When explaining German law on general terms and conditions to foreign clients, you are quickly suspected of having accidentally eaten psychedelic mushrooms. Abroad, people are left flabbergasted when hearing about established German doctrine: even in business transactions, judges examine contract terms in great detail for fairness and appropriateness.
Individual clauses are declared invalid, while the rest of the contract remains in force. Oftentimes, the result has little to do with what the parties originally intended.
This issue is particularly relevant for large-volume contracts, such as those in large construction projects. This is because the review of general terms and conditions does not only apply to classic general terms and conditions as we know them from consumer contracts, but to all pre-formulated contractual terms – which are used in almost every contract.
Judicial scrutiny can be avoided by negotiating all contract clauses in detail. In this case, according to the legal definition, there are no longer any general terms and conditions.
However, this option often remains theoretical: on the one hand, contracts are often complex and lengthy, which makes negotiating each individual clause a time-consuming and costly undertaking. It is common practice to use standard contract templates such as FIDIC or VOB/B – precisely to avoid having to negotiate everything in detail.
On the other hand, the Federal Court of Justice imposes strict requirements on the ‘negotiation’ of contract terms. A serious willingness to change the content and the real possibility for the contractual partner to influence the specific content of a clause must be demonstrated.
Another way to avoid the review of general terms and conditions is for the parties to choose foreign law for their contract. This is possible.
However, a place of jurisdiction outside Germany must then also be agreed. Otherwise, there is a risk that a German court still scrutinises each clause. This is because general terms and conditions law is mandatory and cannot be excluded before state courts.
However, there is often a need to apply German law, particularly in contracts for German projects.
The question therefore arises whether the law on general terms and conditions can be avoided if disputes are to be settled by a private arbitral tribunal rather than a state court.
Is such ‘cherry picking’ possible in arbitration proceedings? Are the parties free to choose their own law? Or would that be anarchy?
In its decision of 9 January 2025, the Federal Court of Justice confirmed in principle that in arbitration proceedings the parties are free to choose German law without the German law on general terms and conditions (Federal Court of Justice, decision of 9 January 2025 – I ZB 48/24). Cherry picking is therefore possible.
However, there is one restriction: if the arbitral award is to be recognised and enforced in Germany, state courts may examine whether the recognition or enforcement of the arbitral award violates German public policy (ordre public).
Such a violation is possible if the arbitral tribunal considers a clause to be valid that leads to intolerable results or whose conclusion is no longer an expression of self-determination.
However, such cases are extremely rare. The risk that a German court will find a violation of public policy is low.
The review of general terms and conditions is always at the expense of the party who ‘provides’ the pre-formulated contractual terms. Anyone who sends a draft contract with pre-formulated contractual terms to their business partner runs the risk that these terms will be subject to review under the law governing general terms and conditions and may be declared invalid.
However, this risk can be avoided by excluding German law on general terms and conditions from the contract and agreeing to arbitration to settle disputes.