Legal certainty regarding choice of law and general terms and conditions
In a ruling from January 2025, the Federal Court of Justice confirmed that the exclusion of German laws on general terms and conditions is permissible in arbitration agreements.
New input for a long-running debate: Is it permissible in commercial contracts to choose German law under exclusion of the German laws on general terms and conditions (§§ 305–310 German Civil Code (BGB)) – and if so, how? A decision by the Federal Court of Justice (BGH) this year (BGH, decision of January 9, 2025 – I ZB 48/24) has brought new momentum to the debate.
Background
German laws on general terms and conditions are seen as restrictive and inflexible for busines relationships between companies, especially when it comes to limitations on liability and price adjustment clauses. The general clause in Section 307 of the German Civil Code stipulates that the strict prohibitions on clauses in Sections 308 and 309 of the German Civil Code must also be taken into account when reviewing the content of contracts between companies. As a result, even in the B2B sector, there is a high risk that clauses contained in general terms and conditions are invalid.
In order to avoid this, two approaches are mainly pursued in practice: the choice of a jurisdiction that does not include any/ or has at least a less strict control of general terms and conditions (e.g., Swiss law) or the choice of German law with the exclusion of the laws on general terms and conditions. However, whether the latter is permissible from a legal perspective is controversial. The Federal Court of Justice has now confirmed that such an exclusion may be permissible within the context of an agreement on the jurisdiction of an arbitral tribunal.
Ordinary jurisdiction vs. arbitration court
There is consensus that excluding mandatory, non-dispositive laws on general terms and conditions while simultaneously stipulating the jurisdiction of ordinary courts is invalid. The application of the laws on general terms and conditions can only be “ avoided” by negotiating the contract clauses individually in accordance with Section 305 (1) sentence 3 of the German Civil Code. But court rulings set really high standards for this, which are rarely met in practice and, if at all, require a lot of (negotiation) effort.
If one decides to agree on the jurisdiction of arbitral courts, there is greater scope for a valid choice of laws.According to Section 1051 (1) of the German Code of Civil Procedure (ZPO), the parties are almost free to determine the applicable legal provisions in this case – for example, by excluding certain statutory provisions or choosing non-state legal rules. According to the prevailing opinion in legal literature, it is also irrelevant whether the case has a foreign connection or is purely domestic.
However, this choice of law is not unlimited. As the Federal Court of Justice explains, it is limited by the so-called “ordre public” whose compliance is reviewed by state courts in the context of enforcement or annulment of arbitation rulings (Section 1059 (2) No. 2 b) ZPO). If the decision of an arbitral court that considers a limited choice of law to be effective would ultimately contradict ordre public in Germany, this would prevent the recognition or enforcement of the arbitral award. But as long as the arbitral tribunal bases its decision on these limits and avoids a violation of ordre public even without applying German laws on general terms and conditions, there is nothing that prevents the award from being enforced.
Consequences for Business
In practice, the decision of the Federal Court of Justice provides greater legal certainty with regard to arbitration agreements that exclude German laws on general terms and conditions. Even though the Federal Court of Justice didn’t directly answer the question of the validity of the limited choice of law (German law without the laws on general terms and conditions), the decision made it clear that there’s no violation of ordre public as long as the principle of contractual self-determination is sufficiently preserved.
The court has thus indirectly confirmed the admissibility of opting out of the German laws on general terms and conditions while simultaneously applying an arbitration agreement.
If the laws on general terms and conditions are permissibly opted out of, the content of general terms and conditions must “only” be assessed on the basis of the principle of good faith in accordance with Section 242 of the German Civil Code and the above-mentioned “ ordre public”.
These principles have less stringent requirements than the principles developed by courts on unreasonable disadvantages and invalidity based on the laws on general terms and conditions under Section 307 et seq. of the German Civil Code.
In concrete terms, this means that if arbitration court jurisdiction is agreed and the laws on general terms and conditions are simultaneously opted out of, the clauses contained in the general terms and conditions are significantly less likely to be invalid.
On the one hand, this is advantageous for the more flexible drafting of general terms and conditions and contracts in pure B2B relationships. On the other hand, however, there are also contracting parties in B2B relationships who, due to their market position, are in a state of dependence on their respective business partners and often have difficulties negotiating or even rejecting the general terms and conditions of their business partners. For these companies, “falling back” on a violation of the laws on general terms and conditions and the resulting invalidity of clauses is often an important “safety net.” Companies affected by this should therefore proceed with caution when choosing and drafting arbitration clauses.
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