Who takes the lead? – The German Federal Supreme Court provides guidance on parallel court proceedings relating to the validity and scope of arbitration agreements

German Federal Supreme Court, Order of 19 September 2019, BGH I ZB 4/19

On 19 September 2019, the German Federal Supreme Court (BGH) issued a decision dealing with the interplay between court proceedings related to the validity and scope of an arbitration agreement and a substantive claim under the contract in question (main claim). The BGH also dealt with the scope of state court competence to order interim relief concerning the subject matter of an arbitration.

After a thorough assessment of the applicable provisions of German arbitration law and the legislator's intent, the BGH ruled that a party to an arbitration agreement is free to request a declaration on the existence, validity, or scope of an arbitration agreement from the Higher Regional Court pursuant to Section 1032(2) German Civil Procedure Code (ZPO), irrespective of whether a main claim has been brought to a state court prior to or following this request. The court further confirmed that the power of a state court to grant interim relief related to the subject matter of an arbitration, pursuant to Section 1033 ZPO, only extends to requests for interim relief in the sense of German procedural law and not to other claims for security under substantive law.

Facts of the case

In 2013, the applicant and respondent entered into a construction contract under which the respondent was to plan and construct an art museum. The arbitration clause contained in the contract provided that all disputes arising out of and in connection with the contract were to be settled by arbitration. After a dispute had arisen concerning the termination of the construction agreement, the applicant prepared arbitral proceedings for damages and a refund of overpaid amounts.

In July 2018, the applicant initiated proceedings under Section 1032(2) ZPO, which provides that a party may request the Higher Regional Court to declare the admissibility or inadmissibility of arbitral proceedings before the arbitral tribunal is constituted. The applicant requested the Higher Regional Court Karlsruhe to declare that the arbitration agreement was valid, thus covering all disputes arising out of and in connection with the contract and in particular claims pursuant to Section 650f BGB. Under Section 650f BGB, a contractor can request security from the customer for remuneration that has been agreed upon, but not yet paid.

Before the Higher Regional Court, the respondent argued, inter alia, that the request was in part inadmissible since Section 1032(2) ZPO did not allow for a declaration as to the scope of an arbitration agreement.

In September 2018, the respondent initiated proceedings against the applicant requesting payment of outstanding remuneration and a security deposit pursuant to Section 650f BGB before the Regional Court Stuttgart. In response, the respondent relied on Section 1033 ZPO and argued that the arbitration agreement did not exclude jurisdiction of the state courts for claims under Section 650f BGB since such a claim was directed at the provision of security. Section 1033 ZPO prescribes that it is not incompatible with an arbitration agreement for a court to grant, before or during arbitral proceedings, a provisional or conservatory measure of protection relating to the subject-matter of the arbitration upon the request of a party.

The Higher Regional Court Karlsruhe declared, pursuant to Section 1032(2) ZPO, arbitral proceedings were admissible and well founded, and granted the applicant's request. The respondent appealed the decision (Rechtsbeschwerde) pursuant to Sections 1065(1), 1062(1) no. 2 ZPO.

The decision of the BGH

The BGH confirmed the Higher Regional Court’s decision that the application was admissible and well founded.

The BGH clarified that, under Section 1032(2) ZPO, the Higher Regional Court could not only review the existence and validity of an arbitration agreement, but also the scope. It emphasised that this was in line with procedural efficiency since Section 1032(2) ZPO is intended to permit an early decision on the admissibility of arbitral proceedings, which also includes the question whether particular claims are covered by an arbitration agreement. Furthermore, the court reasoned that this also results from a coherent standard to be applied under Section 1032(2) ZPO and under Section 1032(1). Under the latter provision, a party to an arbitration agreement may counter a claim in a state court with the argument that the claim is governed by an arbitration agreement and thus not subject to the court's jurisdiction.

The BGH also found the application to be admissible despite the parallel proceedings under Section 650f BGB before the Regional Court. It concluded that the applicant did not lose legitimate interest in its request, irrespective of whether it could have objected to the Regional Court's jurisdiction by invoking the arbitration agreement pursuant to Section 1032(1) ZPO. The court clarified that this principle applied irrespective of whether a main claim is brought before a state court prior to or after initiation of proceedings pursuant to Section 1032(2) ZPO. The BGH reasoned that the German legislator intended the Higher Regional Courts to be competent to hear arbitration-related disputes. According to the BGH, an early involvement of the specialised Higher Regional Court prevents burdensome challenges at a later stage (e.g. in the course of enforcement or setting aside proceedings relating to the final award). In addition, the BGH clarified that there is also no risk of contradictory decisions since the proceedings pertaining to the main claim – the proceedings before the Regional Court – can be suspended pursuant to Section 148 ZPO until a decision on the admissibility of arbitral proceedings is rendered.

The BGH then turned to the merits of the application and rejected the respondent's arguments. In particular, the court found that the arbitration agreement also covered claims for security pursuant to Section 650f BGB. According to the BGH, Section 1033 ZPO did not warrant a decision to the contrary. Referring to the wording of Section 1033 ZPO, the court found that the provision does not cover claims for security pursuant to Section 650f BGB, but only for requests for interim relief provided for under German procedural law, such as asset freezing orders (Arreste) or injunctions (einstweilige Verfügungen). According to the court, the wording "grant … upon request" referred to interim measures rather than main claims. The court further found that from the wording "provisional or conservatory measures relating to the subject matter" it follows that the measures in question do not constitute the main claim. Instead, the court held that this wording refers to measures aimed at securing the enforcement of the main claim.

The BGH noted that this result was supported by the legislator's considerations pertaining to Section 1033 ZPO. According to the court, the provision establishes a parallel competence of state courts and arbitral tribunals to ensure the swift enforcement of interim orders. Since an order by an arbitral tribunal will have to be enforced by a state court, directly requesting such an order from a state court may allow for faster enforcement.

The BGH concluded by pointing out that limiting the application of Section 1033 ZPO to interim measures provided for under German procedural law, and thereby excluding main claims from the scope of application, served the clear separation of competences between arbitral tribunals and state courts. Otherwise, the purpose of a main claim would have to be assessed in each individual case.

Conclusion

In its decision, the BGH strengthens procedural efficiency of arbitration-related court proceedings. The decision promotes the Higher Regional Courts' expertise and specialised role in regard to arbitration-related disputes. Furthermore, the BGH's decision enhances legal certainty on the scope of Section 1033 ZPO. The court expressly clarified that a parallel competence of arbitral tribunals and state courts only exists in regard to interim measures in the sense of procedural law and not for substantive claims, even if these claims concern the provision of security.

The full text of the decision can be accessed here.

For more information on this ruling, contact your regular CMS advisor or local CMS experts: Tilman Niedermaier, LL.M. and Falco Kreis.