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European courts insist on EU arbitration, says expert

FOCUS: A non-EU company signing an agreement with a partner business based in the EU may need to consent to a European arbitration clause or risk having the validity of the agreement disputed by the German courts. 06 Apr 2016

German courts have recently shown a tendency to declare non-EU arbitration clauses 'invalid' if they consider there is a risk that the arbitral tribunal will disregard mandatory provisions of EU law. This may happen also in other EU member states.

The first example of this arose in the 1980s when, under the German Stock Exchange Act of the time, a German party to a futures contract had the right to cancel the contract. When a company attempted to avoid this by specifying the application of a foreign contract law and arbitration outside Germany, the German Federal Court of Justice ruled that the arbitration clause was void, because certain rights under German contract law were mandatory and could not be avoided by 'contracting out' to another country. 

More recently, cases have come up relating to commercial agency agreements. Within the EU, commercial agency agreements are covered by the Commercial Agency Directive. According the Directive when an agency agreement is terminated, the agent will be compensated in cash for the goodwill associated with the customer base he or she established for the principal. The Court of Justice of the EU ruled that this applies to all commercial agency agreements where the agent is based in an EU member state, even if the agreement said that it would be governed by the law of a non-EU country.

The German courts have extended this ruling and held that arbitration clauses providing for a place of arbitration outside the EU are considered void if: the agent is based in the EU; his or her activity is mainly connected to the EU; and there is a risk that the arbitral tribunal will disregard mandatory European law. The very fact that the arbitrators would have to decide the dispute on the basis of non-EU law is seen as proof of that risk.

The clear message is that non-EU companies risk having their arbitration clause declared invalid if they insist on disputes being heard 'at home'. So, what can be done?

First, it is possible to include directions in the arbitration clause to apply mandatory European laws even if these contradict the law chosen by the parties. This alone should convince the European courts that such mandatory European laws will be considered by the arbitrators, because awards that ignore the 'terms of submission to arbitration' are not enforceable under the New York Convention. There is however no case law to date that confirms this.

Where an agreement has already been signed, the non-European principal should look into the mandatory laws in place in the agent's country, and whether the European courts will have jurisdiction to hear claims by the agent. In fact, European procedural law would generally point to the principal's own home country, unless the principal had considerable assets in the agent's country. Even then, a judgement based only on the presence of certain assets in a country would not always be enforceable outside that country.

Finally, it may be possible to change the course of the case law in this area. Invalidating arbitration clauses just because the tribunal might not apply laws that were designed to protect one party could be seen as contrary to the New York Convention. 

Munich-based Ulrich Lohmann is an arbitration expert with Pinsent Masons, the law firm behind Out-Law.com.