Germany is a Model Law country. As a result, German Law provides for only limited grounds to set aside an arbitral award if the seat of arbitration is in Germany (Section 1059 German Code of Civil Procedure which is the equivalent to Article 34 UNCITRAL Model Law). Among others, German state courts can review whether an arbitral award violates German public policy. German public policy is only affected if the result of recognition or enforcement of the award disregards mandatory laws, which form the basis for a functioning public and economic life and/or violates the most basic notions and principles of German law. Otherwise, the prohibition of a révision au fond applies, generally prohibiting state courts from reviewing the merits of an arbitral award.
What is the level of scrutiny in case of an alleged violation of public policy – in the case at hand a violation of antitrust laws? Does a German state court need to reopen the whole matter, and perhaps even enter into the taking of evidence stage if a violation of public policy is alleged or is the review limited to obvious violations of public policy? In a recent judgment, the German Federal Supreme Court (Bundesgerichtshof, BGH) held that state courts can conduct a full review of alleged violations of antitrust laws.
The case concerned a dispute between A, B, and C. A is the owner of two neighboring plots of land in Germany, on each of which a quarry is operated. The companies operating the quarries are B and C.
Decades ago, A and B as well as A and C entered into lease agreements on the land. The amount of rent to be paid by both B and C depended on the turnover achieved by B and C from operating the quarries.
In 2017, A terminated the lease agreement with B effective on 31 January 2018 and tried to persuade B to sell its assets to C. A intended to arrange a merger of B’s and C’s operations: Through this merger, A hoped to put an end to a price war between B and C, which were direct competitors. As a consequence, A expected higher prices on the market, increased turnover, and thus an increased rent.
B opposed the termination because it wanted to continue business and referred the matter to the Federal Cartel Office (Bundeskartellamt, BKartA). The Federal Cartel Office investigated the matter and came to the conclusion that the termination of the contract violated German antitrust law. Therefore, the Federal Cartel Office rendered the termination void and imposed a fine on A. The Federal Cartel Office found that A’s intention for terminating the lease contract was to force B to merge with C by having B transfer all its manufacturing equipment to C after the contract ended. The Federal Cartel Office based its decision on the fact that the conduct of A’s managing directors violated Section 21 (2) No. 1 of the German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB). This provision prohibits threatening other companies with disadvantages in order to induce them to behave in a way which, according to Section 1 GWB, may not be made the subject of a contractual obligation. Furthermore, the Federal Cartel Office found that the managing directors of A violated the prohibition to force companies to merge with other companies within the meaning of Section 37 GWB.
Despite the decision by the Federal Cartel Office, A initiated arbitration proceedings against B in order to enforce a termination of the lease contract. A requested the arbitral tribunal to rule that B was obliged to hand over the plots of land subject to the lease contract. In the same arbitration, B filed counterclaims and demanded the Tribunal to rule (i) that the lease agreement had not been validly terminated, (ii) that A must refrain from threatening or declaring further notices of termination of the contract and (iii) that A must declare its consent to a further lease agreement with a term until 2043.
The arbitral tribunal dismissed B’s counterclaims and ruled in favor of A, obliging B to vacate the quarry.
Unsuccessful Annulment Proceeding in front of the Frankfurt Higher Regional Court
B sought the annulment of the award before the Frankfurt Higher Regional Court (Oberlandesgericht Frankfurt, OLG) pursuant to Section 1059 ZPO. B argued that the terminations and the forced sale of the manufacturing equipment violated Sections 19, 20 and 21 GWB, prohibiting the abuse of market dominant positions and other market restrictive behavior, and thus German public policy.
The Federal Cartel Office learned of these proceedings and exercised its authority under Section 90 (2) GWB to submit its opinion on the matter. In the Federal Cartel Office’s view, the arbitral award violated antitrust laws.
Despite the view expressed by the Federal Cartel Office, the Higher Regional Court dismissed B’s challenge and upheld the arbitral award. While the Higher Regional Court agreed with B that Sections 19, 20, and 21 GWB reflected German public policy, the Court found that there was no obvious violation of these rules.
As to the level of scrutiny, the Higher Regional Court held that a state court may only review whether the arbitral award obviously violated antitrust laws that reflect German public policy. According to the Court, for the following reasons, no full review of antitrust laws was warranted: The review of cases under antitrust rules requires the review of complex factual and legal aspects. Due to this complexity, state courts would be forced to do what they are prohibited from doing: to review the factual and legal aspects of an arbitral award. The court held that in certain cases this might even lead to the complete exchanging of the arbitral tribunals reasoning with the reasoning of a state court.
Therefore, the Higher Regional Court held that state courts had no unrestricted power of scrutiny with regard to antitrust rules when reviewing the violation of the public policy in arbitral awards in recognition and annulment proceedings according to Section 1059 (2) Nr. 2 lit. b) ZPO. Moreover, the Higher Regional Court held that there was no power of state courts to perform summary reviews of antitrust law compliance or antitrust law plausibility checks. Instead, the review competence of state courts was limited to a review of only obvious violations of the public policy. The Court found that in the case at hand there was no obvious violation of antitrust rules.
The decision of the German Federal Court of Justice
B appealed the decision of the Higher Regional Court to the German Federal Court of Justice. In its decision, the Federal Court of Justice largely overruled the decision of the Higher Regional Court. The Federal Court of Justice held that the German state courts are allowed and obliged to fully scrutinize allegations of violations of antitrust laws reflecting German public policy.
Firstly, the Federal Court of Justice clarified that Sections 19, 20 and 21 GWB are part of the elementary foundations of the German legal system and therefore part of the German public policy. In this regard, the Federal Court of Justice confirmed the Higher Regional Court’s view.
Secondly, the Federal Court of Justice held that state courts may, despite the general prohibition of révision au fond, carry out a full review of cases under antitrust law if the relevant rules belong to public policy. The Federal Court of Justice gave three reasons:
1. No legal system can accept that violations of its most fundamental rules are confirmed by its own courts. This must apply regardless of whether the violations are obvious or not.
2. The rules of Sections 19, 20 and 21 GWB are intended to protect not only the interest of the parties to the arbitration agreement, but also the public’s interest in functioning competition. The public’s interest cannot be safeguarded without a full review of antitrust rules. This is because, on the one hand, the Federal Cartel Office has no comprehensive rights of participation before arbitral tribunals (which it has in front of state courts) and, on the other hand, an arbitral tribunal cannot refer a question to the European Court of Justice in the event of a violation of European antitrust law. Moreover, cases reviewed under antitrust law are more often than not complex. Therefore, according to the Federal Court of Justice, it is often impossible for courts to assess if the violation of public policy is obvious or not.
3. A complete scrutiny under antitrust laws is consistent with the intention of the German legislator. When revising the GWB in 1997, the German legislator removed rules rendering certain arbitration clauses void. The reason for the removal of the rule was that in the view of the German legislator arbitral tribunals had to consider the mandatory provisions of antitrust law in the same way as state courts. Furthermore, the legislator assumed that arbitral awards would be subject to a complete control by state courts with regards to compliance with mandatory provisions of antitrust law in the context of annulment and enforcement proceedings. Upon a full review of the facts of the case and the applicable antitrust laws, the Federal Court of Justice found that the arbitral award violated German public policy because the arbitral tribunal misapplied antitrust law. Contrary to the finding of the Arbitral Tribunal, the termination of the lease agreement violated Section 21 (2) GWB.