German law requires notarial form for many commercial transactions, in particular for real estate contracts and the sale and transfer of GmbH Shares. Thus, a decision by the Munich Court of Appeals (Oberlandesgericht München) on challenges to an arbitration agreement based on the lack of notarial form is of great practical relevance.
The applicants, a Swiss and three German companies, moved to set aside a German domestic arbitral award rendered in arbitral proceedings administered by DIS (German Institution of Arbitration). The parties to the underlying agreements, and to the ensuing arbitration, had concluded a framework agreement in notarial form, which governed the sale and transfer of real estate as well as of shares in German limited liability companies (GmbH). The framework agreement contained an arbitration clause referencing the DIS Rules of Arbitration.* On that basis, arbitration proceedings were commenced, and an arbitral award was entered into against the applicants.
The application to the Court of Appeals Munich (Oberlandesgericht München) to set aside the award was based, amongst others, on the argument that the arbitration agreement lacked notarial form. Since the agreement concerned real estate transactions and the transfers of shares in a German GmbH, they required notarial form (Sec. 311 b German Civil Code (BGB), Sec. 15 para 4 German Limited Liability Company Act, GmbHG). Whilst the arbitration clause itself was contained in the notarial deed, the DIS Arbitration Rules were not. However, the court found there was no legal requirement to include into the notarial deed the entire Arbitration Rules – which has the very practical effect of cutting down the reading time for a notarial deed considerably.**
First, the court noted that the arbitration agreement per se does not require notarial form. It only was subject to the form requirement, since was part of an agreement for the transfer of GmbH shares and of real estate. The notarial deed must be complete in the sense that it records the entire agreement between the parties (Vollständigkeitsgrundsatz), not only the fundamental contractual rights and obligations (essentialia negotii). However, the parties are at liberty to provide in their agreement that third parties may define parts of the contractual obligations (Bestimmung von Leistung und Gegenleistung durch einen Dritten; Sec. 317 BGB). In the court’s opinion, referencing the DIS Arbitration Rules is an application of that concept, as the definition of the arbitral process in detail is delegated to the DIS. Therefore, there was no reason to include the DIS Arbitration Rules verbatim into the notarial deed. Finally, the court remarked that there was no duty on the acting notary to advise the parties in detail on the implications of the arbitration clause and the reference to an institution’s rules. If the rules of an established arbitration institution are chosen, this does not trigger any such duties of the notary.
In addition, the applicants alleged that the arbitration clause violated Sec. 1040 para 3 German Code of Civil Procedure (ZPO) and hence was void, as it stated the recourse to the ordinary courts was to be excluded, and that the arbitral tribunal had the power to rule on the validity of the arbitration clause (“ohne dass die Möglichkeit der Anrufung der ordentlichen Gerichtsbarkeit besteht. Das Schiedsgericht kann auch über die Gültigkeit dieser Schiedsvereinbarung bindend entscheiden.“) Sec. 1040 para. 3 ZPO, however, provides that “where the arbitral tribunal believes it has competence, it shall rule on an objection (…) in an interim decision as a matter of principle. In such event, each of the parties may apply for a court decision to be taken, doing so within one (1) month of having received the written notice as to the interim decision.”
With respect to the Kompetenz-Kompetenz provision, the court held that the clause had to be interpreted as being in violation of Sec. 1040 para. 3 ZPO. However, this did not render the entire arbitration clause void. Sec. 139 BGB came to the rescue of the arbitration agreement: In German law, the partial invalidity of an agreement renders the entire agreement invalid only if it is to be assumed that the parties would not have entered into the agreement without the invalid part. Here, the court found that the parties wanted their disputes to be resolved in arbitration. Had they known about the invalidity of the part on the arbitral tribunals super Kompetenz-Kompetez, they would have agreed on a valid arbitration clause.
The Munich court got it right, both on the form requirement and on the Kompetenz-Kompetenz. With respect to the notarial form, it validates what is in my opinion the established practice, namely not to include the arbitration rules into the notarial deed. The Kompetenz-Kompetenz issue illustrates again how dangerous it is to deviate from standard arbitration clauses. At least this part of dispute would not have arisen, had the parties simply inserted the DIS model clause, which excludes the recourse to the ordinary courts of law, but does not mention the Kompetenz-Kompetenz.
* The arbitration clause read as follows:
16.1 Jede Streitigkeit, die aus oder im Zusammenhang mit diesem Vertrag oder seinen Anlagen entsteht, einschließlich jeder Streitigkeit über die Wirksamkeit oder das Bestehen dieses Vertrags, mit Ausnahme derjenigen Streitigkeiten, die von Gesetzes wegen einem Schiedsgericht nicht zur Entscheidung zugewiesen werden können, wird entsprechend der Schiedsgerichtsordnung des Deutschen Instituts für Schiedsgerichtsbarkeit e. V. (DIS) endgültig entschieden, ohne dass die Möglichkeit der Anrufung der ordentlichen Gerichtsbarkeit besteht. Das Schiedsgericht kann auch über die Gültigkeit dieser Schiedsvereinbarung bindend entscheiden.
** For those of you with no exposure to German notarisations: The agreement is read out aloud and in full by the notary.
Cartoon courtesy of and copyright by Stu Rees www.stus.com