partner), Gleiss Lutz
In a decision dated 29 March 2012, but only recently published, the Higher Regional Court of Munich considered the validity and enforcement of an arbitration agreement contained in general trade terms and conditions which the parties had modified in a convoluted manner. Ultimately, the court was able to determine the parties’ intention and correctly decided to implement the clause even though one party alleged a lack of transparency.
Background
Section 1031(3) of the German Code of Civil Procedure (Zivilprozessordnung – ZPO) provides:
"The reference in a contract […] to a document containing an arbitration clause constitutes an arbitration agreement provided that the reference is such as to make that clause part of the contract."
Section 1(1) of the Unified Terms of the German Grain Trade (Unified Terms) (Einheits-bedingungen im deutschen Getreidehandel) provides that all disputes shall be decided by an arbitral tribunal instituted at a German commodity exchange.
Section 1(3) of the Unified Terms provides:
"The arbitral tribunal agreed by the parties shall be competent. In the absence of an agreement, the following shall apply:
a) if the parties belong to the same [commodity exchange], the arbitral tribunal of that institution shall be competent;
b) if the parties belong to several [commodity exchanges], the seller shall have the right to designate the arbitral tribunal of one of these institutions;
c) in all other cases, the seller shall have the right to designate the arbitral tribunal of a [commodity exchange].
[…]"
Facts
The parties had entered into a farming contract whereby the respondent was to deliver about two tons of spelt seeds to the applicant, who in turn promised to plant the seeds on 12 hectares of land, harvest the grain and deliver it to the respondent in exchange for money. The applicant never delivered the harvested grain, causing the respondent to commence arbitration for payment of EUR 8,279.60.
The farming contract did not contain an arbitration clause but it referred to:
"The Unified Terms of the German Grain Trade as well as the arbitral tribunal of the purchaser shall apply."
The applicant asked the Higher Regional Court of Munich to declare the arbitration brought by the respondent inadmissible on the grounds that, among other things, the contract did not contain an arbitration agreement and that the reference to the Unified Terms was not sufficiently transparent. The applicant argued that the lack of transparency resulted in particular from the fact that both parties could be considered as the purchaser, either of the seeds or of the harvested grain.
Decision
The court held the arbitration clause to be effective and dismissed the applicant's request. Relying on section 1031(3) ZPO, the court quickly determined that the contractual reference to the Unified Terms was sufficient to incorporate the arbitration clause set forth in their section 1(1).
The applicant could not rely on European legislation requiring consumer contracts to be drafted in "plain, intelligible language" (Article 5 of Council Directive 93/13/EEC) since even a small farmer is not considered a consumer but a businessperson. However, the court still had to address the transparency requirement because, under German law, it also applies to standard terms and conditions employed in contracts between businesses and because the court apparently considered the relevant portions of the contract to contain standard terms and conditions.
Nevertheless, the court partly avoided the question of transparency. While it quickly found the reference to the Unified Terms as such to be clear and transparent, it did not specifically address the question of whether the designation of the "arbitral tribunal of the purchaser" was also sufficiently transparent. The court merely determined that it was the respondent who must be considered the purchaser because the obligation to deliver the harvested grain was more prominent than the obligation to deliver the seeds, and also because the part of the contract dealing with the former obligation also contained the reference to the Unified Terms.
Having also rejected a challenge of the arbitration agreement based on fraud, the court held the arbitration to be admissible and dismissed the applicant's request.
Comment
The court's decision is not surprising: German courts have a general tendency to uphold arbitration agreements wherever the will of the parties can be determined.
Here, the court had to interpret a standard-term arbitration clause which was incorporated by reference and which was indeed partly modified in that reference. After all, the parties had decided to not determine the competent arbitral tribunal pursuant to the mechanism set forth in section 1(3) of the Unified Terms but had instead stipulated that the "arbitral tribunal of the purchaser" should be competent.
It certainly made sense to regard the respondent as purchaser since it acquired the harvested grain and was the only party with a payment obligation. But some might say that the court should also have addressed the issue, apparently not raised by the parties, of whether the agreement specifying the "arbitral tribunal of the purchaser" was precise enough to be enforceable as part of an arbitration agreement. This issue is independent of the transparency requirement applied to standard terms and conditions.
Again, German law is quite liberal in this respect. As long as the parties clearly submit certain disputes to the exclusive jurisdiction of an arbitral tribunal, the arbitration agreement is valid. Even if the parties mistakenly agree on a non-existent arbitral institution, the courts will attempt to designate an alternate institution through supplementary interpretation of the arbitration agreement (ergänzende Vertragsauslegung).
In the present case, the wording "arbitral tribunal of the purchaser" read in conjunction with section 1(3) of the Unified Terms revealed the will of the parties to submit the dispute to the arbitral tribunal of the commodity exchange to which the respondent belonged. Even though this result was not obvious from the contract and the Unified Terms on their face, the court rightly respected and executed the intention of the parties.