Parties often chose arbitration over state court litigation because arbitral proceedings are more flexible and more efficient. Parties are typically not in the business of “litigating”, but want to resolve their (commercial) disputes in order to continue their business. A dispute is resolved by the decision of the tribunal, i.e. the arbitral award. In order to ensure a timely decision, most arbitral institutions provide for a time limit for the final award (e.g. six months under Article 31 of the ICC Rules or three months under Article 37 of the DIS Rules).
But what happens when the parties agreed on arbitration rules without such a time limit or in case of an ad hoc arbitration: Does the arbitral tribunal have endless time to render its final award? Or might the losing party have a ground to challenge an award because the tribunal needs too much time for the award?
The Higher Regional Court Frankfurt had to deal inter alia with this question in a recent decision (Higher Regional Court Frankfurt am Main, decision of 17 May 2021 – 26 Sch 1/21 – BeckRS 2021, 11890). The award in the underlying ad hoc arbitration was rendered almost one year after the last oral hearing, and was therefore, according to the claimant, procedurally defective (i.e. violated claimants’ procedural rights).
The facts of the case before the Higher Regional Court Frankfurt were the following:
The parties, company A and company B, had established a joint venture X in the field of screw manufacturing for the wind power industry. The parties concluded certain cooperation agreements under which company A was obliged to provide financial assets to the joint venture X. When company A failed to meet its obligation, the joint venture X went bankrupt. Company B initiated arbitration proceedings against company A claiming damages.
The arbitral tribunal conducted an oral hearing on 14 November 2019. At the oral hearing, the tribunal heard witnesses and experts and comprehensively dealt with the relevant aspects of the case, i.e. no further hearing would be necessary to render an award. Both parties likely expected a decision within a reasonably short period of time. However, it took the arbitral tribunal almost one year until 9 November 2020 to render its final award. In its award, the tribunal held that company A had breached the cooperation agreements with company B. The tribunal awarded damages to company B.
Dissatisfied with the award, company A filed an application for annulment of the award under section 1059 of the German Code of Civil Procedure. Company A alleged inter alia that its procedural rights were violated by the fact that the arbitral award was rendered too late and not in accordance with section 310(1) of the German Code of Civil Procedure. Under section 310(1), a judgement in German state court litigation proceedings must generally be issued no later than three weeks after the last oral hearing. The reason behind this rule is to speed up state court litigations and to improve the quality of judgments (i.e. it is assumed under German law that judges give better judgments when the oral hearing is still “fresh in their minds”). Company A argued that this rule would form part of the procedural ordre public in Germany (cf. section 1059(2)(2b) of the German Code of Civil Procedure).
Decision of the court
In its decision of 15 May 2021, the Higher Regional Court Frankfurt dismissed company A’s application for annulment of the award. According to the court, the tribunal was not bound to observe the three week time limit stipulated in section 310(1) of the German Code of Civil Procedure for issuing its award. First and foremost, section 310(1) is not applicable to arbitral proceedings in Germany. The German arbitration law is comprehensively dealt with in sections 1025 et seqq. of the German Code of Civil Procedure (cf. Geimer, in: Zöller-ZPO (2020), Section 1025 ZPO, para 3). The rules of German state court litigations do not generally apply in arbitration. Moreover, the court expressly found that section 310(1) can also not be applied by analogy, i.e. no general rule exists under German law containing a time limit for an arbitral tribunal to render its final award. So, absent a time limit in the applicable rules of an arbitral institution or an agreement between the parties, an arbitral tribunal does in fact have endless time to render its final award.
Furthermore, the court – in an obiter dictum– clarified that the possibility to challenge an award based on the argument that it took the arbitral tribunal “too long” to issue its final award, will hardly ever be successful. Even in a case where a time period for the tribunal’s award is stipulated, a delayed issuing of the award would not justify an annulment for procedural irregularities (ordre public):
“In contrast to a violation of procedural rules which address individual procedural rights of the parties, the late issuance of an arbitral award typically affects both parties in the same way. Therefore, it does not seem justified from an equal treatment of the parties point of view to allow a possibility of setting aside an award which typically only favors the party that, according to the result of the arbitral award, loses.”
(Higher Regional Court Frankfurt am Main, decision of 17 May 2021 – 26 Sch 1/21 – BeckRS 2021, 11890, para 49).
A party will rather need to argue that the late issuing of the award violated an agreement of the parties about the time limit for the award (cf. section 1059(2)(1d) of the German Code of Civil Procedure). Here, German law requires that the alleged violation affected the tribunal’s decision in the award. The Higher Regional Court Frankfurt found that it will generally be difficult to determine how a delay affected the outcome of the proceedings, i.e. the tribunal’s decision. Therefore, it will be an uphill battle to challenge an award based on the argument that the tribunal issued the award “too late”.
On a separate note, the Higher Regional Court Frankfurt also dealt with the relevance of a second aspect of German state court proceedings for arbitral tribunals. In German state court litigations, courts need to formally pronounce the date and schedule an oral hearing for the announcement of their award (so called Verkündungstermin). Company A had also based its challenge on the fact that the arbitral tribunal did not comply with this rule. The Higher Regional Court Frankfurt found that a formal pronouncement of the award or even a Verkündungstermin are not required under German arbitration laws (cf. section 1054(4) of the German Code of Civil Procedure; Higher Regional Court Frankfurt am Main, decision of 17 May 2021 – 26 Sch 1/21 – BeckRS 2021, 11890, para 54).
Parties to (complex) arbitration proceedings should expect that it may take some time before the arbitral award is rendered. However, they are not helpless in this situation: Most arbitral institutions have time limits for arbitral tribunals to render an award. The arbitral institutions monitor these time limits and some even reduce the arbitrators’ fees if they take too long. In drastic situations, parties may request that an arbitrator is removed from his/her position if he/she fails to perform his/her duties within a reasonable time (cf. section 1038(1) of the German Code of Civil Procedure).
There is a certain danger when arbitral awards are rendered very late after the oral hearing: Studies show that the human memory is more prone to error than one might imagine (cf. Harbst, SchiedsVZ 2021, 49). This applies to both state court proceedings and arbitrations. The decision from the Higher Regional Court Frankfurt nevertheless clarifies that the strict rules for German state court litigations do not apply for arbitrations in Germany.