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According to a recently published judgment of the German Federal Court of Justice (BGH)¹, a standard jurisdiction clause does not conflict with an arbitration clause contained in the terms and conditions of the other contracting party. The Court held that a jurisdiction clause does not necessarily imply that arbitration was to be excluded and that only state courts are competent to decide this issue. This judgment is an indication of the German courts’ pro-arbitration approach.

Contract Contained Two Contradictory Sets of Terms and Conditions

The claimant, seeking compensation for services rendered to the defendant, had started legal proceedings in German state courts. The contract between the parties included two separate sets of general terms and conditions. While the first set contained a clause titled “place of jurisdiction”, stating that the competent forum shall be the competent court at the seat of the supplier, the second set contained an arbitration clause. In a separate clause of the contract the parties had agreed on “place of jurisdiction: S.”. The defendant raised the defence of an arbitration agreement.

In view of the arbitration agreement, the Regional Court of Potsdam, as well as the Higher Regional Court of Brandenburg and the Federal Court of Justice, rejected the claim as inadmissible.

Interpretation of the Jurisdiction Clause

The Federal Court of Justice held that the standard jurisdiction clause did not exclude an arbitration agreement. In the opinion of the Court, such a clause does not necessarily mean that state courts were exclusively stipulated by the parties to hear the case and that, therefore, disputes could not be submitted to arbitration. The Court found that the jurisdiction clause still could have effect, albeit only to the extent that the state courts have competence in connection with or support of the arbitration proceedings. If the parties had intended to rule out arbitration proceedings, this would have had to be expressed clearly in the contractual clause.

The Federal Supreme Court held that such intention cannot be derived from the mere fact that in the German legal environment arbitration tribunals still are the exception while most disputes are being resolved by state courts. Therefore, it concluded, the jurisdiction clause would not prevent agreeing at the same time on an arbitration clause and thereby depriving the jurisdiction clause of most of its scope. The Federal Court of Justice pointed out that the jurisdiction clause retained a limited scope in relation to interim measures even in the case of an arbitration agreement. Furthermore, the jurisdiction clause would apply if the arbitration defence was not raised.

Legal Background: Battle of the Forms

Under German arbitration law² and also under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the 1961 European Convention on International Commercial Arbitration, an arbitration agreement can be effectively incorporated if contained in general terms and conditions. If the parties introduce conflicting general terms and conditions, but perform the contract nonetheless, a situation arises that is commonly referred to as “Battle of the Forms”.

Two differing theories are offered to resolve this conflict. Under the “last shot” doctrine, the last party to send its general terms and conditions before performance of the agreement dictates the contract terms. According to the “knockout” rule, in contrast, the conflicting terms cancel each other out and any gaps in the contract are filled by the applicable law.

Which theory prevails depends mainly on the applicable law on the formation of contracts and may also be determined by provisions in the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG) (where that Convention applies to the contract in question). Under the knockout rule which is the prevailing theory in Germany general terms and conditions may become part of the contract provided they do not conflict with the general terms and conditions of the other party, and only if such other general terms and conditions do not contain a general defensive clause to exclude all general terms and conditions of the other party.

Practical Advice

An arbitration clause in one party’s general terms and conditions may be binding upon the other party, even if that party provided for a jurisdiction clause in its own general terms and conditions. To avoid this, the other party may use a clause expressly excluding arbitration or generally excluding all general terms and conditions of its contractual partner.

German Courts Willing to Uphold Arbitration Agreements

The judgment of the German Federal Court of Justice clearly shows the German courts’ willingness to uphold arbitration agreements if the parties had previously shown their clear intent to opt for arbitration rather than ordinary proceedings in state courts. The Federal Court of Justice ruling supports the advice of arbitration practitioners not to delegate dispute resolution clauses to small-print general terms and conditions without giving due consideration to the question of how the parties really intend to resolve any future disputes.