Online Symposium on the Law Governing Arbitration Agreements: A View from Vienna

The post below was written by Matthias Lehmann, who is Chair for Private Law, International Private Law and Comparative Law at the University of Vienna and an editor of the EAPIL blog. It is the fifth contribution to the EAPIL online symposium on the English Law Commission’s proposed reform of the law governing arbitration agreements. The other posts are written by Alex Mills, Manuel Penades, George Bermann, Sylvain Bollée and Giuditta Cordero-Moss. 

Readers are encouraged to participate in the discussion by commenting on the posts. 

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Legislative proposals from the British islands to correct the intricacies of the common law always fill the continental lawyer with joy. Yet interestingly, most of the questions that the Law Commission’s proposal to reform English arbitration law addresses are not dealt with explicitly by legislation but rather by court judgments on the continent. This is at least true for the two legal systems that I will survey in this post, German and Austrian law. Moreover, the case law of these two countries diverges in some very important respects from the Law Commission’s proposal.

The Law Governing the Arbitration Agreement

Respect for Party Autonomy

I start with the law governing the arbitration agreement. German and Austrian courts unanimously rule that the law governing the arbitration agreement can be chosen by the parties (see e.g. German Federal Court, 12 May 2011, IX ZR 133/10; Austrian Supreme Court, 23 June 2015, 18 OCg 1/15v). For this, they rely on the conflicts rule contained in Article V(1)(a) New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards (NYC), which they extend per analogiam to the situation before an arbitration award has been rendered. This position is buttressed by Article 6(2) European Convention on International Commercial Arbitration of 1961, which explicitly allows to choose the law applicable to the arbitration agreement.

Choice for Main Contract = Choice for Arbitration Clause?

More difficult is whether a choice in the main contract can be extended to the arbitration agreement, as the UK Supreme Court held, but the Law Commission denies. This issue is moot in German and Austrian literature. The whole debate is impregnated by an unhealthy dose of dogmatism. It basically revolves around the separability of the arbitration agreement from the main contract and its ‘true nature’ – whether it is procedural or substantive.

The Austrian Supreme Court has left this question open (decision of 23 June 2015, 18 OCg 1/15v). The German Supreme Court, however, has cut the Gordian knot and explicitly ruled that a choice in the main contract is to be presumed to also cover the arbitration clause contained therein – at least absent any indications to the contrary (see German Federal Court, 12 May 2011, IX ZR 133/10, discussed here). You can call this an ‘implied choice’, although this expression was not used by the German court; it would probably be more correct to speak of a ‘presumed choice’.

The Impact of the CISG

A notable particularity in comparison to English law is caused by the fact that both Germany and Austria are signatories of the Convention for the International Sale of Goods (CISG). Although this Convention is geared towards sales contracts, the German Federal Court has held that its provisions concerning the formation of the contract (Articles 14–24 CISG) also apply when determining the validity of an arbitration clause contained in the sales contract (German Federal Court, id.). As a result, the question whether standard terms and conditions of one party which contain such a clause have become part of the contract will be governed by the CISG if the contract falls within its scope. Even where the parties have explicitly excluded the CISG, it may be relevant when courts determine whether German law provides a more favourable rule in the sense of Article VII NYC (German Federal Court, id.). To understand this viewpoint, it is necessary to realise that in the eyes of German (and Austrian) courts, the CISG is part of their domestic law, merely providing a special regime for international sales contracts.

The Impact of the Arbitral Seat

In case no law has been chosen – neither for the arbitration agreement nor for the main contract – German and Austrian courts refer to the law of the place of the seat of arbitration to determine the validity of an arbitration agreement (see German Federal Court, id., para 52; Austrian Supreme Court 18 OCg 1/15v). For this, they rely again on Article V(1)(a) NYC per analogiam; with Article 6(2) European Convention on International Commercial Arbitration of 1961 being even more to the point. In this respect, both legal systems converge with the suggestions of the Law Commission.

The Fall-Back Rule

A difficult question is which law governs the arbitration agreement when the applicable law has not been chosen and the seat of the arbitration is yet to be determined. There is no case law in Austria or Germany on this issue yet.

Two solutions are discussed in literature. The first is to always apply the law of the forum of the state court that is facing the task to assess the validity of the arbitration clause, for instance when it is invoked as an exception to its jurisdiction. Yet, this lex forism has the evident downside of favouring diverging results and inviting forum shopping.

Therefore, the second solution is preferrable, which is to apply the law of the state with the closest connection to the arbitration agreement. This connection must be determined on the basis of all circumstances. Most authors understand this to be the law of the state that governs the merits of the case.

From an Austrian and German perspective, there is light and shadow in the Law Commission’s Proposals. The suggestion to lay down in statutory law the parties’ freedom to choose the law governing the arbitration agreement will be met with cheers. Equally, the role of the seat of the arbitral tribunal as a connecting factor in the absence of a choice is down the alley of German and Austrian law. In contrast, the decoupling of the law governing the main contract and that governing the arbitration agreement will raise some eyebrows, at least in Germany.

Verification of the Validity of the Arbitration Agreement by the Courts

But it is the exclusion of the review of the validity of the arbitration agreement by state courts that will be most frowned upon from Schleswig to the Danube. The Law Commission wants to exclude a de novo hearing when this issue has already been discussed and decided before by the arbitral tribunal (see the post by Ugljesa Grusic). The justification for this are efficiency and fairness.

Although German and Austrian courts are no less committed to these values, their position is entirely different. According to them, a party must always have the possibility to invoke a lack of consent to arbitration before a state court, regardless of whether this question was already debated before the arbitral tribunal or not. The famous concept of Kompetenz-Kompetenz developed by the German Federal Court does not imply otherwise. As the German Federal Court has said quite clearly:

“According to the mandatory provision of section 1041 (1) no. 1 ZPO [German Code of Civil Procedure before the reform of 1998, concerning the annulment of arbitral awards], the ordinary court has to examine the validity of the arbitration agreement without being bound by the decision of the arbitral tribunal. Since the arbitral tribunal, according to § 1025(1) ZPO [German Code of Civil Procedure before the reform of 1998, concerning the validity and effects of the arbitral agreement], obtains its jurisdiction solely through the arbitration agreement, it cannot itself make a binding decision on its legal existence. The so-called competence-competence, i.e. the power to make a binding decision on its jurisdiction for the state courts (or other authorities), is therefore not available to it.” (decision of 5 May 1977, III ZR 177/74)

This position, which is shared by Austrian courts (OGH, decision of 19 December 2018, 3 Ob 153/18y), is not merely the product of a particular legal thinking or culture. Instead, it seems to be required by the European Convention of Human Rights (ECHR). To bind a party to a decision of an arbitral tribunal to which it has not agreed would violate the right to a fair trial enshrined in Article 6 ECHR. In no case can efficiency prevail over this fundamental right. If the UK legislator retained the proposal by the Law Commission in this regard, it would create a permanent abyss between English law and that of other European states. This would certainly give rise to heated discussions and a possible recycling of the title of an old article: “What Sort of Kompetenz-Kompetenz has Crossed the Channel?”

— Many thanks to Paul Eichmüller for his assistance in researching the Austrian decisions.