Frankfurt am Main Higher Regional Court affirms third-party effect of arbitration agreement in framework supply contract

In its decision of 2 January 2025 (26 SchH 1/23), Frankfurt am Main Higher Regional Court (Oberlandesgericht Frankfurt am Main) once again addressed the issue of the third-party effect of arbitration agreements. In line with established case law, it concluded that an arbitration agreement for the benefit of third parties, in particular in a genuine contract for the benefit of third parties, is effective and can have a third-party effect. The decisive factor here is the intention of the parties and the underlying contract in the coverage relationship. By contrast, it is not relevant whether the beneficiary third party alternatively has access to the ordinary courts.

Background to the decision

The applicant is a company based in the People’s Republic of China which manufactures pharmaceutical products. The respondents are affiliated companies of X AG, a company in the pharmaceutical industry. In 2007, X AG and the applicant entered into a long-term framework supply contract for the supply of active pharmaceutical ingredients (API). According to the preamble, the framework supply contract also allowed the affiliated companies of X AG to purchase products under the terms of the framework supply contract.

Over the next few years, several supplementary agreements, inter alia containing arbitration agreements, were added to the framework supply contract.

In mid-2018, X AG had to recall products in a total of 23 countries because impurities were found in the applicant’s API. This was followed by notices of defect and, in April 2020, finally, by the termination of the contract with due notice by X AG with effect from 17 May 2021. During the entire term of the framework supply contract, X AG, which was the only respondent directly involved in entering into the framework supply contract, did not purchase a single product. On 6 June 2020, the respondents filed a request for arbitration against the applicant.

In an interim arbitral award dated 21 December 2022, the arbitral tribunal based in Frankfurt am Main declared that it had jurisdiction. On the grounds that there was no valid arbitration agreement with the respondents, the applicant objected to the interim arbitral award, ultimately without success, and applied for a declaration that the arbitral tribunal had no jurisdiction. The Frankfurt am Main Higher Regional Court dismissed the applications as unfounded.

Decision: The arbitration agreement in the framework supply contract has third-party effect

The Frankfurt am Main Higher Regional Court confirmed the jurisdiction of the ICC arbitral tribunal and upheld the third-party effect of the arbitration agreement contained in the framework supply contract, essentially for the following reasons:

• The arbitration agreement entered into in the supplementary agreement is valid and also has an effect for the benefit of the respondents, who were not directly parties to the framework supply contract. The third-party effect arises by way of interpretation of the contract (sections 133 and 157 of the German Civil Code (Bürgerliches Gesetzbuch – BGB), the court said.
• In principle, the scope of an arbitration clause is limited to the parties to the contract and their legal successors. This is because submission to an arbitration agreement entails a waiver of the right to turn to the ordinary courts, which is equivalent to a fundamental right according to the second sentence of Article 101(1) of the German Basic Law (Grundgesetz); such waiver can only be justified by a party’s intention to that effect, according to the court.
• The extension of an arbitration agreement to third parties is an exception and does not come into question on the mere ground of the respondents being affiliated companies.
• It is generally permissible to make an arbitration agreement for the benefit of third parties, in particular in a genuine contract for the benefit of third parties within the meaning of section 328 of the German Civil Code.
• The framework contract between the applicant and the respondent constitutes such a genuine contract for the benefit of third parties. If a third party is granted a right in a framework supply contract to enter into subsequent individual purchase agreements on the terms of the framework supply contract, the individual purchase agreements entered into in exercise of the right are subject to the arbitration agreement of the framework contract, without this being seen as an impermissible burden on the third party.
• Such an arbitration agreement also does not make it necessary for the benefiting third party itself to enter into an arbitration agreement that satisfies the format requirements of section 1031 of the German Code of Civil Procedure (Zivilprozessordnung – ZPO). Instead, the formally effective arbitration agreement, which is part of the contract entered into for the benefit of third parties, has a direct effect on the third-party beneficiary, according to the court.
• In this setup, neither the contract granting third-party beneficiary rights nor the arbitration agreement entered into in the coverage relationship and binding on the third party are to be regarded as impermissible contracts to the detriment of third parties. No such impermissible contract exists if the only negative effect for the third party is a restriction of the benefit granted. This restriction is inherent in the benefit from the outset and does not prevent the third party from being bound by the arbitration clause. The third party acquires the right encumbered with the restriction to assert the right before the arbitral tribunal, the court said.
• The beneficiary’s right to choose between ordinary jurisdiction and arbitration is also not a requirement for the admissibility of a third-party effect. Ultimately, the third party is free to choose whether or not to take advantage of the opportunity to enter into individual purchase agreements, according to the court.

Conclusion and practical implications

The decision by the Frankfurt am Main Higher Regional Court emphasises the known possibility of third-party effects of arbitration agreements in genuine contracts for the benefit of third parties. The practical applications go beyond the situation in the present case and are not limited to affiliated companies of the party directly involved in the contract. Instead, it is generally possible to include benefiting third parties within the scope of arbitration agreements in framework contracts by means of specific contract drafting.