CLOUT
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The case concerns the "inoperability" of an arbitration agreement due to the lack of sufficient funds and questions whether it is possible for a party to rely on this defence.

The two German parties had entered into a contract for the installation of bathroom appliances and a separate arbitration agreement. During the course of the execution of the contract a dispute as to provisional payments arose which Defendant wanted to have resolved by the state courts. Plaintiff rejected that request and insisted on the existence of the arbitration agreement. No arbitration proceedings were, however, started by Defendant for cost reasons. A year later Plaintiff informed Defendant that he terminated the arbitration agreement for the lack of sufficient funds and sued Defendant for damages for breach of contract in the state courts.

The Trial Court and the Court of Appeals had rejected the action as inadmissible and referred the parties to arbitration in accordance with section 1032 (1) German Code of Civil Procedure (adapted from article 8 (1) MAL). The Federal Supreme Court reversed the decision.

The Court held that the arbitration agreement did not debar Plaintiff from bringing an action before a state court because the arbitration agreement had proven impracticable under the circumstances. According to section 1032 (1) German Code of Civil Procedure, a court is not required to dismiss a claim brought before it, if "the arbitration agreement is null and void, inoperative or incapable of being performed." The Court found that under the circumstances the arbitration agreement was incapable of being performed because Plaintiff was unable to afford the costs of arbitration. The only option for Plaintiff to pursue his claim was in state court, by means of legal aid for which he had qualified. Defendant had not been willing to advance the costs of arbitration. Furthermore, Plaintiff was not estopped from relying on the "incapable of being performed" exception because of his own previous reliance on the arbitration agreement as the use of a procedural means of defence is not in violation of good faith. Unlike Plaintiff, Defendant had not brought an action before a state court. As compared to the otherwise inevitable loss of Plaintiff's right to due process of law, legal proceedings did not constitute undue hardship to Defendant.

Finally, the Court stated that termination of the arbitration agreement is no longer required under the revised version of section 1032 to trigger the aforementioned exception. The right to legal process is not excluded merely because Plaintiff has caused his inability to pay his arbitration expenses. It would be excluded only if Plaintiff had caused the inability in bad faith.

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