Escaping the scrutiny of general terms and conditions? – Federal Court of Justice on the independence of arbitration agreements

published on 20 November 2025 | reading time approx. 4 minutes

The review of general terms and conditions in commercial transactions has always been subject to criticism. In the B2B sector in particular, it is often perceived as an unnecessary restriction of contractual freedom, with the result that German law often appears less attractive in international contract negotiations than it should be. Judicial review of general terms and conditions can lead to contractual provisions that deliberately deviate from legal requirements being declared invalid. Against this background, it is not surprising that many companies have a strong interest in excluding German law on general terms and conditions as far as possible.

This issue was also addressed by the Federal Court of Justice (BGH) at the beginning of this year. The decision handed down on 9 January 2025 – I ZB 48/24 – met with great interest among experts. Among other things, the decision addressed the question of whether the validity of an arbitration agreement must always be separated from the question of the validity of other contractual provisions between the parties, such as the exclusion of the law on standard terms and conditions when German law is chosen as the governing law.

This article takes up the key considerations of the Federal Court of Justice and highlights where companies can expect greater legal certainty in the future.

Background to the decision

The reason for the review by the Federal Court of Justice was a case in which two German entrepreneurs had concluded a construction contract for a building project in the Netherlands. Among other things, the contract contained a penalty clause stipulating that a penalty of up to 10% of the net contract sum would be payable if the contractual deadlines were exceeded. Clause 28.1 of the contract, which was drafted by one of the parties, initially provided that the contract itself and all contractual terms and conditions applicable to it should be governed by German law.

Clause 28.3 of the contract also contained an arbitration clause with (among other things) the following wording:

"(i) All disputes arising out of or in connection with this contract or its validity shall be settled in accordance with the Rules of Arbitration of the German Institution for Arbitration e.V. (DIS) with the exclusion of ordinary legal recourse. (...)

(v) The law applicable to the matter is governed by clause 28.1. The parties expressly agree to waive the application of sections 305 to 310 of the German Civil Code (BGB).

In an arbitration claim dated 4 July 2022, the contractor initially asserted claims for remuneration for work performed against the client. The client rejected the claims and, in turn, asserted claims for defects, delay and contractual penalties by way of a counterclaim.

The contractor and applicant then turned to the Berlin Court of Appeal in October 2023 and applied for a declaration that the arbitration proceedings were inadmissible. It was of the opinion that the contractual penalty clause was excessive according to the case law of the Federal Court of Justice and therefore invalid. In view of the clause in No. 28.3 (v), according to which the arbitral tribunal is not required to review the general terms and conditions, there was a risk that the arbitral tribunal would apply the contractual penalty clause even though it violated the law on general terms and conditions. According to the applicant, this would render the entire arbitration agreement invalid.

Key statements of the Federal Court of Justice

Both the Kammergericht (Berlin Court of Appeal) in the first instance and the Federal Court of Justice considered the application to be unfounded and the agreed arbitration clause to be valid. In this specific case, the Federal Court of Justice clarified that the validity of the submission to arbitration in No. 28.3 (i) did not depend on the validity of the provision contained in No. 28.3 (v) of the contract, which waived the application of Sections 305 to 310 of the German Civil Code (BGB).

A possible invalidity of the provision in No. 28.3 (v) did not affect the validity of the arbitration agreement in No. 28.3 (i), regardless of whether the clause in No. 28.3 (v) was a general term and condition or not. The provision in No. 28.3 (v) of the contract is not part of the actual arbitration clause in No. 28.3 (i), but rather represents a special procedural agreement between the parties. The parties' fundamental decision in favour of arbitration did not depend on other provisions and their validity. It was not apparent that the arbitration clause in No. 28.3 (i), which had been discussed by the parties prior to the conclusion of the contract, was intended to be made dependent on the existence of other procedural provisions.

Even if No. 28.3 were to constitute general terms and conditions, this would not preclude the validity of the arbitration clause in No. 28.3 (i). The standard arbitration clause in commercial transactions would then be subject to content review pursuant to Section 307 of the German Civil Code (BGB), but would withstand such review, as the arbitration agreement does not constitute an unreasonable disadvantage to the other party to the contract.

The legal consequences of a (partial) invalidity of the exclusion of Sections 305-310 BGB by No. 28.3 (v) would be assessed in accordance with Section 306 BGB in the case of general terms and conditions. This stipulates that the contract remains valid in all other respects if general terms and conditions have not become part of the contract in whole or in part or are invalid. Only if the part that continues to be considered valid no longer appears reasonable in the overall structure of the contract would the invalidity of the partial clause affect the entire clause. This applies in particular if the invalidity of the part of the clause would have such serious consequences that the previous contract would have to be redrafted in essential points.

Applying this standard, the arbitration agreement in No. 28.3 (i) would also remain valid if the exclusion of the law on standard terms and conditions in No. 28.3 (v) were to be invalid, as the arbitration clause constitutes an independent, comprehensible provision in its own right.

The decision of an arbitral tribunal that considers the limited choice of law to be effective can only be overturned by the ordinary courts if the recognition or enforcement of an arbitral award would lead to a result that is incompatible with public policy as a corrective measure due to the non-application of the provisions on standard terms and conditions. In this case, recognition or enforcement of the arbitral award would have to be refused. This would be considered, for example, if the arbitral tribunal considered a contractual provision to be valid whose conclusion could no longer be understood as an expression of contractual self-determination or if the provision would lead to contractual consequences that were simply no longer acceptable. Unfortunately, the Federal Court of Justice has not (yet) commented on the standard to be applied in this regard. However, it can be assumed that the scope of what is ‘permissible’ is relatively generous.

Conclusion and implications for practice

Does this decision by the Federal Court of Justice suggest that a choice of law in favour of German law in combination with the exclusion of review of general terms and conditions is legally viable and can withstand judicial review?

The ruling makes it clear that it is fundamentally possible to use an arbitration agreement to take advantage of German law when choosing the applicable law and at the same time avoid the risk of an opaque and case-by-case application of the law on general terms and conditions. Specifically, the Federal Court of Justice clarifies that the validity of an arbitration agreement must be assessed independently of the validity of other contractual provisions, such as the exclusion of the review of general terms and conditions under Sections 305 et seq. of the German Civil Code (BGB). This decision is to be welcomed as it creates greater legal certainty and gives companies greater flexibility in choosing German law. It should help to make arbitration agreements with limited choice of law more attractive for companies, as the exclusion of the law on standard terms and conditions is now possible with much greater legal certainty.