A. LEGISLATION AND RULES
A.1 Legislation
In the 2017-2018 edition of this Yearbook, we reported about a working group that had been tasked with a review of German arbitration law.[1] After the working group had submitted its findings to the German Federal Ministry of Justice, the Ministry wanted to present a draft bill for the reform of German arbitration law before the end of the 19th legislative period in December 2021.[2] The Ministry did not meet this deadline and the new federal government has not yet made up its mind as to whether to pursue the reform project in the present legislative period. We will continue to monitor this development.
A.2 Institutions, rules and infrastructure
In the 2020-2021 edition of this Yearbook, we reported that the German Arbitration Institute (DIS) had published a draft of “Supplementary Rules for Notices of Dispute to Third Parties”.[3] After intensive discussions of the draft within a working group, the DIS presented a revised draft in December 2021. The working group has been asked to comment on this revised draft by the end of February 2022. Thereafter, the DIS plans to hold a workshop to prepare a final draft of the Supplementary Rules which will then be presented for vote to the DIS members.
B. CASES
B.1 Federal Supreme Court quashes EUR 142 million damages award because of a violation of Respondent’s right to be heard
The Federal Supreme Court set aside a EUR 142 million (approximately USD 158 million) damages award in a fight over a blood cancer drug due to a violation of the right to be heard.[4]
The award resulted from an arbitration between an Austria-based pharmaceutical company (“Claimant“) and a Taiwan-based biotech company (“Respondent“). The arbitral tribunal had awarded the Claimant claims for damages in the amount of EUR 142 million due to an alleged breach of contract by the Respondent. The contract included a limitation of liability clause that capped any liability at an amount of EUR 2 million (approximately USD 2.2 million). The liability cap did, however, not apply in case of intentional breaches of contract. The arbitral tribunal assumed that such an intentional breach of contract had occurred on part of Respondent. However, the reasoning of the award did not explicitly set out that and how such an intentional breach had happened.
The Claimant sought a declaration of enforceability regarding the award before the competent Court of Appeal Frankfurt. Respondent opposed the application, arguing, amongst others, that the arbitral tribunal had failed to give proper reasons for its assumption of an intentional breach of contract. The Court of Appeal Frankfurt declared the award enforceable.[5] It held that the arbitral tribunal had “at least implicitly” established an intentional breach. The court pointed, by way of example, to a section of the award mentioning a “clear disregard for [Respondent’s] duty to cooperate”.[6]
Respondent appealed the decision to the Federal Supreme Court. The Federal Supreme Court did not follow the Court of Appeal Frankfurt’s reasoning and set aside the relevant part of the arbitral award concerning the obligation to pay damages. It explained that the reasoning in the award regarding an intentional breach of contract was defective. The court stated that although in general, it is sufficient if an arbitral tribunal presents a short summary of its main reasons for the decision, it is nevertheless necessary that the essential questions are addressed. The Federal Supreme Court held that the question of whether an intentional breach of contract had occurred was essential for the outcome of the case. The arbitral tribunal itself had realized that the question was critical in regard to the amount of damages due. If a tribunal fails to address such an essential question, and in particular fails to deal with the defense arguments presented by the losing party, it must be assumed that it failed to properly consider the parties’ submissions in this regard and therefore violated the right to be heard.
B.2 Federal Supreme Court rules that foreign Respondents in applications for the declaration of enforceability of an award do not have to provide security for cost
In a decision on 29 September 2021[7], the Federal Supreme Court ruled on the obligation of a foreign, i.e., non-EU, party to provide security for costs in proceedings for the declaration of enforceability of arbitral awards.
The decision related to the arbitration between a pharmaceutical company (“Claimant“) and a Taiwan-based biotech company (“Respondent“), which also gave rise to the Federal Supreme Court’s decision reported above (see B.1). The successful Claimant had applied for a declaration of enforceability of the arbitral award before the Court of Appeal Frankfurt. Respondent objected to the application, arguing, amongst others, that the arbitral tribunal had violated its right to be heard. Respondent, therefore, applied for the award to be set aside within the course of the proceedings for the declaration of enforceability. Against Respondent’s objections, the Court of Appeal Frankfurt declared the arbitral award enforceable. The Respondent filed a complaint against this decision with the Federal Supreme Court. In the proceedings before the Federal Supreme Court, the Claimant requested to impose security for costs on the Respondent in accordance with section 110 German Code of Civil Procedure. Section 110 Code of Civil Procedure provides that a plaintiff based outside the European Union has to provide security for costs upon a respective application by the defendant. The Federal Supreme Court rejected the application. First, it held that section110 directly only applies to plaintiffs in civil proceedings. In proceedings for the declaration of enforceability of an award, however, the party putting forward the application is not a plaintiff, but an applicant. The question, therefore, rose whether section 110 can be applied to this situation by way of analogy. The court mentioned that this question had not yet been decided by the Federal Supreme Court, but had been answered affirmatively in setting aside proceedings by the Court of Appeal Frankfurt in a decision of 2018.[8] Eventually, the Federal Supreme Court did not rule on this issue. Rather, it held that the obligation to provide security for costs only rests upon the attacking party. In proceedings for the declaration of enforceability, the party seeking the enforcement must be considered the attacking party. This is so even if the other side is attacking the validity of the award in the proceedings for its declaration of enforceability. For purposes of the application of section 110, the formal party roles are decisive so that the applicant for a declaration of enforceability must be considered the attacking party, in the case at hand the Austrian claimant.
B.3 Intra-association arbitral tribunal no arbitral tribunal within the meaning of Sec. 1025 (2) German Code of Civil Procedure
Intra-Association arbitral tribunals have repeatedly occupied the German Courts. Regular readers of this Yearbook will recall the Pechstein decisions of the District Court Munich I[9], the Court of Appeal Munich[10] and the Federal Supreme Court[11]. In an order of 3 December 2020, the Bavarian Supreme Court had to decide whether a decision by an internal arbitral tribunal of the Bavarian Red Cross constituted an arbitral award in the meaning of the German arbitration law.[12] The court held that this is not the case.
The plaintiff, a former on-call manager in one of the districts of the Bavarian Red Cross, had been excluded as a member of that district for offense and sexual harassment. The Bavarian Red Cross is a corporation under public law. According to its articles of association, membership disputes are to be decided by internal arbitral tribunals of the Bavarian Red Cross. Recourse to the administrative courts is excluded. Thus, the plaintiff initiated arbitral proceedings in accordance with the statute of the Bavarian Red Cross against his exclusion. The application was dismissed by the district arbitral tribunal of the Bavarian Red Cross. Plaintiff filed a complaint with the administrative court, asking the court to set aside the decision of the arbitral tribunal.
The administrative court was of the opinion that it had no jurisdiction because it considered the matter to be a civil, not an administrative matter. The case was referred to the Bavarian Supreme Court, arguing that the dispute was about the setting aside of an arbitral award for which the courts of appeal – in Bavaria the Bavarian Supreme Court – have jurisdiction in accordance with section 1062 (1) No. 4 of the German Code of Civil Procedure.
The Bavarian Supreme Court, however, held that it also had no jurisdiction. It declared that the decision of the internal arbitral tribunal of the Bavarian Red Cross did not constitute an arbitral award in the meaning of the German Code of Civil Procedure. The court emphasized that an intra-association arbitral tribunal can only be considered an arbitral tribunal if it is independent and impartial. This requires that the articles of association ensure equal influence of the parties on the constitution of the tribunal so that the tribunal is neutral and not under the influence of the association.
In the case at hand, this was not the case. According to the arbitration rules of the Bavarian Red Cross, the Bavarian Red Cross had a decisive influence on the formation of the arbitral tribunal while the plaintiff had neither direct nor indirect influence. In fact, both the chairman and the arbitrators were elected by the assembly of the district of the Bavarian Red Cross of which the plaintiff was a member.
Consequently, the decision of the internal arbitral tribunal of the Bavarian Red Cross did not constitute an arbitral award in the meaning of section 1059 of the German Code of Civil Procedure, but only an internal decision of the Bavarian Red Cross subject to a full court review. Plaintiff’s action was thus to be treated not as an action for the setting aside of an arbitral award, but for a civil action for a review of the decision to exclude the plaintiff from the district of the Bavarian Red Cross. The Bavarian Supreme Court, therefore, referred the matter to the competent district court.
B.4 Detailed arbitration agreement not a prerequisite for the validity of an arbitration clause
In a decision of 21 January 2021, the Bavarian Supreme Court had to decide about an application by a former partner of a partnership of tax consultants for a declaration that a dispute between the applicant and the partnership about the amount of the severance claims of the applicant was not to be decided by an arbitral tribunal, but by the courts.[13]
In 2000, the applicant and another tax consultant had created a partnership. The partnership agreement included an arbitration clause which provided that disputes between the partnership and the partners or between partners relating to the partnership agreement should be decided by an arbitral tribunal without recourse to the courts. The arbitration clause stated that the competence of the arbitral tribunal and its constitution as well as the rules of the proceedings would be regulated by a separate arbitration agreement concluded between the parties on the occasion of the conclusion of the partnership agreement. However, such a separate arbitration agreement was not concluded. The former partner, therefore, was of the opinion that arbitration proceedings were inadmissible and the courts had jurisdiction.
The Bavarian Supreme Court did not share this view and dismissed the application. The court considered the arbitration clause to be valid. It pointed out that the conclusion of a detailed arbitration agreement is no prerequisite for a valid arbitration clause. The parties are free to decide whether they wish to make arrangements regarding the procedure. If they do not conclude a detailed arbitration agreement, the statutory provisions of the German Code of Civil Procedure on arbitration apply. Thus, the dispute was to be decided by an arbitral tribunal and the application was dismissed.
B.5 German Federal Supreme Court confirms that intra-EU investor-state arbitration is incompatible with EU law
In a recent decision, the German Federal Supreme Court had to deal with an application by Croatia for a declaration that an investment arbitration initiated by an Austrian and a Croatian bank against Croatia was inadmissible. [14]
The application was triggered by the initiation of arbitration proceedings against Croatia by the two banks based on the 1997 Agreement between Austria and Croatia for the Promotion and Protection of Investments (“Austria-Croatia BIT“). The two banks claimed damages and argued that they were discriminated against by changes to the Croatian insolvency law and were denied legal protection by the Croatian courts. Croatia rejected these allegations and denied that the dispute could be decided by an arbitral tribunal under the Austria-Croatia BIT but accepted the banks’ offer to agree on Frankfurt as the place of arbitration. Before the arbitral tribunal had been constituted, Croatia filed an application under section 1032 (2) of the German Code of Civil Procedure[15], asking the Court of Appeal Frankfurt to declare that arbitration proceedings under the Austria-Croatia BIT were inadmissible in accordance with the Achmea[16] and Komstroy[17] decisions of the European Court of Justice.
In the Achmea judgment, the European Court of Justice had held that:
Articles 267 and 344 TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States … under which an investor from one of those Member States may, in the event of a dispute concerning investments in the other Member State, bring proceedings against the latter Member State before an arbitral tribunal whose jurisdiction that Member State has undertaken to accept.
In the Komstroy case, the European Court of Justice found intra-EU investment arbitration under the Energy Charter Treaty also to be incompatible with EU law.
The Court of Appeal Frankfurt held that the arbitration was inadmissible because the arbitration provisions of the Austria-Croatia BIT were incompatible with EU law.[18]
The banks appealed the decision of the Court of Appeal Frankfurt to the German Federal Supreme Court. The Federal Supreme Court rejected the appeal. Following the reasoning of the European Court of Justice, the German Federal Supreme Court held that investment arbitration pursuant to the Austria-Croatia BIT could involve the application and interpretation of European law and could therefore jeopardize the European Court of Justice’s monopoly concerning the interpretation of European law.
[1] The Baker McKenzie International Arbitration Yearbook 2017-2018, page 121 et seq.
[2] The Baker McKenzie International Arbitration Yearbook 2020-2021, Germany, A.1
[3] The Baker McKenzie International Arbitration Yearbook 2020-2021, Germany, A.2
[4] Decision of 9 December 2021, File No. I ZB 21/21 (not yet published).
[5] Order of 25 March 2021, File No. 26 Sch 18/20, SchiedsVZ 2022, 40 et seqq.
[6] Order of 25 March 2021, File No. 26 Sch 18/20, SchiedsVZ 2022, 44, margin note 51.
[7] Order of 29 September 2021, File No. I ZB 21/21, SchiedsVZ 2022, 32 et seqq.
[8] Order of 31 January 2018, File No. 26 Sch 7/17, BeckRS 2018, 56946.
[9] The Baker McKenzie International Arbitration Yearbook 2014-2015, pages 134-136
[10] The Baker McKenzie International Arbitration Yearbook 2015-2016, page 123.
[11] The Baker McKenzie International Arbitration Yearbook 2016-2017, pages 194,195.
[12] Order of 3 December 2020, File No. 101 Sch 104/20, SchiedsVZ 2021, 168 et seqq.
[13] Order of 21 January 2021, File No. 101 SchH 115/20, SchiedsVZ 2021, 240 et seqq.
[14] Order of 17 November 2021, File No. I ZB 16/21, BeckRS 2021, 39182.
[15] Sec. 1032 (2) of the German Code of Civil Procedure provides that a petition may be filed with the courts until the arbitral tribunal has been formed to have the courts determine the admissibility or inadmissibility of arbitration proceedings.
[16] Judgment of 6 March 2018, File-No. C 284/16, https://curia.europa.eu/juris/document/document.jsf?docid=199968&doclang=EN.
[17] Judgment of 2 September 2021, File-No. C 741/19, https://curia.europa.eu/juris/document/document.jsf?text=&docid=245528&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=2323351.
[18] Order of 11 February 2021, File-No. 26 SchH 2/20, BeckRS 2021, 1799.
