Arbitration Clauses: A tool to get around Germany´s strict law on unfair contract terms?
I. The “Flaw” of German Law
German private contract law bears one feature that makes it partly unattractive to parties to agree on its applicability on their choice of law clause in international contracts:
This “flaw”, if you would like to call it like that, is that the regulations on unfair contract terms (UCT), which originally developed on the doctrine of good faith to protect the weaker party of a contract and based today on an European Directive, apply to their largest extent not only to B2C contracts but also between commercial people. Furthermore, the incorporation of general contract terms is more formal in Germany compared to its neighbouring countries.
The majority of other EU states, including the UK, do not apply their UCT laws to parties from a business background and on equal footing.
This makes German contract law, especially, but not only on Sale of Goods, partly unattractive to commercial parties on an international contract.
Furthermore, under the doctrine of the German Supreme Court, the UCT rules as such become applicable very easily, as even the first set of rules created for a number of contracts comes under the definition of a “standard contract form”. In other words, it is very difficult not to fall under the application of the UCT rules and to prove the opposite, individual negotiation of a contract or clause.
In general, the UCT rules shall protect parties, mainly consumers, from the so called “surprising clauses”, such as short time-bars, loss of guaranteed specifications etc.
One would expect that amongst commercial parties there could be no such thing as a “surprising clause”. However, certain terms are even considered to be – and probably are – unfair, and therefore potentially void, towards a business client, e.g. uniliteral increase of pricing, prolongation of contracts, change of duties etc.
One would further assume, that contract terms considered to be unfair even for a commercial party would fall under the general “good faith”- rule and no complicated, multi- layer, multi-filter and interrelated system of rules is needed for sufficient protection of a potentially weaker counter-part.
II. The System
The full legal frame work consists of 6 paragraphs (§§ 305-310 German Civil Law Code) and in total more than 70 sub-sections, which in the course of the decades triggered a vast number of precedents.
The relevant paragraph on applicability alone is one page long and tries to explain when and to which extend the unfair contract term rules apply to a commercial party or to a customer only.
This – in general brief – title of the second book of Germany´s civil law code does not contribute at all to the popularity of German Law in a choice of law clause or German courts in the jurisdiction clause.
III. Exclusion of UCT Rules?
In the latter lays – potentially – the solution, at least an option, for parties to agree on German Law: Instead of agreeing on a jurisdiction clause, parties can agree on an arbitration clause in their contract.
In doing so, parties may agree on German law as the applicable law on the merits but exclude the paragraphs §§ 305-310 of the German Civil Law Code.
The specific paragraph in the German Civil Procedural Code is § 1051, which allows the parties to agree on the applicable law of the merits, e.g. the law of a specific state, not necessarily German law. Parties may thus agree on German law under the exclusion of the §§ 305-310 Civil Law Code.
No precedent is yet available on the validity of such choice of law cause in combination with an arbitration clause.
However, the wording of § 1051 German Civil Procedure Code speaks for it as well as the systematic interpretation of its following sub-section:
This allows the arbitration tribunal upon direction of the parties, to decide also on what is “fair and equitable”, whereby “equity” in the German understanding is not limited to land law disputes but does apply to all areas of law.
As the unfair contract term rules are nothing more than a very detailed system and implementation of the “good-faith” – doctrine, it appears reasonable, that the exclusion of the §§ 305-310 German Civil Law Code shall be allowed, as all its detailed rules are only specifications of the general good-faith doctrine, which as such, will of course not be excluded.
The opportunity, to exclude German UCT law by an arbitration clause, as discussed above, is of course not the invention of the author but has been previously discussed and presented in different forums, inter alia recently during the North German Arbitration Days in the Commercial Chamber of Hamburg (see picture) as well as within the GMAA, the German Maritime Arbitration Association.