Germany’s Federal Court of Justice rules on exclusion of German General Terms and Conditions Law in arbitration clauses

In its order dated 9 January 2025 (case no. I ZB 48/24), the Federal Court of Justice (Bundesgerichtshof ‒ BGH) handed down a groundbreaking ruling for German arbitration practice. The court considered whether an arbitration clause remains valid when the parties have chosen German law, yet excluded the application of Sec. 305 et seq. of the German Civil Code (Bürgerliches Gesetzbuch ‒ BGB) (“GTC Law”). The Federal Court of Justice confirmed the validity of the arbitration clause and clarified that it is generally the responsibility of the arbitral tribunal, rather than state courts, to determine the effectiveness of the exclusion of the GTC Law.

Background

Under German law even business-to-business (B2B) contracts can qualify as general terms and conditions (Allgemeine Geschäftsbedingungen – AGB) (“GTC”). They thus fall under the scope of Sec. 310 para. 1 of the German Civil Code, which subjects them to rigorous scrutiny of GTC Law that is notably strict by international comparison. In cases of ambiguity, such terms are interpreted to the detriment of the persons providing the GTC (Sec. 305c para. 2 of the German Civil Code). Consequently, it is common in B2B contracts to exclude the application of GTC Law wherever possible.

However, before state courts such an exclusion is not feasible in purely domestic matters because parties cannot “escape” mandatory national law (cf. Article 3 para. 3 Regulation (EC) No 593/2008 – “Rome I Regulation”). Contract practice therefore sometimes involves choosing an arbitral tribunal and German law while excluding GTC Law. This approach has until now been subject to legal uncertainty, particularly with regard to its enforceability before German courts. While the Federal Court of Justice did not rule conclusively on the exclusion of GTC Law, it confirmed the validity of the arbitration clause and, in addition, offers important guidance on the exclusion of GTC Law in arbitration proceedings.

Facts of the Federal Court of Justice’s decision

In the underlying case, two companies were in dispute over, among other things, contractual penalties arising from a contract based on the standard rules for the award of construction contracts (VOB-Vertrag) for the construction of a carport solar power plant in the Netherlands. The contract contained (i) a choice of law clause in favour of German law, (ii) an arbitration clause with Berlin as the seat of arbitration and (iii) an express provision excluding the application of GTC Law.

Fearing that arbitral tribunal would apply the contractual penalty despite a violation of GTC Law, the applicant applied to the Berlin Higher Regional Court (Kammergericht) for a declaration that the arbitration proceedings were inadmissible (Sec. 1032 para. 2 of the German Code of Civil Procedure (Zivilprozessordnung ‒ ZPO). The Higher Regional Court dismissed the application and the Federal Court of Justice upheld that decision.

The Federal Court of Justice’s decision at a glance: valid arbitration clause

The Federal Court of Justice emphasises the separability of the arbitration clause from the choice of law clause and from the exclusion of GTC Law. In the present case, the clauses were set out separately in the text, could be clearly distinguished in terms of their place in the contractual system and each contained its own independent set of rules. Therefore, the arbitration clause, the choice of law and the exclusion of GTC Law can each be reviewed independently by the state courts. The Federal Court of Justice reviewed exclusively the arbitration clause, as only its validity determines the admissibility of arbitration. Even if the exclusion of GTC Law were invalid, the arbitration clause would remain effective. The arbitral tribunal is solely responsible for deciding whether the exclusion of GTC Law is itself effective.

A state court only reviews the arbitral tribunal’s decision at a later stage, in recognition or annulment proceedings, and then only against the benchmark of public policy (ordre public). An arbitral award may infringe public policy especially if it leads to a result that conflicts with fundamental principles of law. The mere exclusion of GTC Law does not, in itself, amount to a breach of public policy. What matters instead is whether the award leads to outcomes where, for example, contractual provisions can no longer be understood “as an expression of contractual self‑determination” or where a contractual arrangement results in “consequences that are simply no longer acceptable”.

Legal classification: greater party autonomy in arbitration proceedings

Limits on choice of law under Sec.1051 of the Code of Civil Procedure

The Federal Court of Justice’s decision is linked to a dispute about the limits of party autonomy in choosing the applicable law before an arbitral tribunal. The German Code of Civil Procedure allows parties to specify which “legal provisions” the arbitral tribunal should apply (Sec. 1051 of the Code of Civil Procedure). Unlike in proceedings before state courts, this gives the parties the option not only to choose an entire legal system (Article 3 para. 1 of the Rome I Regulation), but also to select, exclude, or combine individual state-law provisions (or non‑state sets of rules). It is therefore in principle possible to exclude GTC Law before arbitral tribunals.

However, this freedom to structure contracts is not without limits and legal scholarship remains divided on its precise limits. There is broad agreement, however, that certain restrictions on freedom of contract always apply. These include general clauses, for example on immorality (Sec. 138 of the German Civil Code) and good faith (Sec. 242 of the German Civil Code) or the prohibition of harassment (Sec. 226 of the German Civil Code).

At the latest during enforcement or recognition proceedings, the arbitral award will be reviewed by reference to public policy. If recognition or enforcement would lead to an outcome contrary to public policy, a state court will set aside the arbitral award ex officio (Sec. 1059 para. 2 no. 2(b) of the Code of Civil Procedure) or refuse to recognise it (Sec. 1061 para. 2 of the Code of Civil Procedure). This judicial review of the result in the individual case is mandatory for the parties.

Influence of EU law

The question of whether mandatory national and international provisions within the meaning of the Rome I Regulation (cf. Article 3 para. 3 and 4, Article 9 of the Rome I Regulation) are also binding on arbitral tribunals and thus “override” the free choice of legal provisions (Sec. 1051 of the Code of Civil Procedure) remains highly controversial. The prevailing opinion in German legal literature is that arbitral tribunals are not directly bound by the Rome I Regulation. Nevertheless, it is acknowledged that EU law has an indirect effect: mandatory provisions of EU law (for example, in consumer or employee protection) and internationally mandatory provisions of the chosen law (see Article 9 of the Rome I Regulation) must be taken into account to ensure the recognition and enforceability of the arbitral award within the EU.

In cross-border cases with an EU connection, mandatory EU provisions (e.g. consumer protection, commercial agents’ compensation claims, competition law) must therefore always be observed (known as Union public policy – ordre public de l’Union). The ECJ has already endorsed this understanding in earlier decisions (e.g. judgment dated 1 June 1999 – Case C-126/97 (Eco Swiss)) and most recently explicitly confirmed it in the context of reviewing arbitral awards by the Court of Arbitration for Sport (CAS) (judgment dated 1 August 2025, Case C-600/23 (Royal Football Club Seraing SA v FIFA et al.).

Special aspects in purely domestic cases

For purely domestic cases, the legal situation is less certain due to the absence of a landmark court ruling. The following special aspects should be noted:

• The limits laid down in the Rome I Regulation generally do not appear to apply directly, which means that mandatory GTC Law (within the meaning of Article 3 para. 3 Rome I Regulation) could be excluded.
• This means that in B2B contracts within Germany the exclusion of GTC Law can be effective, subject to the general clauses and the limits of German and European public policy.

Conclusion and practical advice

In light of the Federal Court of Justice’s decision, it is advisable to set out the arbitration clause, the choice of law and any exclusion of GTC Law clearly, systematically and as separate provisions in a contract. At the same time, the decision strengthens arbitral tribunals’ decision‑making authority on issues of choice of law and the exclusion of GTC Law. However, a definitive answer as to whether GTC Law can be excluded is still outstanding. Accordingly, certain uncertainties remain when excluding GTC Law in arbitration clauses:

• It remains open how arbitral tribunals will deal with such an exclusion in practice, and this is likely to depend on the individual arbitrator.
• There remains a risk that state courts will only intervene at the subsequent recognition and enforcement stage if the exclusion of GTC Law leads to unacceptable results. This may ultimately result in the arbitral award being set aside.

In view of these risks, excluding GTC Law in arbitration clauses can still be an attractive option, particularly for complex B2B projects or along the supply chain, in order to gain greater contractual flexibility.