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Invalidity of arbitration agreement in contract with German consumer
Practical Law Legal Update 7-505-4471 (Approx. 3 pages)
Invalidity of arbitration agreement in contract with German consumer
| Published on 31 Mar 2011 • Germany, International |
Stephan Wilske (Partner) and Claudia Krapfl (Associated Partner), Gleiss Lutz
In a decision dated 25 January 2011, but only recently published, the Federal Court of Justice held that an arbitration agreement contained in a contract for investment services between a foreign broker and a German consumer is invalid if the arbitration agreement is not contained in a separate document personally signed by the parties.
Background
Section 37h of the German Securities Trading Act states that arbitration agreements for future disputes arising out of investment services are only binding if both parties are merchants.
Section 1031 paragraph 5 of the German Code of Civil Procedure on the form of arbitration agreements provides:
"Arbitration agreements to which a consumer is a party must be contained in a document which has been personally signed by the parties. The written form pursuant to sentence 1 may be substituted by electronic form pursuant to section 126a of the Civil Code. No agreements other than those referring to the arbitral proceedings may be contained in such a document or electronic document; this shall not apply in the case of a notarial certification."
Facts
The German plaintiffs claimed damages for losses made in connection with investment services from a broker based in the US. The plaintiffs initiated court proceedings in Germany. The defendant broker argued that the German courts were not competent because of an arbitration agreement contained in the general terms and conditions applicable between the German plaintiffs and the US broker.
Decision
The German Federal Court of Justice held that the arbitration agreement contained in the general terms and conditions was invalid. With regard to one of the plaintiffs this was due to the fact that he was not a merchant: under section 37h of the German Securities Trading Act, arbitration agreements in contracts for investment services are only valid if both parties are merchants.
Even though the two other plaintiffs were merchants, the court held that they were nevertheless to be treated as consumers for the purposes of the form requirements for an arbitration agreement under German law. This was because the investment services concerned the private assets of the plaintiffs and had nothing to do with their professional activities as merchants.
If an arbitration agreement is concluded with a consumer, German arbitration law under section 1031 paragraph 5 of the German Code of Civil Procedure provides that the arbitration agreement must be contained in a separate agreement signed by the parties, whereby the separate agreement may not contain any other agreements not dealing with the arbitral proceedings. Since in this case, the arbitration agreement was contained in general terms and conditions, these prerequisites were not fulfilled. The Federal Court of Justice therefore confirmed the jurisdiction of the German courts.
Comment
This decision is in line with a number of prior decisions by the Federal Court of Justice in the past year confirming the jurisdiction of the German courts for claims for damages resulting from foreign investment services. Since the German parties are treated as consumers as long as the investment services are related to their private assets, the strict form requirements for arbitration agreements with consumers under German arbitration law must be fulfilled.