GERMANY
Ragnar Harbst, Heiko Plassmeier, Jürgen Mark
A. LEGISLATION AND RULES
A.1 Legislation
International arbitration in Germany continues to be governed by the provisions of the Tenth Book of the German Code of Civil Procedure (ZPO)[1], to which no legislative amendment has been made since 1998. In 2016, a working group started to review the German arbitration law. Based on their findings, the German Federal Ministry of Justice is presently working on a draft bill which it hopes to finish in 2021. We will continue to monitor this development.
A.2 Institutions, rules and infrastructure
The German Arbitration Institute (DIS) has published a discussion draft of “Supplementary Rules for Notices of Dispute to Third Parties.”[2] If adopted, these Rules shall apply if the parties have agreed amongst themselves and at least one party has agreed with a third party to apply these Rules.
According to the draft Rules, a third party notice of dispute will only be effective if the third party (a) agrees and confirms that it accepts to be included in the dispute, (b) does not have any objections against the constitution of the arbitral tribunal or the appointment of the sole arbitrator and (c) is willing to accept the status of the proceedings at the time of joining. A notified third party can also request a notice of dispute to be served upon another third party. In this case, the same conditions apply.
If the supplementary rules are adopted by the DIS, a third party who has received a valid notice of dispute cannot argue that the decision taken by the arbitrator or arbitral tribunal was wrong and that the party who had requested service of the notice of dispute did not conduct the arbitral proceedings properly if and insofar as the third party could have made submissions in the proceedings to compensate for any omissions by the party. Furthermore, the third party will have to accept the outcome of the arbitration as binding in a subsequent dispute with the party who had requested service of the notice of dispute upon the third party.
The DIS published the discussion draft in January 2021. It remains to be seen whether the draft will be accepted in the present form by the DIS members.
B. CASES
B.1 Enforcement of an award despite foreign challenge proceedings
The Court of Appeal Munich had to deal with a request for enforcement of a Croatian award while challenge proceedings were still pending in Croatia.[3] The award had been rendered by the Permanent Arbitration Court at the Croatian Chamber of Economy against a legal entity based in Germany. The German entity challenged the award before the competent court in Croatia. After the court of first instance had dismissed the annulment application, the German entity filed a complaint against this decision. The Croatian entity commenced enforcement measures, first, before the Croatian courts and, second, before the German courts. The German entity applied for a stay of the German enforcement proceedings on two grounds; first because annulment proceedings were still pending in Croatia, second because the Croatian entity had already availed itself of enforcement measures in Croatia. The court of appeal dismissed the application. It held that enforcement measures abroad do not stand in the way of enforcement measures in Germany unless such foreign enforcement measures have led to a full settlement of the debt. If not, it is permissible to commence enforcement measures in various jurisdictions at the same time. The court further held that pending annulment actions do not automatically justify a stay of enforcement proceedings in Germany. A stay would only be justified if the applicant can demonstrate that the pending annulment proceedings are prima facie likely to succeed.
B.2 Dismissal of payment claim based on a “paid-when-paid” clause does not justify setting aside an award
The Federal Supreme Court dealt with an application for setting aside an arbitral award that had dismissed a payment claim based on a “paid-when-paid” clause.[4] The facts of the case were as follows: a sub-contractor had supplied certain equipment to a general contractor. The supply contract included a “paid-when-paid” clause. According to this clause, the general contractor only had to effect payments to the sub-contractor once the general contractor itself had collected payments for the equipment from the employer. It was established that the employer had not yet effected such payments to the general contractor. The sub-contractor argued, amongst other things, that such a “paid-when-paid”-clause was invalid under German law. The arbitral tribunal rejected the argument and dismissed the subcontractor’s payment claim as temporarily inadmissible. Accordingly, it remained possible for the sub-contractor to start fresh arbitration proceedings, if necessary, once the employer had effected payments to the general contractor. The sub-contractor challenged the award before the competent Court of Appeal Berlin, arguing that the tribunal’s interpretation of the contract violated public policy. The court dismissed the application, holding that a “paid-when-paid” clause does not constitute such violation of public policy. The Federal Supreme Court confirmed this ruling. The court explained that such a clause in essence only determines the due date of a payment claim in the sense that the claim only becomes due once the employer effects payment. Such determination of the due date did not constitute a violation of public policy.
B.3 Arbitrator’s dissenting opinion as a reason to vacate an award?
On 16 January 2020, the Court of Appeal Frankfurt issued a judgment [5] in annulment proceedings that raised concerns in the German arbitration community about the admissibility of dissenting opinions in arbitration awards. The subject matter of the arbitration was a post-M&A dispute, and the main issue was the tribunal’s treatment of an opinion issued by a tribunal-appointed expert. The applicant, in his capacity as an insolvency administrator, had brought an action under the ICC Rules for payment of an outstanding cash contribution exceeding USD 350 million against the insolvent company’s former parent company. The case turned on the liquidation value of the insolvent company on which both parties submitted largely varying expert opinions (approximately USD 130 million and minus approximately USD 370 million respectively). The tribunal ultimately appointed its own expert who assessed the liquidation value of approximately USD 39 million. Two rounds of briefs followed, in which the parties made extensive submissions with respect to the basis and contents of the expert opinion. In a three-day hearing, the tribunal also took evidence from fact witnesses on issues relating to the liquidation value. Ultimately, the tribunal dismissed the action based on the report by the tribunal-appointed expert, holding that the respondent parent company owed no further cash contribution. One day after the tribunal had rendered the award, one of the party-appointed arbitrators issued a dissenting opinion in which he criticized the expert report and the other arbitrators’ appreciation of evidence. The insolvency administrator then filed an application for annulment of the award with the Court of Appeal Frankfurt based on the submissions that the tribunal had violated the applicant’s right to be heard in that it did not sufficiently consider his objections against the expert opinion.
The court of appeal vacated the award for a breach of public policy (section 1059 para. lit. 2 b ZPO), holding that the tribunal had acknowledged the applicant’s objections against the expert report, but failed to consider them sufficiently in the award. Among others, the applicant had submitted that the expert had used outdated figures. The award only included the blanket assertion that the expert had “proceeded from correct facts”; the tribunal did not provide any justification for this finding, which the court of appeal held to constitute a violation of the applicant’s right to be heard, as these submissions were the “essential core” of the applicant’s factual submissions. It is recognized that a violation of one party’s right to be heard constitutes a breach of German public policy that justifies the annulment of an award. The court of appeal found that it was conceivable that this violation had influenced the outcome of the proceedings, as the tribunal could have asked the expert to comment on the applicant’s objections.
While the court of appeal’s judgment would not have attracted much attention insofar as the judges vacated the award for the above reason, the real bone of contention lies in the closing paragraph of the decision: there, the court “left open whether a further ground for annulment under section 1059 para. lit. 2 b ZPO for a violation of public policy” existed because one arbitrator had disclosed his dissent from the majority of the tribunal. According to the court, “there is much to suggest that the disclosure of a dissenting opinion is inadmissible in domestic arbitral proceedings,” as it violates the secrecy of deliberations within the tribunal, which in turn “should be regarded as part of the procedural public policy.” The court did not have to determine this issue, as it had already found another reason to vacate the award.
This appears to be the first reported case in which a German court expressed a view on the lawfulness of dissenting opinions in arbitral awards, which is not surprising, as dissenting opinions are few and far between in domestic German proceedings. [6] The majority of scholars in Germany tend to consider them to be legitimate and not a reason to vacate an award, [7] as the reasons that justify the secrecy of deliberations in a state court do not apply to the same extent in arbitration. It remains to be seen whether the court of appeal’s decision sets a new trend. The Federal Supreme Court [8] rejected an appeal against the judgment. It did not seize the opportunity to comment on the issue, pointing out that there was no need to do so, as the court of appeal had only stated its view in an obiter dictum.
B.4 No referral of the dispute back to the arbitral tribunal in case the award is set aside due to an obvious and serious violation of a party’s right to be heard
The general contractor for the erection of a power plant had awarded a subcontract for the prefabrication and assembly of the piping to the respondent. The work was divided into three lots. While the respondent directly executed lot 1, it awarded lots 2 and 3 to the claimant. In the course of the project, delays occurred and the quantities of pipes were increased. The parties were unable to agree on a remuneration adjustment for the additional quantities and services provided by the claimant. The claimant filed a request for arbitration, applying for an adjusted remuneration or alternatively for the original remuneration and compensation for the higher quantities and the additional work. The arbitral tribunal awarded the claimant only a small part of the claims and split the costs accordingly. The respondent declared a set-off with its claim for reimbursement of costs and applied for a declaration of enforceability with respect to the remaining claim for reimbursement of costs.
At first instance, the Court of Appeal Düsseldorf declared the award enforceable. The Federal Supreme Court overturned this decision, dismissed the application for a declaration of enforceability of the award and refused to remit the case to the tribunal.[9] According to the Federal Supreme Court, the arbitral tribunal had violated the respondent’s right to be heard by failing to take into account the respondent’s submissions. The Federal Supreme Court went so far as to state that the arbitral tribunal had not relied on factual allegations made by the claimant, but had made up allegations out of thin air. For the Federal Supreme Court, there was no indication that the tribunal had considered the claimant’s main arguments. The court concluded that the award violated German public policy and had to be set aside(section 1059 (2) No. 2 (b) ZPO).
The claimant’s application to remit the case to the tribunal was also rejected. The court considered the case not suitable for remittal. The court left open whether, if the setting aside of an arbitral award is based on the violation of the right to be heard, a referral back is always ruled out with regard to possible concerns about the impartiality of the arbitral tribunal. In the case at hand, it was out of the question for the Federal Supreme Court to remit the case to the tribunal, as the violation of the right to be heard of the claimant was obvious and serious.
B.5 Breach of procedural equality of arms as a reason to vacate an award – undue influence of a witness
A recent decision from the Federal Supreme Court [10] might gain importance in COVID-19 times and beyond, even though the underlying facts date back to 2018: the applicant sought the vacation of an award issued in proceedings under the ICC Rules in Berlin. They claimed that the award breached German public policy because the tribunal had failed to observe the basic procedural principle of equality of arms. The tribunal had conducted a hearing and, among others, interrogated a witness by video conference. The witness’ native language was Farsi, and he did not have a sufficient comprehension of German to answer the tribunal’s questions in the language of the proceedings. The tribunal did not use an interpreter. Instead, the respondent’s managing director was in a room with the witness, translated the tribunal’s questions (and presumably also the witness’ answers) and talked to the witness in Farsi in between. For lack of an interpreter, the tribunal could not follow the conversation between the witness and the respondent’s managing director, and it could also not determine whether the translations were correct.
At first instance, the Court of Appeal Berlin [11] rejected the application to vacate the award. The Federal Supreme Court confirmed this decision, holding that while the fundamental principle of procedural equality of arms as enshrined in article 3 paragraph 1 and article 20 paragraph 3 Grundgesetz (German Constitution) and section 1042 paragraph 1 ZPO is part of the German procedural public policy, the breach alleged in this case was not sufficiently grave to be invoked as a reason to vacate the award. The court held that in the case at hand, a possible violation of the tribunal’s duty to prevent interventions by the parties that could jeopardize the establishment of the truth during the examination of witnesses did not reach the weight required for a violation of the constitution. “Not every unpunished intervention of the parties leads to a violation of the principle of procedural equality of arms.” Even according to the applicant’s submissions, the respondent’s managing director had only made isolated statements to the witness in Farsi.
Since the principle of procedural equality of arms was not violated in the arbitration, the Federal Supreme Court left it open whether the Applicant was precluded from asserting a violation of procedural law because it had neither raised a complaint relating thereto in the oral hearing before the tribunal, nor in a brief to the tribunal submitted after the hearing.
B.6 Reasons for granting preliminary enforcement of an award for purposes of securing assets
The Court of Appeal Frankfurt had to deal with a request for permission of preliminary enforcement of an award for purposes of securing assets (section 1063(2) ZPO).[12] Section 1063(2) ZPO allows a party to combine a request for a declaration of enforceability with a request for permission of preliminary enforcement of the award for purposes of securing assets. The court in charge of the enforcement proceedings can grant such preliminary measures ex parte. Whether or not to grant such permission is within the court’s discretion. There is no clear guidance in the law as to when courts should exercise their discretion in favor of granting preliminary enforcement. Many courts, including the Court of Appeal Frankfurt, have decided in the past that it is sufficient to grant preliminary enforcement if the opposing party only has assets in Germany that can easily be brought out of the country (e.g. funds in a bank account). The Court of Appeal now decided that this in itself is no sufficient reason to grant preliminary enforcement. Further, according to the court, the applicant would have to demonstrate a risk that the opponent may actually attempt to avoid enforcement of the award in Germany, e.g., by moving assets abroad. In the current case, there was no indication that the opponent would try to thwart enforcement. The request for permission of preliminary enforcement was therefore rejected.
[1] The Baker & McKenzie International Arbitration Yearbook, 2007 edition, p. 41-42.
[2] https://www.disarb.org/fileadmin/user_upload/Ueber_uns/DIS-Mitteilungen/ERSD_Diskussionsentwurf_27_1_2021.pdf (in German)
[3] Order of 20 December 2019, File No. 34 Sch 14/18, SchiedsVZ 2020, 145.
[4] Order of 5 March 2020, File No. I ZB 49/19, unpublished, but available online at https://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=en&sid=91191abc842bcdf339ee43dd919c7f18&nr=106500&pos=0&anz=1.
[5] File No. 26 Sch 14/18, BeckRS 2020, 4606; GWR 2020, 301.
[6] Cf. Escher, SchiedsVZ 2018, 219
[7] Cf. Bartels, SchiedsVZ 2014, 133; Bickmann/Wagner, GWR 2020, 295; Altenkirch/Klodt, https://www.globalarbitrationnews.com/higher-regional-court-frankfurt-finds-publication-of-a-dissenting-opinion-to-be-ground-for-annulment/ all with further references.
[8] Order of 26 November 2020, File No. I ZB 11/20, BeckRS 2020, 39395.
[9] Order of 18 July 2019, File No. I ZB 90/18, SchiedsVZ 2020, 46.
[10] Order of 23 July 2020, File No. I ZB 88/19, SchiedsVZ 2021, 46.
[11] Order of. 26 September 2019, File No. 12 Sch 3/19, BeckRS 2019, 48782.
[12] Order of 16 September 2019, File No. 26 Sch 11/19, SchiedsVZ 2020, 94.
