## Facts

- A private contractor and a local public entity entered a long-term framework agreement for construction and operation of hospital facilities.
- The parties included an arbitration clause governing dispute resolution under the contract.
- The clause contemplated that members of the parties’ governing bodies could be appointed as arbitrators.
- A dispute arose, and the parties attempted to constitute an arbitral tribunal under the agreed mechanism.
- One party objected that appointing a governing-body member of a party as arbitrator would violate the prohibition on judging one’s own case and the requirement of arbitrator independence.
- A Higher Regional Court refused to confirm the disputed appointment and instead appointed a different arbitrator through court assistance.
- The dissatisfied party filed a legal complaint to the Federal Court of Justice seeking to overturn the court-appointed replacement.

## Issues

1. Whether a member of a party’s governing body may serve as an arbitrator in a dispute involving that party.
2. Whether an arbitration clause permitting appointment of such a person is valid, or invalid to the extent it conflicts with mandatory requirements of arbitrator independence and impartiality.
3. When the contractual appointment method yields a structurally non-independent arbitrator, whether the court may disregard the defective mechanism and appoint an independent arbitrator.

## Decision

- The Federal Court of Justice dismissed the legal complaint and affirmed the lower court’s substitute appointment.
- The court held that, as a rule, members of a party’s governing body are barred from acting as arbitrators in that party’s dispute.
- The court held the arbitration agreement was ineffective to the extent it permitted appointment of a party organ representative as arbitrator.
- The court concluded that where the agreed appointment process fails because the designated arbitrator cannot lawfully serve, the court must appoint an independent arbitrator.

## Legal Principles

- Arbitrators must be independent and impartial; this requirement is a mandatory minimum standard that limits party autonomy in structuring arbitral tribunals.
- A party’s organ representative is structurally aligned with that party’s interests, creating an objective appearance of self-judging that is incompatible with arbitral neutrality.
- Contract terms that permit structurally non-independent arbitrators are severable and disregarded to preserve the parties’ overarching agreement to arbitrate.
- When the agreed appointment mechanism produces an invalid appointment, courts providing appointment assistance must select an independent arbitrator rather than implement the defective clause.

## Conclusion

The court required arbitral neutrality by treating party organ representatives as generally ineligible to serve as arbitrators in disputes involving their own organizations and by authorizing courts to replace invalid contractual appointment mechanisms with independent appointments while keeping the arbitration agreement otherwise effective.


Private Contractor v. Local Authority, No. I ZB 12/17 (BGH Oct. 11, 2017)