I. Initial situation

Partnerships continue to be an attractive legal form for a wide range of business activities. Many family businesses are organized as limited partnerships (KG (limited partnership), GmbH & Co. KG (limited partnership with a limited liability company as general partner)), and partnerships continue to be the predominantly chosen legal form for professional associations of freelancers. If a dispute arises between the partners, the public nature of the ordinary court proceedings and their probable duration – a second instance may always be possible until a final decision is reached, and perhaps even a third – can provide the opposing partner with a threatening potential in terms of procedural law which sometimes significantly exceeds the persuasiveness of the partner’s substantive arguments. The decision on disputes regarding partners‘ resolutions by a private arbitration court can avoid exactly these side effects of the ordinary court proceedings. As a rule, arbitration proceedings are not open to the public. The arbitration court’s decision is final and conclusive. There is no provision for an appeal against the arbitral award. The fact that partnership agreements nevertheless provide for arbitration agreements for disputes regarding partners‘ resolutions relatively rarely is probably also due to procedural uncertainties that are still considerable.

II. Previous case law of the Federal Court of Justice

The Federal Court of Justice (Bundesgerichtshof – BGH) has so far dealt with the arbitrability of disputes regarding shareholders‘/partners‘ resolutions three times. In its 1996 decision (“Arbitrability I”), it initially rejected the arbitrability of actions on a dispute regarding a shareholders‘ resolution in the case of a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH). This was based in particular on the absence of comparable provisions to Sec. 248 para. 1 sentence 1 and Sec. 249 para. 1 German Stock Corporation Act (Aktiengesetz – AktG) in arbitration proceedings. Those provisions, which are applied to the GmbH analogously, provide for the effect of judgments of state courts in disputes regarding shareholders‘/partners‘ resolutions for and against all shareholders/partners (so-called inter omnes effect).
In 2009 (“Arbitrability II”), the BGH changed its opinion and affirmed a fundamental arbitrability of actions for disputes regarding shareholders‘ resolutions for the GmbH. In the course of this decision, it established minimum requirements to ensure that the arbitration proceedings have a similar legal protection as proceedings before the state courts would have. These requirements are as follows:

• The arbitration agreement must have been concluded with the consent of all shareholders;
• the shareholders not participating as claimants in the arbitration action as well as the corporate bodies must be informed about the initiation and course of the arbitration proceedings and thus be given the opportunity to join the arbitration proceedings at least as intervening parties;
• all shareholders may participate in the selection and appointment of arbitrators, unless the selection and appointment of arbitrators is made by a neutral body; and
• all actions for disputes regarding shareholders‘ resolutions concerning the same subject matter of dispute must be consolidated before one arbitral tribunal.

If these requirements are not met in the articles of association or the arbitration agreement, the arbitration clauses are null and void under Sec. 138 German Civil Code (Bürgerliches Gesetzbuch – BGB), as the inter omnes effect of Secs. 248 para. 1 sentence 1, 249 para. 1 AktG, which apply mutatis mutandis, requires sufficient participation of all shareholders. In addition, it must be ensured that arbitral tribunals consisting of different arbitrors cannot decide on the same matter.
In 2017 (“Arbitrability III”), the BGH ruled that the aforementioned minimum requirements also apply to partnerships, i.e. also to the KG (and the GmbH & Co. KG). Therefore, at least limited partners and general partners of a KG, like shareholders of a GmbH, would have to be protected from disadvantage and deprivation of the necessary legal protection. This ruling has attracted a great deal of criticism in the legal literature and in practice. This is particularly the case because, in the case of partnerships, actions against the validity of partners‘ resolutions are generally to be directed against all disputing partners with an action for a declaratory judgment. Accordingly, all the partners concerned participate in the court or arbitration proceedings and the judgment or arbitral award is effective for and against all of them, so that there is no need for special protection. A deviating regulation would have to be expressly stipulated in the partnership agreement or in an arbitration agreement – which is, however, often done in practice.

III. Decision of the BGH of 23 September 2021

In 2021, the BGH ruled once again on the arbitrability of partners’ disputes in partnerships and also commented on actions for disputes regarding partners‘ resolutions (“Arbitrability IV”).

1. Factual background

The BGH had to rule on a case in which partner group A sought the exclusion of a limited partner from a GmbH & Co. KG and wanted to have members of partner group B ordered to agree to the exclusion of another member of partner group B from the partnership. The arbitration agreement as well as the partnership agreement contained a provision according to which all disputes arising from the partnership relationship were to be decided by an arbitral tribunal. After the arbitral tribunal had declared itself competent, the Cologne Higher Regional Court, at the request of the defendant, found that the arbitral tribunal did not have jurisdiction, against which the claimants in the arbitration proceedings appealed to the BGH.

2. Decision of the BGH

Essentially, the question to be clarified was whether the arbitration agreement was void in its entirety due to the inclusion of disputes regarding partners‘ resolutions under Sec. 138 para. 1 BGB, as the requirements of the Arbitrability II decision were not met. In its decision, the BGH has now partially adapted its lessons from Arbitrability III by incorporating the criticism from the literature.
The requirements set out by the BGH in Arbitrability II only apply to partnerships if the partnership agreement stipulates that such disputes are not to be settled among the partners, as provided by law, but with the partnership. The requirements developed in Arbitrability II served to protect the non-participating partners due to the lack of opportunities to participate in the arbitration proceedings. However, such special protection of the partners is not necessary in the case of partnerships which follow the statutory rules for actions for disputes regarding partners‘ resolutions, precisely because all partners shall participate in the arbitration proceedings and there is no danger of the effects being extended to those who are not involved in the proceedings. Therefore, in this case, actions for disputes regarding partners‘ resolutions are likely to be arbitrable on a regular basis without further provisions in the arbitration clause.
The situation is different if the partnership agreement stipulates that actions contesting the validity of resolutions are to be brought against the partnership. Indeed, the standards of stock corporation law do not apply (analogously) and a direct inter omnes effect of the judgment does therefore not arise. However, the BGH has consistently held that the other partners are bound by the decision in the proceedings against the partnership, at least under the law of obligations. If actions are to be brought against the partnership for disputes regarding partners’ resolutions, a need for protection therefore remains on the part of the partners who are to abide by the arbitral award but are not involved in the arbitration proceedings. This need for protection must be met by complying with the requirements of Arbitrability II. Otherwise the arbitration agreement is void pursuant to Sec. 138 para. 1 BGB.
In addition to this differentiation as to when the arbitration clause in the case of a partnership must contain the requirements of Arbitrability II, the BGH elaborated a further aspect in Arbitrability IV: Although the subject matter of the proceedings was not a dispute regarding a partners’ resolution, the BGH nevertheless gave a comprehensive explanation of the arbitrability of disputes regarding partners’ resolutions in its decision. The issue was whether the entire arbitration clause is void pursuant to Sec. 139 BGB as soon as the provision for disputes regarding defects in resolutions is insufficient and thus void. The BGH denied this in the specific case because, by interpreting the agreements of the partners in the arbitration agreement and in the partnership agreement, it came to the conclusion that the partners had in any case intended all other disputes to be arbitrable with the exception of disputes regarding partners‘ resolutions. The arbitration clause was to be upheld with the exception of the ineffective part. It should be emphasized, however, that this was an interpretation in an individual case which cannot be generalized.

IV. Modernization of the law on partnerships

The principles outlined will continue to be relevant when the Act on the Modernization of Partnership Law (Gesetz zur Modernisierung des Personengesellschaftsrechts – MoPeG) comes into force on 1 January 2024. This will result in an amendment to the German Commercial Code (Handelsgesetzbuch – HGB), in particular to Sec. 113 HGB, with the consequence that the regime for defects in resolutions of commercial partnerships will be largely adapted to that of corporations. Sec. 113 para. 1 HGB in its future version stipulates that actions to contest resolutions must be brought against the partnership and that the judgment will have effect against all partners. Consequently, arbitration agreements involving disputes regarding resolutions must comply with the requirements of Arbitrability II for all commercial partnerships that do not expressly provide in their bylaws for legal action to be taken against all partners.
However, the new regulations do not apply without restrictions. Civil law partnerships (Gesellschaft bürgerlichen Rechts – GbR) and partnership firms (Partnerschaftsgesellschaft) are generally excluded from this new regulation, but have the option to opt for the new regulations.

V. Conclusion

The decision of the BGH has created clarity and corrected inaccuracies from past decisions, so that there are now dogmatically unobjectionable guidelines. The decision of the BGH as well as the upcoming reform of partnership law give reason to definitely take a look at the partnership agreement as well as a possible arbitration agreement and examine those rules. The consequences of an inadequate arbitration clause are fatal in the event of a dispute, and there is a risk of years of litigation over jurisdiction before the matter can even be decided.