In the Federal Supreme Court’s decision of June 18, 2014 (III ZB 89/13) the court had to decide the question whether a court’s decision on the validity of an arbitration agreement is binding for a succeeding arbitral proceeding based on the same arbitration agreement.
The facts
The decision is based on the following case: The dispute arose from a cooperation agreement and a lease agreement regarding a golf course. Both agreements contained an arbitration agreement. After some frictions emerged between the parties, the lessor and later respondent terminated the agreements without notice, which induced the leaseholder and claimant to initiate arbitration proceedings against the respondent requesting a declaration on the invalidity of those terminations. The arbitral tribunal rendered an interim award confirming its jurisdiction. The respondent applied to the Higher Regional Court of Frankfurt am Main requesting determination of the invalidity of the interim award on jurisdiction.
The Higher Regional Court of Frankfurt am Main declared the arbitral awards invalid and held that arbitral proceedings with regard to these claims were impermissible. It decided – among other things – that a precedent (and questionable) judgment by the Regional Court Gießen holding the arbitration agreement to be invalid was binding on the parties to the current proceedings. The parties to the dispute before the Regional Court Gießen were the claimant in the current arbitration proceedings and a limited liability company, of which the respondent in the current arbitration proceeding was the managing director. This limited liability company had been assigned rights by the respondent and was claiming payment for fees due from a golf tournament in the court proceedings in Gießen. The Regional Court of Gießen decided on the merits of the payment claim and implicitly ruled that the arbitration agreement had been terminated.
The decision
The Federal Supreme Court reversed the Higher Regional Court of Frankfurt am Main’s decision and remanded it back to the court.
The Federal Supreme Court confirmed the jurisdiction of the arbitral tribunal. It explained that, according to section 1032 (1) ZPO, if court proceedings are initiated, a court shall dismiss an action as impermissible if the matter is subject to an arbitration agreement and the respondent raises a valid objection prior to the beginning of the oral hearing on the substance of the dispute. Any such decision by a court denying its jurisdiction is binding for further arbitral proceedings between the same parties on claims brought under the same arbitration agreement.
If the state court reaches a decision on the merits because it determines the arbitration agreement to be invalid – as the Regional Court of Gießen did in this circumstances -, it is disputed whether the arbitral tribunal is bound by the legal effect of such decision insofar as the state court holds the arbitration agreement to be invalid.
The Federal Supreme Court left this question open, since, in the case at hand, the parties to the court proceedings were not the same as the parties to the arbitral proceedings. It is widely accepted that the doctrine of res judicata is not applicable if the parties in a later proceeding differ from the precedent case. In the court proceedings a limited liability company was the claimant, whereas in the arbitral proceedings, the managing director of that limited liability company was the respondent. The court held that any binding effect could not be extended to a third party who was not a party to the state court proceedings. The court explained that, while it was the purpose of section 1032 (1) ZPO to avoid contradictory decisions and to ensure a clear distinction between state court jurisdiction and arbitral tribunal jurisdiction, this purpose did not justify binding a third party, who had not been involved in the state court proceedings.
Comment
The Federal Supreme Court has clarified that a decision by a state court including in its reasoning a statement as to the invalidity of an arbitration agreement will not be binding on a third party relying on the same arbitration agreement. This of course is not surprising as it is clear that the legal effect of a previous decision can only arise inter partes. The court left open the question whether the arbitral tribunal is bound by a state court’s former decision on a dispute between the same (sic!) parties if the state court accepts the claim and therefore implicitly decides that the arbitration agreement is invalid.
