In a judgment dated July 14, 2011, the German Federal Supreme Court (Bundesgerichtshof) has confirmed its approach to pathological arbitration clauses. The court held that an arbitration agreement that stipulates a non-existing arbitration institution is not per se unenforceable.
Ironically, the defective clause was part of an agreement between between lawyers for the sale and transfer of a law practice: The parties to the agreement in dispute had made reference to a “Lawyers Arbitration Tribunal” (Anwaltsschiedsgericht) to be constituted in accordance with the rules of the Cologne Bar Association (Rechtsanwaltskammer Köln). However, neither such tribunal nor such rules exist.
The fact that the parties erroneously stipulated a non-existing arbitration institution does not render the arbitration agreement “inoperative or incapable of being performed“ within the meaning of Sec. 1032 German Code of Civil Procedure. In line with previous case law, the Federal Supreme Court held that it is for the court to decide whether, by way of contract interpretation, the non-existing institution can be substituted by another arbitral institution or arbitral process.
This is exactly what the court of first instance, in this case the Cologne Court of Appeals (Oberlandesgericht Köln) which had jurisdiction pursuant to Sec. 1062 German Code of Civil Procedure, had done when it first heard the matter: The Court had confirmed the competence of an ad hoc arbitral tribunal to decide the dispute. The overriding consideration was that the parties clearly did not want the matter to be decided by a state court, but by an arbitral tribunal.