In a ruling of 1 October 2014, the Higher Regional Court Munich had to deal with an arbitration clause containing certain conditions for the appointment of the arbitrator which could not be met when the dispute arose. The court decided that nevertheless the arbitration proceedings were admissible.
The applicant was a former limited partner of the respondent, a limited partnership. The dispute was about a compensation which the applicant claimed from the respondent. Pursuant to the arbitration clause in the partnership agreement, disputes between the partnership and its members or between members were to be settled in arbitration proceedings with a “colleague” as sole arbitrator who was to be appointed jointly by the parties. If the parties were unable to agree on a “colleague”, the arbitrator was to be appointed by a certain association named in the arbitration clause. After the dispute had arisen, the parties were unable to agree on an arbitrator and also the association refused to appoint an arbitrator. The applicant requested the court to declare that arbitration proceedings were inadmissible because the arbitration clause was ineffective. He argued that arbitration proceedings could not be executed as the clause was unsuitable to lead to the appointment of an arbitrator.
The Higher Regional Court did not share the applicant’s view. The court considered the arbitration agreement to be valid and the arbitration to be admissible. It held that agreements with respect to the procedure of the arbitration – including the nomination and appointment of arbitrators – are legally independent from the arbitration agreement as such by which the parties grant an arbitrator or an arbitral tribunal the competence to finally settle a dispute. If those procedural agreements are invalid or impracticable, this does not cause the entire arbitration agreement to be invalid unless otherwise agreed by the parties. As the partnership agreement provided for arbitration without recourse to the ordinary courts and as there was no reason why this agreement should be invalid, the court declined to declare the arbitration proceedings to be inadmissible. It held that German statutory arbitration law applies insofar as additional provisions, for example on the qualification of the arbitrators or the appointment procedure, are invalid or impracticable.
The court’s ruling is in line with prior decisions of the German Federal Supreme Court (Bundesgerichtshof – BGH) and of other courts of lower instance as well as with the opinion of most German scholars. For example, in 2007, the BGH decided that agreements on the nomination of arbitrators in standard terms which discriminate the other party do not lead to the invalidity of the arbitration agreement as such. Rather, the invalid standard clause is substituted by the respective statutory provision (judgment of 1 March 2007, III ZR 164/06). In 2011, the BGH had to decide whether an arbitration agreement was invalid because the parties had referred the dispute to a non-existing arbitration institution. Also in this case, the BGH held that the arbitration agreement was valid and that the competent tribunal had to be determined by way of supplementary contract interpretation (ruling of 14 July 2011, III ZB 70/10). According to the Higher Regional Court Koblenz (judgment of 6 March 2008, 6 U 610/07) and the Higher Regional Court Berlin (ruling of 28 April 2011, 23 U 33/11), the same principles apply if articles of association provide for dispute settlement by arbitration and refer to a supplementary agreement with detailed procedural provisions which later on is not concluded.
In view of the above, if parties to a contract want to make sure that a dispute is only settled by a certain arbitrator or in accordance with specific appointment procedures and that it should be referred to a court if this certain arbitrator is not available or if the appointment procedures cannot be met, the dispute resolution clause should contain explicit provisions.
Higher Regional Court Munich, 1 October 2014, 34 SchH 11/14