The applicability of the UN CISG on the arbitration agreement

Judgments of the Federal Court of Justice of 26 November 2020 in case No. I ZR 245/19 and the Court of Cassation of 28 September 2022 in Case No. 20-20.260

Both the material validity of an arbitration agreement and the effective integration in the contract of an arbitration clause contained in general terms and conditions can comply with the UN Convention on the International Sale of Goods (CISG). Where the parties select a governing law in a contract, it will not necessarily also apply to the arbitration clause.

Background

The judgment of the German Federal Court of Justice (Bundesgerichtshof, BGH) of 26 November 2020 on whether and to what extent the UN Convention on the International Sale of Goods (CISG) applied to arbitration agreements caused significant legal uncertainty. The Court looked closely at the formal requirements for the effective agreement of an arbitration clause and the conditions for integrating the General Terms and Conditions (CTGs) into the contract under the CISG. In this respect, the BGH confirmed its previous jurisprudence that, under the CISG, the CTGs must be sent or otherwise made available to the other party for them to be considered a component of the contract. In contrast to German law, the mere possibility to obtain the CTGs, such as by clicking on a link on the seller’s homepage, is insufficient. This is particularly important when the CTGs contain an arbitration clause. The BGH leaves the question of whether and to what extent the governing law selected by the parties in a contract also determines the law applicable to the arbitration clause (so-called arbitration statute). The French Cour de cassation answered this question in its judgment of 28 September 2022 and assessed the effectiveness of the arbitration clause – contrary to the English court that was also involved in the same case – based on French substantive law.

1. The German perspective: Judgment of the BGH of 26 November 2020 in Case No. I ZR 245/19

Brief facts of the case

The BGH was asked to decide on an objection to the application of an arbitration agreement under § 1032 (1) of the Civil Process Code (Zivilprozessordnung, ZPO). Under this provision, the defendant has until the start of the oral proceedings before the state court to file a plea that the claim is inadmissible and the court does not have jurisdiction because an arbitration agreement determines that the dispute must be decided by a court of arbitration.

Two companies located in Germany and the Netherlands had a dispute about compensation claims arising with respect to a sale and purchase agreement for goods. The contract was formed from orders from the purchaser and a document entitled “Contract of Sale” (Verkaufskontrakt), in which the seller, a spice trader located in the Netherlands, confirmed the order. The confirmation letter noted that all sales and contracts were subject to the General Terms and Conditions of Sale and Delivery. However, the purchaser was not sent these GTCs. The terms of the Dutch Association of Spice Trade (“NVS-Bedingungen”) were also not enclosed. The NVS Bedingungen contained a choice of law clause that subjected the contract to Dutch law, without application of the UN CISG, as well as an arbitration clause in favour of an arbitration court of the Dutch association in Amsterdam.

The District Court (Landgericht) issued a default judgment in written pre-trial proceedings, which the defendant appealed. In the appeal, the defendant raised the arbitration agreement. The Court dismissed the claim as inadmissible because it held arbitration clause in the NVS Bedingungen effectively formed part of the contract. The claimant appealed. The Court of Appeal held that the plea that an arbitration agreement existed was groundless so that the claim before the District Court was admissible. It referred the case back to the District Court. On further appeal to the BGH, admitted by the Appeal Court, the defendant sought to preserve the judgment of the District Court dismissing the claim.

The BGH confirmed the judgment of the Court of Appeal. The defendant’s second appeal was unsuccessful.

The judgement of the BGH of 26 November 2020 in case no. I ZR 245/19

The BGH held that the action before the District Court was admissible. In accordance with § 1032 (1) of the ZPO, the defendant could not rely on the arbitration agreement because the arbitration agreement was not effectively agreed. Under § 1025 (2) of the ZPO, § 1032 of the ZPO is also applicable where the place of arbitration is in another country, in this case, the Netherlands.

Raising the plea that an arbitration provision applied before the start of the oral hearing

The plea that the court did not have jurisdiction because of an arbitration agreement was raised before the start of the oral hearing. Through the objection to the default judgment, the proceedings reverted to the status before the defendant’s default. The plea that an arbitration agreement applied, first raised in the statement of opposition (Einspruchsschrift), was thus not delayed under § 1032 (1) of the ZPO and not precluded. The objection does not have to be raised within the deadline for the statement of defence.

Form requirements for an arbitration agreement

Under Art. II (1) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Arbitration Convention), any arbitration agreement must be in writing. In accordance with Art. II (2) of the New York Arbitration Convention, this includes an arbitration clause in a contract signed by both parties or an exchange of letters between the parties. A unilateral declaration, such as the confirmation letter signed by just one party in this case, is not sufficient.

Under the most-favoured-nation principle (see Art. VII (1) of the New York Arbitration Convention), an arbitration agreement can also be effective when the national or substantive law selected by national conflict of law rules applies fewer demands and is, therefore, more favourable. This was not the case here.

The form requirements for an arbitration agreement under § 1031 of the ZPO are also not fulfilled. Under § 1031 (2) and (3) of the ZPO, a reference to a document containing an arbitration clause shall suffice (here: the NVS-Bedingungen). This does not apply here because the arbitration clause was not effectively included in the contract.

The conditions for effectively making an arbitration clause in the GTCs part of the contract

The BGH held that the question of whether the arbitration clause was effectively part of the contract must be assessed under the UN CISG. As both Germany and the Netherlands are signatories to the CISG, the parties to the contract for the supply of goods have their registered office in a contracting state. Therefore, the UN CISG applies pursuant to Art. 1 (1) (a) of the CISG. Accordingly, for GTCs – here the arbitration clause – to effectively form part of a contract they must be provided to the other party or otherwise made accessible. This was not the case here. The arbitration clause, therefore, was not an integral part of the contract.

2.

The French perspective: the judgment of the Cour de cassation of 28 September 2022 in Case No. 20-20.260

Brief facts of the case

In 2001, a Lebanese company, Kabab-Ji concluded a Master Franchise Agreement with a Kuwaiti company, Al-Homaizi Foodstuff Co (AHFC). The agreement licenced the use of the “Kabab-Ji” brand in Kuwait and provided for the agreement of individual contracts for each point of sale over ten years. The agreement expired in 2011 and the parties did not extend it. During the term of the agreement, AHFC was restructured and a holding company, Kout Food Group (KFG) was established. The franchisor, Kabab-Ji approved the restructuring in 2004, expressly agreeing that the restructuring would not otherwise affect the conditions agreed in the contracts between the parties. The Master Franchise Agreement contained a governing law clause selecting English law, as well as an arbitration clause selecting the rules of arbitration of the International Chamber of Commerce (ICC), located in Paris. However, the agreement did not contain a clear choice of law provision concerning the law applicable to the arbitration agreement.



In 2015, the franchisor commenced arbitration proceedings against KFG, the successor of the original contracting party. It alleged that the Kuwaiti master franchisee had not performed its contractual obligations and used the acquired know-how without authorisation to develop its own restaurants. An arbitration award from 2017 sentenced KFG to pay compensation to the franchisor, Kabab-Ji.

While Kabab-Ji (unsuccessfully) commenced proceedings before the English courts to enforce the arbitration award, KFG filed an action for annulment of the arbitration award in France. KFG appealed the judgment of the Paris appeal court (Cour d’appel de Paris), which confirmed the arbitration award, to the Cour de cassation. In particular, KFG accused the Appellate Court court of not using English law to assess the effectiveness and applicability of the arbitration clause, despite the governing law clause in the contract between Kabab-Ji and AHFC.

Judgement of the cour de cassation of 28 September 2022 in case no. 20-20.260

The Cour de cassation confirmed its jurisprudence on the law applicable to arbitration clauses. Accordingly, an arbitration clause should be considered independently from the rest of the agreement. The effectiveness of such a clause primarily depends on the common will of the parties. The governing law clause contained in the agreement does not offer any cause to also apply the governing law clause to the arbitration clause. If the parties do not agree on a specific choice of law clause, under French international private law, any conflict of law connection is not considered; instead the material provisions developed under international arbitration law apply.

These material provisions grant the arbitration courts broad powers. This includes the possibility to extend the arbitration clause (extension d’une convention d’arbitrage). Accordingly, an arbitration agreement can apply to a legal dispute between parties, which have not signed the agreement. This requires the parties to have taken part in the contractual negotiations, to have influenced them, or for there to be some other way that their agreement to the arbitration agreement can be determined. The arbitration court, therefore, had the right – based on this material provision – to assume jurisdiction.

3. Comment

Arbitration awards are internationally recognised and enforceable under the New York Arbitration Convention. Arbitration clauses are therefore often used in international supply agreements to avoid the hurdles of recognition and the enforcement of awards before state courts in countries outside the European Union, where the rules are not uniform. For the arbitration clause to be effective and fulfil its function in the case of a dispute, a few things must be kept in mind when using GTCs. Where the UN CISG applies, strict requirements apply to the inclusion of GTCs in agreements: the GTCs must actually be sent to the foreign contracting partner. A reference to the ability to view the CTGs online via a link on the homepage of the vendor may be sufficient under German law but is not sufficient under the CISG. In addition, the CTGs must either be in the common language of the contract and negotiations between the parties, or they must be in the native language of the recipient. If a German purchaser corresponds with a French vendor in French, for example, CTGs in English will not fulfil these requirements. English is not recognised as the universal contract language everyone must master. Neither the CTGs nor any arbitration clause they contain has effectively been made part of the contract.

The law applicable to the arbitration clause requires a separate connection, i.e., it will be determined separately. The law applicable to the rest of the contract does not necessarily apply. In the past, the BGH also applied the law selected in the governing law clause to the arbitration agreement; the BGH expressly left this decision open in the current case. In the Kabab-Ji case, the Court de cassation held that the arbitration agreement is generally not covered by the law applicable to the rest of the agreement in line with the governing law clause. The English court took a different view and refused to enforce the French arbitration award. In cases of doubt, therefore, international agreements should contain an arbitration agreement that expressly states which law applies to the arbitration agreement.

Dr Birgit Münchbach
Etienne Sprösser