With or without you - When does a corporation's arbitration agreement include its directors?

Germany

On 16 January 2019, the Higher Regional Court of Munich (“OLG Munich”) rendered a decision that dealt with the question of whether the personal scope of an arbitration agreement entered into by a limited company also extends to its directors (case no. 7 U 1365/18). The question arose when the defendant – a director of a limited company that had concluded an arbitration agreement with the claimant – raised a motion to stay the court proceedings because he considered himself a party to the arbitration agreement.

The Court held that a director is only bound by an arbitration agreement concluded by the limited company if he was involved in the negotiations of the arbitration agreement as a representative of the company, and the contractual interpretation of the arbitration agreement shows that the director was to be bound personally. In the absence of any indications that the arbitration agreement in the present case should extend to the director, the Court rejected the defendant’s motion.

The Facts of the Case

The claimant is a former shareholder of two limited companies (G.G. GmbH and G.G. SL GmbH). Along with the other shareholders, he sold his shares in both companies to another limited company (A. GmbH). The defendant represented the buyer, A. GmbH, as its then director at the conclusion of the share purchase agreement on 1 February 2012. The purchase agreement contained an arbitration agreement, which in the English translation reads as follows: “All legal disputes arising out of and in connection with this contract or measures pertaining to its execution, including disputes regarding the validity of this contract or this arbitration agreement, are finally decided by an arbitral tribunal according to the arbitration rules of the German Institution for Arbitration (DIS) without possibility of recourse to legal action before state courts.” [Note: translation provided by the authors.]

The purchase agreement made the transfer of shares dependent upon fulfilment of two conditions both of which were later fulfilled by A. GmbH.

On the same day the share purchase agreement was concluded, the claimant and A. GmbH entered into a separate consulting agreement. Again, the defendant represented A. GmbH. Under this agreement, the claimant was entitled to a monthly retainer fee and a guaranteed amount. To secure his claims, A. GmbH was obliged to provide a guarantee of another limited company within four weeks. This guarantee, however, was never provided.

On 8 February 2012, the defendant resigned from his position as director of A. GmbH. A few months later, a controversy arose between the claimant and A. GmbH as a result of which A. GmbH terminated the consulting agreement for exceptional cause.

Despite a settlement with A. GmbH, the claimant eventually decided to pursue legal action against the defendant as the former director of A. GmbH. He based his tortious claim on an allegation of fraudulent misrepresentation: according to him, the defendant made false statements about the guarantor securing A. GmbH’s obligations under the consulting agreement and A. GmbH’s intention to fulfil its obligations under that agreement.

During the proceedings before the first-instance District Court of Munich (“LG Munich I”), the defendant raised the defence that he was a party to the arbitration agreement and that the court lacked jurisdiction. The District Court followed his reasoning and dismissed the claim as inadmissible pursuant to Section 1032(1) of the German Procedural Code (“ZPO”).

The claimant appealed the District Court’s decision arguing that the court had erred on the inadmissibility of the claim as the arbitration agreement did not extend to the respondent.

The Decision of the OLG Munich

On 16 January 2019, the OLG Munich overruled the District Court’s decision finding that the defendant could not invoke the arbitration agreement as he was not a party to it.

The question whether and to what extent natural persons acting as legal agents of a corporation fall within the personal scope of an arbitration agreement (ratione personae) was expressly left open by the German Federal Supreme Court in its decision of 28 January 2014 (III ZR 210/13, para. 1). In that case, the Supreme Court held that it did not need to consider this question since the arbitration agreement no longer bound the corporation. Consequently, any accessory jurisdiction of the arbitral tribunal regarding the corporation’s agents would have ceased as well.

In the absence of any decision by the German Supreme Court, legal analysts and the lower courts suggest three different approaches.

According to the first approach, which the District Court adopted in its decision, a director of a limited company is bound by the company’s arbitration agreement due to his capacity as the company’s legal agent independent of whether the director was personally involved in the conclusion of the arbitration agreement or even appointed at that time. Interestingly, the OLG Munich (albeit a different division) had followed this approach in an earlier decision of 13 February 1997 (29 U 4891/96, para. 6).

The second approach advocates a less extensive interpretation of the personal scope of arbitration agreements according to which only directors who were personally involved in the conclusion of the arbitration agreement as legal agents of the company are bound by it.

The most restrictive approach subjects a director to an arbitration agreement only if he acted as the company’s legal agent during the conclusion of the arbitration agreement, and there are indications that the arbitration agreement was meant to extend to the director personally. This was the path chosen by the Higher Regional Court of Nuremberg (“OLG Nuremberg”) in its decision of 29 April 2013 (1 U 316/12, para. II.3), and by the OLG Munich in the present case.

Given that a person bound by an arbitration agreement foregoes its access to state courts, extending the arbitration agreement to a director who is not a party to the agreement would lead to a loss of rights of a non-party. Pursuant to the doctrine of privity of contract (Verbot des Vertrags zulasten Dritter), such agreements to the detriment of a third person are impermissible under German law. 

Against this background, a contractual interpretation of the arbitration agreement must reveal the parties’ intent to extend the agreement to a director who is involved in the negotiations as a legal agent. Either the arbitration agreement itself or the remaining contract must contain clear indications of the parties’ will for an extension.

The OLG Nuremberg and the OLG Munich set a relatively high bar for such indications. Neither the phrase in the arbitration agreement that it extends to “related entities” of the parties (OLG Nuremberg) nor the inclusion of the director’s name and the extent of his representative powers in the heading of the share purchase agreement (OLG Munich) were considered sufficient indications.

Finally, the OLG Munich deemed it irrelevant that the defendant as the former director invoked the arbitration agreement in the proceedings for his benefit. According to the ruling, the scope of an arbitration agreement cannot depend on who relies on it, but must be determined objectively.

Absent any clear indication of the parties’ intent to extend the arbitration agreement to the defendant, the Court found the claim admissible. For the claimant, however, this did not provide much relief as he lost on the merits failing to establish a case of fraudulent misrepresentation.

Conclusion

The present ruling is the second relatively recent decision of a German Higher Regional Court to follow a restrictive approach to extending the personal scope of arbitration agreements to the legal agents of a corporation. Pending a decision by the German Supreme Court, however, the question cannot be regarded as resolved and there remains some legal uncertainty as to how other courts might treat the issue in the future.

Extending arbitration agreements to the legal agents of the involved companies may be a commercially sensible choice. Claimants might not only bring contractual claims against the opposing parties of the underlying agreement, but they might also consider tortious claims against non-party legal agents. In many such cases (as in the present one), the tortious claims will involve allegations of fraudulent misrepresentation by the legal agent during the contractual negotiations. Companies choosing arbitration for its confidential proceedings might also wish to keep disputes involving their legal agents out of the public sphere as these disputes regularly involve similar issues and could thrust the underlying contractual dispute into the limelight.

In light of the still unsettled case law, corporations that wish to extend an arbitration agreement to their legal agents are advised to put this in writing and to have all legal agents personally sign the agreement.

For more information on the drafting of multi-party arbitration clauses or other arbitration issues, please contact one of our local experts.