Global Development

In November 2020, the German Federal Supreme Court (‘Bundesgerichtshof’) recently dealt with the question as to whether the parties had concluded an arbitration agreement by way of incorporation by reference to standard conditions. It held that the CISG can be applicable to questions of the validity of the arbitration agreement in specific circumstances.

Content and background of the judgment¹

A buyer seated in Germany and a seller seated in the Netherlands had concluded several contracts over 1,500 kg grounded mace in total. For every order of the buyer, respondent seller had issued an order confirmation according to which the contract terms of the ‘Nederlandse Vereniging voor de Specerijhandel’² (‘NVS standard conditions’) applied. The NVS standard conditions contain an arbitration clause (Article 16) and stipulate that contracts made on those conditions should be governed by the law of the Netherlands excluding the CISG (Articles 17 and 18). The conditions were not attached to the order confirmation. All order confirmations had been signed by the respondent seller but not by the buyer.

After a dispute arose, the claimant (the buyer’s insurer) initiated state court proceedings in Germany against the seller. In its defence, the seller argued that the state courts lacked jurisdiction because of the arbitration agreement contained in Article 16 of the NVS standard conditions. When the case was brought before the German Federal Supreme Court (‘FSC’) as the final court of appeal, the FSC held that the respondent could not rely on the arbitration agreement because the arbitration agreement did not meet the necessary form requirements.

According to the FSC, an arbitration agreement does meet the necessary form requirements if it conforms to either (i) Article II(2) of the New York Convention (‘NYC’), or – under the most favourable law test under Article VII(1) NYC – (ii) German law, or (iii) the law applicable to the arbitration agreement according to German conflict of law rules.³ The FSC held that the arbitration agreement at issue met none of these standards.

First, the FSC held that the arbitration agreement did not meet the requirements of Article II(2) NYC given that the buyer had not responded to the order confirmations.⁴

Second, the FSC concluded that the arbitration agreement did not meet the formal requirements of German law, i.e. Section 1031 of the German Code of Civil Procedure (‘CCP’).⁵ Although Section 1031 CCP governs the formal validity of the arbitration agreement, the FSC decided that the question whether the arbitration clause was validly incorporated by reference to a document containing the clause in terms of Section 1031(2) and (3) CCP is governed by

German substantive law. In light of the fact that the general requirements for the CISG to apply were met,⁶ this could be the CISG. Therefore, the FSC had to address the question whether the CISG can be applied to questions relating to the contractual dimension of the substantive validity of an arbitration agreement. After a detailed analysis, it came to the conclusion that, in this specific context, this was the case. Following an analysis of the CISG, the FSC rejected the formal validity of the arbitration agreement.

Third, the FSC rejected the notion that the arbitration agreement had been validly concluded pursuant to the law applicable to the arbitration agreement according to German conflict of law rules.⁷ In essence, the FSC concluded that applying Article 11(2) first alternative of the Introductory Act to the Civil Code (‘IACC’), German conflict of law rules point to the application of Article V(1)(a) NYC by analogy. Therefore, the validity of the arbitration agreement is governed by the law chosen by the parties, or, absent such choice, by the law of the seat of the contemplated arbitration. According to the FSC, the parties had not chosen the law applicable to the arbitration agreement given that the only potential choice of law clause, providing for the application of the law of the Netherlands excluding the CISG, had not been validly incorporated per the CISG. Therefore, the law of the Netherlands including the CISG applied and, thus, the arbitration agreement itself had not been validly incorporated either. For the same reasons, Article 11(2) second alternative IACC – according to which either the law of the Netherlands or German law were to apply to the arbitration agreement – led to the same conclusion.

Implications

Scope and limits of the decision

The FSC expressly limited its decision to apply the CISG to questions relating to the contractual dimension of the substantive validity of the arbitration agreement to instances in which the most favourable law rule as per Article VII(1) NYC is applied to determine if the agreement meets the formal validity test. In light of the strict divide, which typically exists between issues of formal and of substantive validity, this mainly

applies to cases in which the arbitration agreement was incorporated by reference. Nevertheless, the (potential) implications of the decision should not be underestimated.

It seems likely that the FSC would be ready to apply the CISG to all kinds of questions relating to the contractual dimension of the substantive validity of an arbitration agreement if the conditions for the CISG to apply are met. The FSC conducted a thorough analysis of the pros and cons for applying the CISG. It weighed the doctrine of separability and the wording of Article 4, sentence 1 of the CISG⁸ against the argument that the CISG itself contains several references to dispute resolution clauses which suggest that the CISG is applicable to arbitration agreements.⁹ The pros prevailed in the eyes of the court.¹⁰ Thereby, the FSC ultimately based its decision on arguments which do not relate to the individual case in question; rather, they are of general nature. It is hence to be expected that the FSC will follow the same line of arguments when it comes to questions relating to the contractual dimension of the substantive validity of the arbitration agreement outside the context of the formal validity of the arbitration agreement.

In addition, it is highly likely that the FSC and German higher regional courts will apply the same standards when assessing whether the arbitral award was based on a valid arbitration agreement in annulment, recognition and enforcement proceedings. Otherwise, the courts would run the risk that one and the same arbitration agreement was found to be valid when a motion to stay the proceedings before German courts was granted but would be found invalid when a party sought to enforce the arbitral award based on that arbitration agreement before German courts.¹¹ The FSC itself highlighted the importance of avoiding such outcome.¹²

Impact

Despite many similarities between the CISG and the national contract laws of its Contracting States, it can make a crucial difference to the outcome of a particular case whether the questions relating to the contractual dimension of the substantive validity of the arbitration agreement are governed by the CISG or national contract law. The following example illustrates this:¹³

Scenario: A seller sends an offer including an arbitration agreement to the buyer. The buyer signs the offer and asks an employee to dispatch it to the seller. Shortly afterwards, and before the employee has completed the task, the seller notifies the buyer that it revokes the offer. Moments later, the signed document is dispatched to the seller.

• Under Article 16(1) of the CISG, an offer may be revoked until a contract is concluded if the revocation reaches the offeree before he or she has dispatched an acceptance. As a consequence, neither the sales contract nor the arbitration agreement contained therein are valid under the CISG. Any dispute arising out of the potential transaction would have to be dealt with by the state courts.
• Under Sections 130(1) and 145 of the German Civil Code (‘CC’), the offer becomes effective and irrevocable at the same time, i.e. when the offer reaches the offeree, unless the revocation reaches the offeree before that or simultaneously. Consequently, the seller’s revocation has no effect on the offer. Therefore, both the sales contract and the arbitration agreement contained therein are validly concluded. Any dispute arising out of the potential transaction could be brought before the jurisdiction of an arbitral tribunal.

Recommendation

The case highlights that both parties should sign the arbitration agreement in order to minimize risk. In any case, parties should carefully assess which law would apply to the main contract as well as any arbitration agreement contained therein, in case a dispute arises at a later stage of the contractual relationship. Thereby, the parties can prevent unnecessary delay and additional costs caused by uncertainties pertaining to the applicable law. This applies to the arbitration agreement just as much as to the main contract.¹⁴

In the international context, the fact that over 90 states have ratified the CISG increases the likelihood that an international sales contract may be governed by the CISG to a significant level. Practice has shown that state courts have a tendency to apply the CISG to questions of the contractual dimension of the substantive validity of the arbitration agreement if the main contract is also governed by the CISG.¹⁵ To prevent unnecessary delay and additional costs if a dispute arises, particular regard should be given to cases in which the application of the CISG is legally possible, but uncertain. In those cases, it can make sense to make an explicit choice, i.e. to agree on the application of the CISG, or to exclude its application.¹⁶

Article 6 of the CISG allows parties to derogate from singular provisions of the CISG or opt out of its application altogether. Nevertheless, courts and practitioners widely agree that a choice of law clause referring to the national law of a Contracting State without a specific wording according to which the CISG shall be excluded does not exclude the CISG’s application.¹⁷ Accordingly, any choice of law clause aimed at the exclusion of the CISG should be drafted carefully.

Interestingly, though, the decision of the FSC also highlights the limits of the parties’ freedom to choose the law applicable to the arbitration agreement and/or to the main contract: to determine if the choice of law clause excluding the CISG was validly concluded, the FSC applied the CISG.

---

---