German Federal Supreme Court upholds arbitration agreement despite opt-out of Law on General Terms and Conditions in arbitration clause

28 April 2025

The landmark decision confirms the validity of arbitration agreements where the parties' choice of law excludes the Law on General Terms and Conditions ("GTCs").

The GTC law deals with standardised business terms for the sale of goods and services, and often applies to commercial contracts governed by German law. Originally introduced to protect consumers against unfair terms in pre-formulated contracts, German case law has increasingly broadened the scope of the GTC law to also include commercial transactions between businesses, with no consumer involvement at all.^[i] The consequences are far reaching. Contractual clauses that qualify as GTCs can be rendered null and void if they do not meet the strict requirements of the GTC law. A notable example is the invalidation of limitations of liability clauses if they qualify as a GTC and exclude or limit the liability for damages caused by gross negligence.

Choice-of-law clauses as vehicle to exclude GTC law

Recognising this, some voices in the German legal community have considered ways to exclude the applicability of the GTC law, with a combination of choice-of-law and arbitration agreements being proposed as an option. Some scholars argue that parties should be able to choose German law and, at least where foreign parties or foreign jurisdictions are involved, at the same time expressly exclude GTC law from their choice if the contract in question also contains an arbitration agreement.

Up until recently, German courts had not ruled on such clauses. It was uncertain whether an arbitration agreement with such choice-of-law clauses would be challenged as invalid, or whether the arbitral award upholding such an agreement would be challenged in annulment or enforcement proceedings for its failure to apply the GTC law. Some of this uncertainty has now been resolved.

German Federal Supreme Court's Decision

On 9 January 2025, the German Federal Supreme Court (Bundesgerichthof) issued a ruling on a choice-of-law clause that excluded the application of the GTC law (BGH, Judgement of 9 January 2025 - I ZB 48/24 -). In this case, one of the contract parties brought an action before the Berlin Higher Regional Court for a declaration that the arbitration agreement contained in the contract was invalid. The party argued that the exclusion of the GTC law in the choice-of-law clause created a risk that a contractual penalty clause would be upheld by the arbitral tribunal, which would otherwise be deemed invalid by application of the GTC law.

The Berlin Higher Regional Court dismissed the action and upheld the arbitration agreement as valid. The Federal Supreme Court confirmed this decision. It noted that the arbitration agreement should be assessed separately from the choice-of-law clause, with the state court's task being limited to examining the validity of the arbitration agreement. Insofar as the choice-of-law clause created the risk of non-application of the GTC law, the Court did not consider this as affecting the validity of the arbitration agreement. It found that the DIS arbitration rules applicable in that case, provided a sufficient guarantee that the arbitral tribunal would be composed of arbitrators qualified to make a fair decision as regards the applicability or exclusion of German GTC law.

The Federal Supreme Court thus delegated the task of deciding on the admissibility of choice-of-law clauses that exclude GTC law to arbitral tribunals. At the same time, the Court recalled the power of state courts to review an arbitral tribunal's decision at the annulment or enforcement stage. It noted that the state courts would still be able to set aside the award or deny the recognition or enforcement of the award if the non-application of the GTC law resulted in a violation of public policy.

In this context, the Federal Supreme Court did not tackle the question of whether the GTC law itself forms part of German public policy, but stated that public policy is violated in any case if, by not applying the GTC law, "the arbitral tribunal considers a contractual provision to be valid, the creation of which can no longer be understood as an expression of contractual self-determination, or if a contractual provision leads to contractual consequences that are no longer acceptable per se".

Implications for legal practice

With the decision of the Federal Supreme Court, the parties can now be certain that the validity of arbitration agreements with German choice-of-law clauses excluding the GTC law is not at risk. However, the decision does not resolve all uncertainties. Although the Federal Supreme Court has left it to arbitral tribunals to decide on the validity of such choice-of-law clauses, in view of their duty to render enforceable awards, tribunals may be wary of not applying the GTC law (at all). Commercial parties relying on such choice-of-law clauses will, for the time being, have to factor this in, when they take a call on the law applicable to a commercial transaction.

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[i] We note that the 2025 coalition agreement between the CDU/CSU and SPD contains a brief declaration that the law will be amended to allow the exclusion of GTC law in contracts between two "large corporations" within the meaning of Section 267 para. 3 of the German Commercial Code (Handelsgesetzbuch). However, it remains to be seen whether, when and to what extent this will be implemented.