On 25 January 2008, the Higher Regional Court of Hamburg (OLG Hamburg) rendered a decision (Hanseatic Court of Appeal, decision of 25 January 2008 – file no 6 Sch 07/07, SchiedsVZ 2009, page 71 et seq) on the conclusion of an implicit agreement to arbitrate. Whereas arbitral agreements usually form part of written contracts or are at least written down in some way and signed by the parties, this case shows that even without such agreements in writing, an arbitral agreement can be concluded effectively due to commercial usages.
Facts of the case
The dispute between the parties was about whether an arbitral agreement contained in a charterparty on the transport of sewage sludge from Greece to Hamburg which contained an arbitral agreement had become effective.
The respondent had sued the petitioner for payment of damages before the arbitral court of the German Maritime Arbitration Association (GMAA). The petitioner challenged the arbitration action by arguing that no arbitral agreement existed which would give the GMAA jurisdiction. The arbitral court, after hearing evidence from two witnesses, concluded that a binding arbitral agreement came into force by way of a confirmation of order with contractual effect (in German Kaufmännisches Bestätigungsschreiben – COO). Thus, the arbitral court decided by way of an interlocutory decision that it had jurisdiction in this case. Thereupon, the petitioner filed an applicationfor a declaratory court judgment, pursuant to the German Code of Civil Procedure (ZPO), against this interlocutory decision.
The OLG Hamburg confirmed the arbitral court’s decision as, in its view, it was correct to assume that an arbitral agreement with binding effect had been entered into by the parties by way of a COO.
Confirmation of order doctrine
In Germany, there exist commercial usages (or customs) which are considered binding rules between businessmen as a consequence of a consistent and unitary commercial practice. Pursuant to section 346 of the German Commercial Code (HGB), such commercial usages have to be taken into account in the commercial relationship between businessmen. One example of these commercial usages is the principle of a COO: one businessman writes down the content of an oral agreement already made (at least from his point of view) with the other businessman and sends it to his counterparty; if the counterparty does not immediately object to the “confirmed” agreement or contract, his silence is interpreted as an implicit consent and therefore an agreement is deemed to be concluded between them under the terms specified in the confirmation of order. Hence, this interpretation of silence in response to a COO is an exception to the general principle under German law that mere silence may not be interpreted as a declaration of intent and has no legal significance.
“Under the German confirmation of order doctrine, silence on receipt of a document confirming an oral agreement can contractually bind the recipient”
A contract under the terms of the COO becomes effective if the following conditions are fulfilled:
- both parties are merchants or take part in business activities on a regular basis
- contractual negotiations have taken place between the merchants and both parties must have firmly believed that the existing (oral) agreement between them covered all terms and conditions in a conclusive and final way. A simple confirmation which can only be used to achieve a conclusion of a contract is not sufficient. The COO should clearly repeat and finalise the existing (oral) agreement and it should be sent immediately after the contractual negotiations, so that the recipient is prepared for it
- the sender must act in good faith. Thus, he must be entitled to rely on the fact that the silence of the recipient can be understood by him as an implicit agreement to the COO . Modifications and amendments to the previous (oral) agreement contained in the COO will only become part of a contract if the sender can honestly expect the recipient’s approval. This, however, will not apply in the case of essential modifications or amendments and depends on the circumstances; and
- the other party must have received the COO and must not have immediately (without undue delay) objected to it. Furthermore, it does not matter whether the COO is named as such. It is the content of the letter which is decisive.
“Great care should be taken in responding to a confirmation letter from a German party”
If the COO is only a summary of the content actually agreed upon in the previous (oral) negotiations, the COO only has declaratory effect. If, on the other hand, an agreement has not yet been reached from the point of view of the issuing party, the COO has a constituent effect, ie, the contract is concluded by this COO if there has been no objection to it.
In the present case the arbitral court, after taking evidence, came to the conclusion that the parties had conducted contractual negotiations on a shipment of 3,000 tonnes of sewage sludge. After several telephone conversations, in which the freight rate was negotiated, the petitioner sent a “fixture confirmation”, stating a freight rate of €33.00 per tonne to the respondent. This fixture confirmation contained a reference to the “Pro Forma Charter Party”. Box 25 of this
Pro Forma Charter Party stated, inter alia, the following wording: “German Law, Arbitration Hamburg according to GMAA rules”. By his “fixture confirmation” dated 17 May 2006, the respondent confirmed the conclusion of a charter party on the shipment of 3,000 tonnes of sewage sludge on the terms and conditions specified in the Pro Forma Charter Party.
This confirmation qualified as a COO. Both parties were merchants and the fixture confirmation referred to contractual negotiations previously conducted by them. Therefore, the petitioner would have needed to object immediately to the fixture confirmation in order not to be bound by its content. As this was not the case, the contract including the arbitral agreement was validly concluded between the parties in accordance with the principles of a COO.
The case demonstrates that in an appropriate situation and based on silence in response to a COO, a contract can be validly concluded which, in turn, triggers the jurisdiction of an arbitral court. This can lead to unanticipated results, in particular, if the parties do not wish disputes to be resolved before an arbitral court or neither party wants to accept the other party’s terms and conditions.
Even in international business relationships it is important to bear in mind that although the principles of a COO are unknown in most foreign jurisdictions, they may apply in certain cases, depending on the counterparty. The legal significance of silence does not depend on the agreed choice of law but on the ordinary residence of the silent party.
This, however, does not apply to business transactions being performed in the country in which the counterparty to the silent party resides. In this case, the agreed choice of law will apply, as the silent party will not be entitled to rely on his actions being judged by the law of his country of residence.
Therefore, caution is highly recommended in cases where a COO, a confirmation letter or a similar kind of communication is received from a party which has its residence in Germany and where such a letter refers to a business transaction to be performed outside Germany.
Axel Kunze is a partner and Kevin Quennet is an associate in Frankfurt.