Originally from European International Arbitration Review

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I. Introduction

The recurring discussion in the international arbitration community on the role of overriding mandatory rules before arbitral tribunals has given way to a number of controversial debates.  Perhaps one of the most significant questions relates to the obligation of the tribunal to take mandatory rules into consideration and, moreover, to the effect those provisions might have on the arbitration proceedings. Several decisions of German Higher Regional Courts addressing arbitration clauses in franchise contracts  [see Part II] and two leading cases decided by the German Higher Regional Court of Munich in 2006  and the Austrian Supreme Court in 2017  covering arbitration clauses in commercial agency agreements [see Part III] have turned the spotlight to a slightly different aspect: the validity of the arbitration agreement with regard to (overriding) mandatory rules. The Higher Regional Courts addressing franchise contracts refused the recognition and enforcement of arbitral awards which had been rendered in the United States based on arbitration agreements between the Dutch subsidiary of a US parent company and German franchisees. The German courts held that the underlying arbitration agreements were not valid pursuant to art. V para. 1 (a) New York Convention  in connection with section 1061 para. 1 ZPO,  since the clauses stipulated mandatory hearings and a seat of arbitration in the US, which constituted a “gross disadvantage” of the German franchisees according to the applicable section 879 para. 3 ABGB  [see Part II.A]. The judges of the Higher Regional Court of Munich and the Austrian Supreme Court had to assess arbitration agreements in agency contracts that provided for arbitration in the United States. Both courts invalidated the arbitration agreements due to the threat that an overriding mandatory rule of European law would not be applied by the respective arbitral tribunals [see Parts III.A and III.B].

With regard to the Higher Regional Courts’ decisions refusing the recognition and enforcement of the arbitral awards rendered in the US, this contribution will attempt to clarify what exactly constitutes such “gross disadvantage” to the franchisee as to render the underlying arbitration clauses invalid [see Part II.B]. In this context, the interrelation between the lex contractus of the arbitration agreement and the procedural public policy of the lex fori shall be discussed, thus revealing the international dimension of the problem [see Part II.C]. Furthermore, this contribution will elaborate on the case law background of the decisions of the Higher Regional Court of Munich and the Austrian Supreme Court and critically analyze the standard of review and the legal remedies used by the two courts to invalidate the arbitration agreements [see Part III.C]. In this regard the related question arises, whether the arbitral tribunal has an obligation to identify and apply overriding mandatory provisions. Such an obligation could either be the result of the party interest as the backbone of commercial arbitration or has its origin in the subsequent control by state courts [see Part III.D].