INTRODUCTION

The extent to which international arbitrators should respect the domestic case law of the jurisdiction whose law is applicable to the contract has become a matter of great concern in arbitrations involving contracts governed by German law. In fact, it is fair to assume that this issue arises in a large number of these arbitrations since many, if not most, contracts concluded in international business are based in whole or in part on standard terms (Allgemeine Geschäftsbedingungen or AGBs).1 Very often, such AGBs constitute the heart of the warranties and liabilities system to which the parties have agreed in their contract and which constitute the subject matter of their dispute before the arbitral tribunal. In these cases, the German Law on Standard Terms (AGB-Law), contained in §§ 305-310 of the German Civil Code (Bürgerliches Gesetzbuch, BGB), invalidates a great number of those AGBs, provided the law is interpreted in line with the long-standing and restrictive case law (ständige Rechtsprechung) of the Federal Court of Justice (Bundesgerichtshof, BGH).2 Whether an arbitral tribunal should follow or deviate from that case law in deciding the validity of AGBs becomes a highly contentious issue in those arbitrations.

1. EXAMPLES FROM ARBITRAL PRACTICE

a. ICC arbitration No. 10279

The interim award of January 2001 by the arbitral tribunal in ICC arbitration No. 10279 illustrates the problem and the significance of this issue in arbitrations arising out of contracts governed by German law.3

i. The Case

A German supplier and a foreign buyer concluded a contract for the delivery of a complex industrial machine which was later the subject of their arbitration. The managers who concluded the contract on behalf of their companies were experienced businesspeople. The contract was governed by German law and by the ‘ECE General Conditions for the Supply of Plant and Machinery for Export (LW 188)’,4 which had been attached to the seller’s confirmation of order. The ECE Conditions qualified as AGB and had been validly incorporated into the contract. The seller had supplemented the ECE General Conditions with an additional, typewritten provision that was inserted into the text of the AGBs and provided:

“11.3 The liability in damages [of the seller] according to article 11.1 is limited to 5% of contract value.

11.4 Any further claims of purchaser, in particular for indemnification of damages of any nature and also such damages not resulting from the scope of supply are excluded without consideration on which legal ground they are presented.”

When the buyer sued the seller for damages in an ICC arbitration, because the machine allegedly did not meet the capacity parameters agreed upon in the contract and warranted by the seller under the applicable German law, the seller invoked the limitation of liability (‘cap’) clause in Section 11.3 of the ECE Conditions. The buyer argued that the cap clause was invalid under German AGB law. Assuming that the cap clause was valid, it would have meant a considerable limitation of the damages claimed from the seller. That the dispute even arose confirmed that the protection granted to the seller under the cap clause against subsequent damage claims from the buyer was of vital importance at the time of conclusion of the contract for two reasons:

1. The transaction involved a new type of machine that, until that purchase transaction, had only existed in the form of a scientific study. This made it impossible for the seller to pre-estimate a risk premium for any potential damage that the machine could have caused to the buyer’s business.

2. The seller was not in a position to monitor or influence the potentially damaging manner in which the machine would be operated by the buyer after delivery, namely, after it had left the seller’s sphere of influence.

Consequently, the claimant’s witnesses, who had participated in the negotiations of the contract, testified before the arbitral tribunal that, even though they “did raise the point of clause 11.3, namely the 5% liability limitation,” they “were told that this clause cannot be changed” and that since the seller’s representatives “said that they had to insist on these general conditions on a take it or leave it basis,” and “since B [the seller] were the only ones who could deliver such a machine, we could not but accept these conditions.”5

ii. The Core Problem: Standard Terms or a Clause that Was ‘Bargained for in Detail’?

The witnesses’ testimony in this arbitration demonstrated the core problem with respect to the German AGB-Law.

The distinction between AGBs imposed by one party on the other and contract provisions that have been drafted by the parties in the exercise of party autonomy is of utmost relevance for the decision of disputes such as the one before the tribunal in ICC arbitration No. 10279. It determines whether a low or a high legal threshold is to be applied to determine the validity of such clauses. The statutory test for this distinction is contained in § 305 (1) 3rd sentence BGB. It provides that contract terms that have been “bargained for in detail” (“im Einzelnen ausgehandelt”) are not AGBs and, thus, are not subject to the strict rules and case law related to AGB-Law. Over the past decades, the BGH has developed a very restrictive and abstract formula to determine when a contract clause may be regarded as ‘bargained for in detail’ and, thus, as being outside the scope of the AGB-Law and related case law of the BGH which both tend to invalidate such clauses. Pursuant to that case law, a contract clause may only be regarded as ‘bargained for in detail’ if:

“the party introducing the clause seriously puts at the disposition of the other party the core substance of that clause, i.e. those provisions which deviate from or change the essential contents of the law [‘gesetzesfremder Kerngehalt’] and provides the other side with freedom to safeguard its own interests, i.e. with the realistic opportunity to influence the contents of such clause.”6

This formula requires the parties to discuss extensively and in detail every contract provision with their counterparties during contract negotiations. General negotiations between the parties that do not amount to a detailed analysis of each individual contract clause, but rather focus on selected provisions that are of interest for either side and/or involve so-called ‘package deals’ with respect to contract provisions that are connected with each other would not suffice to bring the clause outside the scope of the AGB-Law.7 The fact that the parties read the clause together and discuss its content does not suffice, even if the other party had no problem with the clause because it agreed with the policy behind it at the time the contract was negotiated.8 The party that has introduced the clause bears the burden of proof for the fact that the clause was ‘bargained for in detail’.9 For the party that is faced with AGBs, the BGH’s strict formula provides a strong incentive to remain silent and accept the imposition of the contract provision by the other side during contract negotiations only to argue later, once a dispute arises, that these contract clauses were not ‘bargained for in detail’ and, thus, constitute invalid AGBs.10 This scenario is sometimes called the ‘AGB trap’11 in German law. Indeed, the BGH has almost never confirmed that a clause was ‘bargained for in detail’ when it has been called upon decide this issue and has therefore invalidated most of the clauses put before him.

While the BGH’s strict formula makes perfect sense in b2c-transactions, where consumers must be afforded optimum protection under the AGB-Law, the BGH also applies this formula to b2b-transactions, where the presumption of the professional competence of businesspeople — as a basic tenet of German commercial law —12 would not require the same degree of legal protection that the BGH affords to consumers. Furthermore, in commercial reality, businesspeople do not conduct their negotiations in the artificial manner proscribed by the BGH’s formula.

If the parties had bargained for the cap clause in detail, in the exercise of party autonomy granted to them by German contract law, the clause would have been valid. Under German law, contract clauses — including AGBs — that are ‘bargained for in detail’ are only considered void if they violate boni mores (§ 138 BGB) or if they violate a legal provision prohibiting the very result that the parties intend to achieve by inserting the clause into their contract (§ 134 BGB). Thus, the legal threshold for invalidating such clauses is very high. As a general rule, therefore, contract provisions, like the cap clause at issue in ICC arbitration No. 10279, are usually considered as valid under German law if they do not qualify as AGB.

If, however, the clause were to be qualified as AGB, because it was imposed by one party on the other, rather than being the result of a detailed bargaining process between them, the provision would have to be considered invalid under the long-standing case law of the BGH. The BGH has held that a limitation of liability clause may not serve to free the party that has introduced it into the contract from performing an obligation. This includes the duty to pay damages to the other side. The purpose of such an obligation is to ensure the orderly execution of the contract and, in addition, counterparties usually — and rightfully — rely upon the performance of such an obligation. In other words, the party introducing the clause into the contract may not take from its contract partner with one hand (limitation of liability) what it has given to it with the other (an undertaking to pay damages in the event of breach of contract). The BGH bases this reasoning on § 309 No. 7 b) BGB. That provision invalidates limitation of liability clauses in AGBs if that limitation, as in ICC arbitration No. 10279, extends to damages caused by grossly negligent conduct of the party using the clause.13 According to § 310 (1) BGB, however, that provision is not applicable if the contract provision limiting liability is contained in a b2b-contract. § 310 (1) BGB specifies that, in those cases, the question of whether the clause is valid shall be decided solely under the more flexible standard of the blanket clause of § 307 BGB. Under that provision, a contract clause contained in AGB is invalid if it leads to an “unreasonable disadvantage” for the other side that contravenes the principle of good faith. § 310 (1) BGB specifically requires courts, when analyzing standard form clauses contained in b2b-contracts under the blanket clause of § 307 BGB, to take appropriate account of the practices and usages prevailing in the trade concerned. The purpose of that legislative distinction between clauses contained in b2c- and b2b-contracts is to allow the courts to validate those AGBs in b2b-contracts that they would have to invalidate in b2c-contracts.14 The BGH, however, has consistently disregarded this legislative policy and has declared AGBs invalid, regardless of whether the clause is contained in a b2c- or b2b-contract. In the BGH’s view, businesspeople and consumers alike are entitled to rely on the belief that their contractual partner will not cause damage to them through grossly negligent acts. The BGH, therefore, sees no reason to differentiate between b2c- and b2b-contracts in its treatment of such AGBs.15

iii. The Tribunal’s Approach

Given that exclusion and limitation of liability clauses are valid if they are ‘bargained for in detail’, the question of whether an arbitral tribunal should follow the long-standing case law of the BGH becomes a core issue in arbitrations involving AGBs. The tribunal in the ICC arbitration No. 10279 held, by a majority decision in an interim award, that the formula developed by the BGH,16 which is designed to ensure an effective protection of the party against whom the other side’s AGB is used, cannot be applied in the same manner to b2b-contracts — such as the one before that tribunal — where there is no commercial imbalance between the parties, such as when one is dealing with experienced international businesspeople and companies. Against that policy background, the tribunal held that the cap clause in No. 11.3 of the ECE General Conditions had to be considered as ‘bargained for in detail’ and, therefore, as valid under the applicable German law because it had been the subject of the negotiations between the parties. The tribunal found this even though the clause had not been changed during the contract negotiations and had been declared non-negotiable by the seller who introduced the clause. The tribunal argued that to assume, in a case where the other party was aware of the clause and its significance, that the clause is not ‘bargained for in detail’ would be inconsistent with commercial reality. Rather, the tribunal held the view that, in a b2b-context, a clause is ‘bargained for in detail’ if, after negotiations between two business parties, the party who is confronted with a certain contract clause decides to conclude the contract in full knowledge of that specific contract provision and the relevant risks connected with it. The tribunal found that this condition was met in ICC arbitration No. 10279 because the parties had discussed the cap clause during contract negotiations, such that the buyer must have been aware of the significance of the clause and was free to abstain from the conclusion of the contract if it was not willing to carry the risks associated with that clause.

b. Other Examples

The dispute that was the subject of the interim award in ICC arbitration No. 10279 is exemplary of the numerous international arbitrations that have occurred in the past decides where the contract was governed by German law and AGBs were used by one party. These arbitrations concerned not only supply and other delivery contracts, but also post-M&A and similar disputes where the representation and warranty sections of the contract were at issue. In these cases, counsel sometimes argued that exclusion or limitation of liability clauses contained in the ‘representation & warranties’ section of the M&A contract were not ‘bargained for in detail’ and, therefore, qualify as invalid AGB. Counsel would make this argument even though the parties, their advisors, and their attorneys had exchanged mark-up copies of the draft contract numerous times prior to the signing. This approach, however, has the potential of destroying the self-contained system of liabilities which the parties typically establish in M&A contracts.

Another ICC case concerned the question of whether a penalty clause qualified as ‘bargained for in detail’ or as an invalid AGB. Unlike the ICC arbitration no. 10279 tribunal, that tribunal took a strict approach. After hearing legal experts on this issue, that tribunal held that, even though the text of the penalty clause was discussed and changed during the contract negotiations, the clause as a whole was not ‘bargained for in detail’ and was, therefore, invalid because the amount of the penalty had remained unchanged throughout the contract negotiations. This tribunal reached this conclusion by following the strict interpretation of the BGH’s long-standing case law, which takes the wording of § 305 (1) 3rd sentence BGB literally and requires the clause to be ‘bargained for in detail’, i.e. with respect to every single part of the penalty clause.17 This analysis has consequences beyond penalty and limitation of liability clauses. The question of whether a clause was ‘bargained for in detail’ or qualifies as an invalid AGB may even be relevant for the jurisdiction of an arbitral tribunal in cases where the arbitration clause is contained in a set of contract conditions that were drafted for use in a number of transactions and for which the BGH has developed strict requirements for arbitration clauses that qualify as AGB.18

2. IS THE INTERNATIONAL ARBITRATOR BOUND TO FOLLOW LONG-STANDING CASE LAW OF THE BGH?

To answer the question as to whether the arbitrators in ICC arbitration No. 10279 and in similar cases are bound to follow the case law of the BGH, one needs to examine the effect of precedents in civil law jurisdictions such as Germany (a) and the role of international arbitrators and the parties’ expectations in international disputes (b).

a. The Effects of Precedent in Civil Law

Under Anglo-American law, a precedent is proof of the existence of a particular rule of law and has authority ‘because it is a correct statement of the law.’19Blackstone acknowledged this law-making power of the common law judges in his commentaries on the Laws of England:

“[...] it is an established rule to abide by former precedents, where the same points come again in litigation: as well to keep the scale of justice even and steady, and not liable to waver with every new judge’s opinion; as also because the law in that case being solemnly declared and determined, what before was uncertain, and perhaps indifferent, is now become a permanent rule, which it is not in the breast of any subsequent judge to alter or vary from, according to his private sentiments [...]”.20

In German law, however, precedents are not considered as a source of law. Rather, they merely provide an authoritative example for the correct interpretation of a statute:21

“May we now say that a judge-made legal principle is law, as if it is to be found in the code itself? Does the judicature create law? Is there a ‘judicial law’, a judge-made law like it is, to a certain extent, acknowledged in England?

In Germany, no such judge-made law with full authority like the statute itself exists. Law is only what is ‘in force’: what is, because it is in force, plainly authoritative, without having to ask for the reasons why.”22

In spite of this weak concept of precedent, case law in civil law jurisdictions is frequently regarded as a source of law that has a binding effect on lower courts comparable to a statutory provision of law.23 It is fair to say that a factual stare decisis effect of precedents exists in civil law, the effect of which is not unlike the legal stare decisis doctrine of common law. The judge of the lower instance will simply adopt the ruling of the higher court and apply it to a case, not because a judge is legally bound to do so, but because the judge wants to avoid reversal by the court that may have rendered opposing precedent in the next appellate instance. Due to the authority of the appellate court system, the case law of a superior court develops a factual force that comes close to the legally binding nature of a statute.24 The precedent is, thus, considered to be conclusive,25 and to have a presumptively binding character.26 Because of that conclusive nature of the court decision, a court that intends to deviate from the case law of the higher courts carries an increased burden of justification.27

With their judge-made case law, the higher courts assume the function of ‘quasi-legislators.’28 Karl Llewellyn also observed in his famous study on the American case law system that ‘the [German] Imperial Court (Reichsgericht) is de facto a law-making instance.’29 This applies particularly where the courts, in deciding individual cases that come before it, have developed a general rule that is close to a statutory rule of law that can easily be applied to all future cases of this kind.30 This is exactly what has happened with the formula developed by the BGH to determine when a contract clause is ‘bargained for in detail.’31 That formula is being used today by the BGH and the lower courts in an almost reflexive manner, as if it was not developed by the Court, but contained in the abstract language of the BGB itself.

External factors also influence the courts’ obedience to long-standing case law of higher courts. Parties and counsel, or more generally ‘the public’, expect the lower courts to follow the decisions of the higher courts in order to ensure predictability, certainty, and economy of conflict resolution, as well as legal uniformity of case law.

Thus, judges of civil law countries like Germany, even though not legally bound by a stare decisis doctrine, are under subtle pressure or even a quasi-legal obligation to follow the case law of their highest courts. A similar, de facto system of precedents can be observed in the area of international investment arbitration32 and sports arbitration under the auspices of the CAS.33

b. The Role of International Arbitrators as ‘Private Judges’

Looking at the function of international arbitrators as private judges whose decision has the same effect between the parties as the judgment of a domestic court,34 one would be tempted to agree that international arbitral tribunals must be bound to apply and construe the AGB-Law ‘as a German court would,’35 i.e. strictly along the long-standing case law of the BGH:

“If international arbitral tribunals were to deny effect to national court decisions, parties would be returned to precisely the ‘legal no-man’s land’ that their choice of law and arbitration agreements were designed to avoid. That would be doubly misconceived, given that the fundamental purposes of rules of stare decisis and binding precedential authority are to enable ‘professional men,’ and women, to ‘regulate their actions and their contracts’ by reference to decided authority, and ‘to ensure predictability, certainty and economy of conflict resolution.”36

In addition to promoting the foreseeability of their decision-making, application of court precedents by international arbitrators ensures that parties to international contracts governed by the same law who are in comparable factual situations are treated comparably.37

In actual practice, international arbitrators often use court precedents in much the same manner as state court judges would, even though arbitrators — unlike judges — are appointed for the resolution of only a single dispute and issue final decisions that are not subject to appeal,38 i.e. a ‘révision au fond’ of their rulings by the competent domestic courts in setting aside proceedings at the seat of the arbitration is not permissible. In addition, their awards are usually not published and they, therefore, need not and cannot be concerned with the consistency of their decisions with other awards.39

i. Legal Certainty Versus Openness of Statutory Interpretation

Predictability and legal certainty are not absolute values. While a choice of law by the parties or, absent such choice, the determination of the applicable law by the arbitral tribunal, will allow everyone concerned — arbitrators, parties and advisors alike — to know where they stand and what sort of legal arguments must be presented or considered,40 cases where the applicable law provides one definite answer to a legal issue will be rare. Usually, statutory law is open to different constructions by those who apply it:

“Even the best lawyer in the most highly developed country is often in doubt. Moreover, predictability is only one of several social values. Rules which create certainty and predictability also bring about rigidity. The legal process is not and can never be a mere syllogism. It is above all an effort to reach the most fair and appropriate solution. In this process, which is partly inventive, the arbitrator will have to take the special circumstances of the case into account.”41

This applies with even more force to precedents established by the courts that construe this law. Even though they are sometimes considered as such in day-to-day court practice,42 they do not constitute abstract statutory rules. Rather, they have evolved out of the specific factual patterns underlying each individual case. The arbitrator’s deviation from the long-standing case law of the BGH must, therefore, not be confused with rendering a decision according to what the arbitrator deems fair and reasonable in the particular case (‘ex aequo et bono’): a decision that a tribunal may render only if expressly authorized by the parties.43 Uncertainty as to the outcome of statutory interpretation and openness as to the broad array of possible solutions offered by the law is an inherent element of every application of substantive law, regardless of whether the case is pending before a state court judge or an international arbitrator:

“It would be deceptive to expect that the application of the law is a process in which the norm is applied to the facts as a mere measuring stick. This would presuppose first that the norm to be applied is definite from the outset such that its contents are beyond doubt. If this would be so, there would be no need for construction. Second, this would also presuppose that the facts to be considered in applying the norm would be fixed in all their details prior to any application of the law, such that they would fit easily into the pattern provided by the norm. This is not so. Most factual matrices are highly complex. The norm, which has to simplify because it has to cover many factual situations, covers only some elements or parts of each individual case. It neglects all others. In many cases this necessarily leads to the question whether some of the elements that have been neglected in the norm are so determinative in the given case that their being taken into consideration is inescapable in order to avoid that dissimilar factual patterns are treated alike, which would lead to an ‘unjust’ decision.”44

ii. The Limited Effect of Precedent in German law

Finally, and most importantly, the authority for the international arbitrator operating under German law to deviate from long-standing case law of the BGH is grounded in the very nature of the factual doctrine of precedents in civil law.45 That doctrine is more flexible than the stare decisis doctrine of common law. Rather than blindly following the precedents of their higher courts, German judges shall form their own opinions about the legal issues relevant in the cases before them.46 Rather than imposing a legal duty to follow the rules established by the higher courts on the judge, the case law — even long-standing case law that remains below the threshold of customary law — presents itself not as a source of law (Rechtsquelle) but as a mere ‘source for the cognition of the law’ (Rechtserkenntnisquelle),47 which the judge or arbitrator is not bound to apply in the same way as a statute:

“The legal considerations of a court, the legal principles promulgated by the court, do not assume a binding nature that goes beyond the case before it. Other courts, and also the same court in other cases, are not bound by it, but are only ‘subject to the statute.’ They must verify — over and over again — whether the reasons for that decision were correct, and they may not only, but must decide differently, if, in doing so, they come to a different conclusion. No court is bound by the case law of the higher courts, not even by the case law of the highest court of the Empire.”48

Accordingly, it is not the precedent in and of itself that binds, but rather the norm which has been rightly construed in it. Whether the construction of the law contained in the precedent is correct and is grounded in the law as it stands is, in principle, a decision that a judge or arbitrator, who has to decide the same legal question, should decide independently and according to his or her conscientious conviction.49

Courts of lower instances may, therefore, deviate from the long-standing case law of the highest German courts, so long as such case law has not developed into customary law:

“As so-called judge-made law, case law may develop into customary law, but it does not, in and of itself, constitute customary law. As long as this is not the case, the practice of the courts does not enjoy the quality of a source of law. Even a long-standing case law may be ‘right’ or ‘wrong’ in the sense that it is subject to criticism de lege lata or through [judicial] correction due to a better understanding of the law. The courts of the lower instances may, therefore, deviate from the case law of the highest courts, if and insofar as a better understanding of the law makes that case law appear as irreconcilable with existing law.”50

The German Federal Constitutional Court (Bundesverfassungsgericht) has confirmed this authority of the German courts from a constitutional perspective. The German Federal Constitutional Court made it clear that, because the long-standing case law of the highest German courts does not assume the force of statutory law, a judge who deviates from that case law does not violate the constitutional rule-of-law principle (Rechtsstaatsprinzip) manifested in Art. 20 (3) of the German Constitution (Grundgesetz, GG).51 A German court is independent in its judgement and, therefore, not bound to follow the case law of other, even higher, courts:

“Different interpretations of the same statutory provision by different courts do not violate the duty of equal treatment. Judges are independent and only subject to the law (Art. 97 (1) GG). A court, therefore, in interpreting and applying a statutory provision must not follow a prevailing opinion. It is not prevented from having its own legal opinion and from basing its decision on that opinion, even if all other courts — including those from higher instances — hold a contrary position.”52

These principles apply equally to arbitrators deciding a dispute under German law. Arbitrators, as private judges, enjoy the same degree of independence of decision-making as do German judges. They may, therefore, deviate even from the long-standing case law of the BGH if they come to the conclusion that such deviation is justified in a given case.

iii. The International Character of Arbitration

Another important factor that influences the arbitrator’s consideration of long-standing case law of the highest courts is the international character of the transaction out of which the dispute arises. The case law of the UK Supreme Court, which — due to the global significance of English law as the law governing international transactions and the choice of English forum clauses contained in these contracts — is traditionally concerned with domestic cases as well as with disputes of an international character. The case law of the BGH, however, is mostly domestic in nature and influenced by domestic particularities. Reference to the facts underlying BGH precedents may have little justification in disputes with an international or truly transnational character, thereby allowing an arbitral tribunal to ‘distinguish’ the precedent from the factual setting of the case before it:

“Of course, an arbitral tribunal may properly conclude that a particular national judicial precedent was not intended to, or would not be applied to, international transactions, or a particular type of international transactions. There are frequently instances where domestic rules are not applied, or meant to apply, in transnational contexts, and arbitral tribunals would be free — and indeed obligated — not to give effect to domestic precedent in such circumstances.”53

Most, if not all, of the judgments rendered by the BGH concerning when a contract clause may be regarded as ‘bargained for in detail’ were rendered in purely domestic cases. Most of these cases involved routine transactions between small- or medium-size companies and consisted of everyday contracts such as car wash contracts, commercial lease agreements, and delivery contracts with building supply stores.54 Complex, multi-million Euro commercial transactions for the delivery of industrial machines of the type that was the subject of ICC arbitration No. 10279 or post-M&A disputes, however, are typically the subject of arbitration agreements. Such disputes rarely reach the BGH as the final instance in the German court system.55 This factual deficit of the BGH’s case law provides an additional and legitimate argument against international arbitral tribunals following the long-standing case law of the BGH. In following BGH precedent, international arbitrators would be confronted with judgments that were not made in the context of such international business disputes and that, therefore, do not qualify as proper precedents for the resolution of such disputes.56

iv. The Parties’ Expectations

One may also ask whether, in disputes arising out of contracts where parties have chosen German law as a neutral lex contractus without any knowledge of the contents or subtleties of that law, the arbitral tribunal should apply the long-standing case law of the BGH to determine whether a contract clause was ‘bargained for in detail’ strictu sensu. The answer depends largely on the parties’ expectations with respect to the arbitral tribunal’s decision-making. It is fair to assume that, for the very reasons that they prefer dispute resolution by arbitration instead of domestic courts, these parties expect arbitrators to refrain from a ‘mechanical’ application of the law. They may expect that arbitrators have due regard of the economic circumstances of the case, including the international context in which the parties operated when they concluded their contract and the legitimate expectations of the foreign parties. Under most arbitration laws and rules,57 the arbitrator’s mandate includes the consideration of trade usages. This underscores the objective of arbitration to provide resolutions of international disputes in a manner that accord with the commercial expectations of the parties and practices in the trade concerned.58 Business parties from other countries who are unfamiliar with the AGB-Law59 and who do not even consider themselves as deserving the high degree of protection granted under the AGB-Law, may regard a strict application of that case law as being inconsistent with commercial reality in which they operate in their daily business. German legal doctrine acknowledges that these party expectations must be taken into account when applying the AGB-Law in an international setting. Commentators of the AGB-Law rightly emphasize that in dealing with issues related to the AGB-Law in cases that involve international business contracts, it must be recognized that parties to such transactions deserve even less protection than parties to domestic business contracts. Accordingly, particular restraint should be exercised when the question of whether clauses in international business contracts should be invalidated under §§ 305-310 BGB arises.60 This applies in particular in arbitrations where all parties come from outside Germany or even outside Europe.

v. Consequences for Arbitral Decision-Making

International arbitral tribunals operating as ‘private courts’ under German substantive law may, therefore, deviate from the BGH’s long-standing case law, so long as the solution that they find for the problem before them still reflects the specific character of this legal system.61 They may disregard even long-standing case law of the BGH if the result does not conform to the needs of international trade and commerce, provided that there is sufficient support in German doctrine for the result they endeavour to achieve in the case before them. The safest way for a tribunal to ensure that their decision is compatible with the basic tenets of the German legal system is to find support for their decision — not merely in their own ideas of how the law should be construed — but by making reference to the judgments of lower courts or to doctrinal writings. To do otherwise would likely lead to a distortion of the law not contemplated by the parties when they chose the applicable law. The arbitral tribunal in ICC arbitration No. 10279 referred to doctrinal writings and to a decision of the Court of Appeals of Cologne (Oberlandesgericht Köln) to support its approach to deviate from the long-standing case law of the BGH in construing the statutory terminology ‘bargained for in detail’ in § 305 (1) 3rd sentence BGB.62

3 THE SITUATION TODAY

Since the interim award in ICC arbitration No. 10279 was rendered in 2001, the number of arguments justifying international arbitral tribunals operating under German law to deviate from the long-standing BGH case law related to the AGB-Law in b2b-transactions has dramatically increased. First, the past years have witnessed an intense debate over whether the AGB-Law, in the situation of b2b-transactions, should be modified in order to bring it more in line with commercial reality. Such modification could also improve the competitiveness of German law as the law of choice in international contracts.63 An increasing number of authors argue that even de lege lata, in a b2b-context, mere negotiations between the parties with respect to a certain contract provision should suffice to bring a contract clause outside the scope of the AGB-Law, which would be in line with the approach taken in Section 2.1.19 (2) UNIDROIT Principles of International Commercial Contracts.64 That section provides that AGBs are provisions ‘which are actually used without negotiation with the other party.’65 A lower court even characterized the case law of the BGH with respect to the question as to whether a clause was bargained for detail pursuant to § 305 (1) 3rd sentence BGB as ‘out of touch with reality’.66 Second, one of the leading commentaries on the BGB, obviously influenced by that ongoing reform debate, now favours a more liberal approach towards the interpretation of the requirement of ‘bargained for in detail’ in disputes that relate to b2b-transactions. According to that commentary, it shall suffice to meet that requirement in a b2b-context if the party using the AGBs has given the other side adequate opportunity to negotiate and that other party could make use of its rights in the given negotiation scenario with reasonable effort. A clause may even be considered as ‘bargained for in detail’ and, thus, as outside the scope of the restrictive AGB-Law if, as in ICC arbitration No. 10279,67 it was declared as conditio sine qua non for the conclusion of the contract by the party that has introduced the AGB in the contract negotiations.68 This view is clearly not in line with the BGH’s strict and long-standing case law, which the BGH applies to both b2c- and b2btransactions. 69 Another leading German commentary, in making specific reference to the interim award in ICC arbitration No. 10279, pleads for a departure from the long-standing case law of the BGH and a move toward a more realistic and practice-oriented approach in the construction of § 305 (1) 3rd sentence BGB, even in purely domestic cases that involve a dispute arising out of a b2b-contract.70 To the knowledge of the present author, this is the very first time that a leading German commentary on the BGB refers to an international arbitral award to justify — even in domestic cases — a construction of German statutory law that deviates from a long-standing case law of the BGH. At the same time, this situation is proof of the fact that there are situations where parties need arbitral awards to understand what their law requires of them.71

CONCLUSION AND OUTLOOK

The above considerations reveal that the ‘cult of the precedent’ is just as dangerous as the rejection of it. Rather, distinctions present themselves in arbitral practice.72 Even long-standing case law of the highest courts, such as the BGH’s case law concerning AGBs, is not carved in stone. International arbitral tribunals may find a variety of legitimate reasons why they may deviate from that case law, without violating the legitimate expectations of the parties in such arbitrations. If domestic courts have the right to deviate from such case law, then international arbitral tribunals that consider contracts governed by German law should have the same authority. It is fair to assume that the tribunal in ICC arbitration No. 10279 was not the only tribunal that has pursued that approach. Given that most arbitral awards are unpublished, a study commissioned by the German Federal Ministry of Justice to determine whether the AGB-Law, as applied to b2b-transactions, should be modified will soon request arbitration practitioners to provide accounts of their personal experience with the BGH case law concerning AGBs. Through this study, the practice of arbitral tribunals may become the driving engine for a more practice-oriented approach in the judicial scrutiny of standard forms under German law, not only de lega lata, but also de lege ferenda.

1
See Collins, ‘Regulatory Competition in International Trade: Transnational Regulation through Standard Form Contracts’, in: Eidenmüller (ed.), Regulatory Competition in Contract Law and Dispute Resolution, 2013, pp. 121, 122 et seq.

2
See generally Berger, ‘Abschied von der Privatautonomie im unternehmerischen Geschäftsverkehr?’, ZIP 2006, 2149 et seq.

3
ICC Interim Award No .10279, SchiedsVZ 2005,108 et seq. with Note Hobeck id. p. 112.

4
Text available at www.apischmidt-bretten.de/pdfdat/EU-lieferbedingungen_ 188_english.pdf.

5
ICC Interim Award No. 10279, supra note 3, p. 112.

6
See, e.g., BGHZ 143, 103, 111 et seq.; 150, 299; 153, 311, 312; BGH NJW-RR 1987, 144, 145; 1993, 504; NJW 1992, 2283, 2285; 2000, 1110, 1111; ZIP 2004, 315; see generally Gottschalk, ‘Neues zur Abgrenzung zwischen AGB und Individualabrede’, NJW 2005, 2493, 2494 et seq.; Uusitalo, Einbeziehung von AGB im unternehmerischen Geschäftsverkehr zwischen Deutschland und Finnland, 2012, pp. 120 et seq.

7
See, e.g., BGH NJW 2003, 1805, 1807 et seq., where the Court denied that the contract clauses were ‘bargained for’ even though the parties had read, discussed and made changes to the provisions during their contract negotiations; see also BGH NJW 1982, 2309; 1997, 135; Berger, ‘Aushandeln von Vertragsbedingungen im kaufmännischen Geschäftsverkehr’, NJW 2001, 2152 et seq.

8
BGH NJW 2000, 1110.

9
BGHZ 83, 56, 58; BGH NJW 1998, 2600, 2601.

10
See Rabe, Die Auswirkungen des AGB-Gesetzes auf den kaufmännischen Verkehr, NJW 1987, 1978, 1979.

11
Berger/Kleine, ‘AGB-Kontrolle im unternehmerischen Geschäftsverkehr’, BB 2007, 2137, 2141; Berger, ‘Für eine Reform des AGB-Rechts im Unternehmerverkehr’, NJW 2010, 465, 470; Kaufhold, ‘„Echte“ und „unechte“ AGB in der Klauselkontrolle’, BB 2012, 1235, 1237.

12
See Berger, supra note 2, p. 2151.

13
§ 309 No. 7 b) BGB does not mention damages caused by wilful conduct because pursuant to § 276 (3) BGB, a party may not exclude its liability for damages caused by wilful conduct, no matter whether such exclusion is contained in a freely negotiated clause or in standard forms.

14
Bundestags-Drucksache 7/9319, p. 43 (on § 12 AGBG); Schlosser, in: Staudinger, Bürgerliches Gesetzbuch, new ed. 2013, § 310, No. 1 et seq.

15
See, e.g., BGH NJW 2007, 3774, 3775; ZIP 2013, 1674; NJW-RR 2006, 267; see also BGH NJW 1984, 1750, 1751; 2006, 46; 2008, 1148, 1149; NJW-RR 2005, 247, 248; Grüneberg, in: Palandt, Bürgerliches Gesetzbuch, 72th ed. 2013, § 309, No. 48.

16
See supra note 6.

17
See, e.g., BGH NJW 1998, 2600, 2601.

18
Cf., e.g., BGH NJW 1999, 282. According to this judgment, a choice of jurisdiction clause declaring, at the user’s option, domestic courts or an arbitral tribunal competent disadvantages the other party to the contract disproportionately (§ 307 [1] BGB), since the other party (claimant), which cannot bring the case before the arbitral tribunal, at the moment the case comes before the public court does not know whether the beneficiary of the choice of jurisdiction clause (respondent) will exercise its option. The claim brought before the public court would become inadmissible if the beneficiary were to raise the objection that the parties had agreed to arbitration. According to the Court, such a clause is valid only if it contains an additional part obliging the user, on demand of the other party, to exercise the option in advance of the initiation of proceedings.

19
Allen, Law in the Making, 5th edition, 1951, p. 273.

20
Blackstone, Commentaries on the Laws of England, Vol. 1, 15th ed. 1809, p. 68.

21
See Montesquieu, De l’esprit des lois, Vol. XI, Chapter 6, who characterizes the judge as the ‘bouche qui prononce les paroles de la loi’; in French legal doctrine, views are divided as to whether court decisions constitute a source of law, see Gobert, La jurisprudence, source du droit triomphante mais menacee, RTD civ. 1992, 344 et seq.; Bach, Jurisprudence, 2009, Rep. dr. civ., Dalloz, paras. 36 et seq.

22
Heinsheimer, Lebendiges Recht, Rektoratsrede mit Anmerkungen, 1929, pp. 20 et seq. (original in German, translation by the author).

23
Cf., e.g., Germann, Präjudizien als Rechtsquelle, 1960, pp. 45 et seq.; Fikentscher, Methoden des Rechts, Vol. IV, 1977, pp. 352 et seq.; ‘the binding effect of statutory and case-law can, by their very nature, not be different’ (original in German, translation by the author), id., p. 354; Coing, ‘Zur Ermittlung von Sätzen des Richterrechts’, Juristische Schulung (JuS) 1975, 277: ‘Today, the understanding that case-law is a source of law, has been more or less accepted.’ (original in German, translation by the author); Ott, Die Methode der Rechtsanwendung, 1979, p. 65; Esser, Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts, 3rd ed. 1974, pp. 137 et seq.; Meier-Hayoz, Der Richter als Gesetzgeber, 1951, pp. 179 et seq.

24
Meyer-Cording, Die Rechtsnormen, 1971, p. 69; see also Kruse, Das Richterrecht als Rechtsquelle, 1971, p. 12: ‘The norm contained in the court decision is of universal applicability. It has legal effects for and against everybody. This follows necessarily from the dual role of the judge to decide legal disputes and to create legal norms.’ (original in German, translation by the author).

25
See Gutteridge, Comparative Law, 2nd ed. 1949, p. 113: ‘Theoretically, precedents are not binding either on the French or on the German judges. But in practice the decisions of the Court of Cassation in France and of the Reichsgericht in Germany, though not absolutely binding, are treated with such respect by the subordinate courts that they are, to all intents and purposes, conclusive.’

26
Kriele, Theorie der Rechtsgewinnung, 1967, p. 195.

27
Krebs, Die Begründungslast, AcP 195 (1995), 171, 182 et seq.; Berger, Der Bankjurist und das Case Law, Festschrift Schimansky, 1999, p. 3, 13.

28
Roellecke, in: Roellecke (ed.), Zur Problematik der höchstrichterlichen Entscheidung, 1982, p. 1, 18; see also Louven, Problematik und Grenzen rückwirkender Rechtsprechung des Bundesarbeitsgerichts, 1996, p. 190 (‘lawmaking on a lower level’); Esser, Grundsatz und Norm in der richterlichen Fortbildung des Privatrechts, 4th ed. 1990, p. 119.

29
Llewellyn, Präjudizienrecht und Rechtsprechung in Amerika, 1933, p. 112; see also Hedemann, Reichsgericht und Wirtschaftsrecht, 1929, p. 288.

30
Larenz, Methodenlehre der Rechtswissenschaft, 6th ed. 1991, pp. 435 et seq.

31
See supra note 6.

32
See, e.g., D’Agostino/Maxwell/McClure/Wilkie, ‘A Discussion on the Use of Precedents in International Investment Arbitration and its Consequences. Does the Evolving Practice of Relying on Previous Investment Arbitration Awards Represent the Birth of a Customary International Law on Investment?’, 2011, pp. 34 et seq. (available at http://www.sccinstitute.com/filearchive/4/40956/Justin%20D%27Agostino_Report.pdf); Commission, ‘Precedent in Investment Treaty Arbitration’, 24 Journal of International Arbitration 129, 158 (2007); Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’, 23 Arbitration International 357, 368 et seq. (2007); Reinisch, ’The Future of Investment Arbitration’, in: Binder/Kriebaum/Reinisch/Wittich (eds.) International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, 2009, p. 894, 916.

33
See Bersagel, ‘Is There a Stare Decisis Doctrine in the Court of Arbitration for Sport? An Analysis of Published Awards for Anti-Doping Disputes in Track and Field’, 12 Pepperdine Dispute Resolution Law Journal 189, 204 (2012).

34
§ 1055 of the German Code of Civil Procedure (Zivilprozessordnung, ZPO).

35
Schütze, Schiedsgericht und Schiedsverfahren, 5th ed. 2012, para. 391.

36
Born, International Commercial Arbitration, Vol. II, 2009, pp. 2963 et seq. (footnotes omitted); see for legal certainty as a major advantage of the English case law system Radbruch, Der Geist des Englischen Rechts, 1946, p. 49; see also Schütze, Schiedsgericht und Schiedsverfahren, 5th ed. 2012, para. 391: ‘The arbitral tribunal must apply German law as a domestic [German] court would do’ (original in German, translation by the author).

37
Guillaume, ‘The Use of Precedent by International Judges and Arbitrators’, 2 Journal of International Dispute Settlement 5 (2011).

38
This means that a ‘révision au fond’ of their rulings by the competent domestic courts in setting aside proceedings at the seat of the arbitration is not permissible. See Berger, Private Dispute Resolution in International Business, Vol. II, 2nd ed. 2009, Nos. 28-54 et seq.

39
See Weidemaier, ‘Judging Lite: How Arbitrators Use and Create Precedent’, 90 North Carolina Law Review 1091, 1122 (2012), with respect to the handling of precedents by arbitrators in US labour, employment, class action and securities arbitration.

40
Redfern/Hunter on International Arbitration, 5th ed. 2009, No. 3-109.

41
Lando, ‘The Law Applicable to the Merits of the Dispute’, in: Sarcevic (ed.), Essays on International Commercial Arbitration, 1989, p. 129, 141; see also Berger, ‘The International Arbitrator’s Application of Precedents’, Journal of International Arbitration, No. 4 1992, 5, 12 et seq.

42
See supra note 23.

43
See, e.g., Art. 28 (3) UNCITRAL Model Law on International Commercial Arbitration; § 1051 (3) ZPO.

44
Larenz, supra note 30, pp. 211 et seq. (original in German, translation by the author).

45
See supra a.

46
Heinsheimer, supra note 22, p. 24.

47
See Heinsheimer, supra note 22, p. 21 footnote 15, stating that precedents may only have persuasive authority for the legal principle acknowledged in them, but may never be qualified as the raison d’être of such principle.

48
Heinsheimer, supra note 22, p. 21 (original in German, translation by the author).

49
See Larenz, supra note 30, p. 430; cf. also Tyan, Droit commercial, Vol. I, Beirut 1968, p. 22: ‘As judicial decisions repeat themselves and are confirmed by the higher instances, the rules which they apply acquire an authority which is no longer disputed. Certainly, the courts in principle always reserve the right not to follow their preceding decisions and to create new solutions through a revirement of their case-law. But these changes do not affect the mandatory character of the judicial rules: the texts of the statutory law, are they not also changed from time to time?’ (original in French, translation by the author).

50
K. Schmidt, in: Münchener Kommentar zum HGB, 3rd ed. 2010, Vorbemerkung § 1, No. 33 (original in German, translation by the author).

51
BVerfGE 38, 386, 396; 84, 212, 227; Leibholz/Rinck, Grundgesetz, Art. 20, No. 607; Durner, ‘Verfassungsrechtliche Grundlagen und Grenzen des Richterrechts’, Juristische Arbeitsblätter 2008, 7, 8.

52
BVerfGE 87, 273, 278 (original in German, translation by the author); see also BVerfGE 98, 17, 48; 122, 248, 267; Schulze-Fielitz, in: Dreier (ed.), Grundgesetz, 2nd ed. 2008, Art. 97, No. 41; Pieroth, in: Jarass/Pieroth, Grundgesetz, 12th ed. 2012, Art. 97, No. 7.

53
Born, supra note 36, pp. 2964 et seq.

54
See Berger, ‘Für eine Reform des AGB-Rechts im Unternehmerverkehr’, NJW 2010, 465, 466 with reference to case law of the BGH; see also Kötz, Deutsches Recht und Common Law im Wettbewerb, Mitteilungsblatt DAV Internationaler Rechtsverkehr, 2/2009, p. 12, 15, arguing that German private law, contrary to English law, is rather a law for consumers than for commercial men.

55
See for the problems caused by this increasing ‘privatization’ of judicial decision-making Duve/Keller, ‘Privatisierung der Justiz - bleibt die Rechtsfortbildung auf der Strecke?’, SchiedsVZ 2005, 169, 171 et seq.

56
Berger, supra note 54, p. 466.

57
See, e.g., Art. 28 (4) UNCITRAL Model Law on International Commercial Arbitration; § 1051 (4) ZPO; Art. 21 (2) ICC Arbitration Rules 2012; Sec. 23.4 DIS Arbitration Rules.

58
Born, supra note 36, p. 2146; but see Gaillard/Savage (eds.), Fouchard/Gaillard/Goldman on International Commercial Arbitration, 1999, No. 1514, arguing that international arbitrators are usually not entitled to exclude or amend provisions of the law chosen by the parties on the pretext that they are applying trade usages. In the context of this article, however, the issue is not whether arbitrators are allowed to change the law but whether and to what extent they must follow the de facto precedential effect of the case law of the highest courts.

59
The situation will be different in cases in which the foreign parties, following the advice of their lawyers, have selected German law for the very reason that it provides a strict law on general contract terms.

60
Hau, in: Wolf/Lindacher/Pfeiffer, AGB-Recht, 6. ed. 2013, Internationaler Geschäftsverkehr, No. 57; see also H. Schmidt, in: Ulmer/Brandner/Hensen, AGB-Recht, 11th ed. 2011, Anhang § 305, No. 34; see already Wolf, ‘Auslegung und Inhaltskontrolle von AGB im internationalen kaufmännischen Verkehr’, ZHR 153 (1989), 300, 310 who has favoured the application of ‘international legal standards’ in the examination of standard forms in international business contracts.

61
Berger, supra note 41, p. 15.

62
ICC Interim Award No. 10279, supra note 3, pp. 110 et seq.

63
See for views in favour of reform Berger, supra note 54, pp. 465 et seq.; Müller, ‘Die AGB-Kontrolle im unternehmerischen Geschäftsverkehr — Standortnachteil für das deutsche Recht’, BB 2013, 1355 et seq.; see for views contra von Westphalen, ‘Wider einen Reformbedarf beim AGB-Recht im Unternehmerverkehr’, NJW 2009, 2977 et seq.; von Westphalen, ‘Der angebliche „Standortnachteil“ des deutschen Rechts aufgrund des AGB-Rechts — Analyse der Fallbeispiele der Reformer’, BB 2013, 67 et seq.; the competitor of legal systems was triggered by the publication of the brochure England and Wales: The Jurisdiction of Choice by The Law Society of England and Wales in 2007; see also for a general overview on the discussion Uusitalo, supra note 6, pp. 123 et seq.

64
Koch, ‘Das AGB-Recht im unternehmerischen Verkehr: Zu viel des Guten oder Bewegung in die richtige Richtung?’, BB 2010, 1810, 1812.

65
Art. 2.1.19 (2) in: UNIDROIT (ed.), UNIDROIT Principles of International Commercial Contracts 2010, 2010, p. 66.

66
LG Frankfurt NZBau 2004, 44.

67
See supra text at note 6.

68
Grüneberg, in: Palandt, supra note 15, § 305, No. 22.

69
See supra note 6.

70
Schlosser, in: Staudinger, supra note 14, § 305, No. 36a (under the heading ‘The practical necessity for a flexible handling of the statutory text [of § 305 (1) 3rd sentence BGB]’; original in German, translation by the author).

71
But see Rivkin, ‘The Impact of International Arbitration on the Rule of Law — The 2012 Clayton Utz/University of Sydney International Arbitration Lecture’, 29 Arbitration International, 327, 340 (2013): “…parties do not need arbitration awards to understand what New York or English or New South Wales law requires of them. Similarly, arbitrators do not need other arbitral awards to inform them of these laws, because there are so many other sources.”

72
See Guillaume, supra note 37, p. 23.