On 9 March 2023, the German Federal Court of Justice (“BGH“) confirmed the decision of the Higher Regional Court of Koblenz to refuse recognition and enforcement of an arbitral award issued in Russia.[1] Among others, the BGH held that the Arbitral Tribunal exceeded its personal jurisdiction by extending an arbitration agreement to a de facto group of companies. In its decision, the BGH answered several highly relevant questions:
- Is the enforcement court bound by a decision of a court at the seat of arbitration refusing to annul an arbitral award (when the seat is located in another state)?
- What is the law applicable to the arbitration agreement?
- Can an arbitration agreement be extended to a parent company or a group of companies if a case of piercing the corporate veil is argued?
Factual Background
The claimant in the arbitration and applicant in the enforcement proceedings was a German businessman who worked for decades in Russia. Claimant was the shareholder of various companies in Russia (“Claimant Companies”).
The respondents in the arbitration were four group companies of a fruit juice manufacturer (“Respondent Companies”), one of them the holding company established for the operations in Russia (“Holding Company”).
Claimant, various Claimant Companies and various Respondent Companies entered into a range of operational contracts concerning the expansion of the fruit juice business in Russia. Amongst others, Claimant, Claimant Companies, and Holding Company entered into a “settlement agreement” containing an arbitration clause providing for arbitration before the Moscow Chamber of Commerce and Industry, with seat in Moscow, in German language (“Arbitration Agreement”). It also contained a general choice of law clause, according to which the contract should be governed by German law.
At the end of 2007, the Holding Company terminated the operational contracts with Claimant Companies. What is more, insolvency proceedings were opened and the Holding Company was liquidated.
The Arbitration Proceedings
In December 2016, the Claimant filed before the Moscow Chamber of Commerce and Industry an arbitration against the Respondent Companies and three former managers of the Respondent Companies. Claimant sought damages for interventions that destroyed one of Claimant’s Companies, namely damages resulting from the withdrawal of the Holding Company’s corporate assets that began in summer 2008.
Claimant based the Request for Arbitration on the Arbitration Agreement in the above mentioned “settlment agreement” between the Holding Company and the Claimant. The Respondents challenged the jurisdiction of the arbitral tribunal; the Respondents argued that only the Holding Company had entered into the Arbitration Agreement. The arbitral tribunal dismissed the jurisdictional challenge and affirmed its jurisidcition over the non-signatories to the Arbitration Agreement. In the final award, the arbitral tribunal ordered the Respondents to pay damages to the Claimant.
Respondents unsuccessfully tried to annul the final award in Russia.
The Decision of the Koblenz Higher Regional Court
In 2020, the Claimant requested the Higher Regional Court of Koblenz to declare the final award enforceable.
The Higher Regional Court of Koblenz held that it was not bound by the Russian court’s decision to confirm the final award. It ruled that the Arbitration Agreement was governed by German law and declared the final award non-enforceable under Art. V(1)(a) in conjuction with Art. II(1) and (2) of the New York Convention (“NYC“) because, among other issues, the arbitral tribunal exceeded the personal scope of the Arbitration Agreement.
The Claimant challenged the Higher Regional Court’s decision.
The Decision of the Federal Court of Justice (BGH)
The BGH refused to recognize and enforce the award in Germany. The BGH held as follows:
I. German courts are not bound by the Russian court’s decision confirming the arbitral award
The BGH highlighted that it is disputed in case law and literature whether a party who unsuccessfully tried to set an award aside at the seat of arbitration may rely on the same grounds for refusal when resisting enforcement in another country.
The NYC sets out the rules for enforcement of foreign arbitral awards in Germany (§ 1061 of the German Code of Civil Procedure).
The NYC provides that the successful annulment of the award at the seat constitutes a ground for refusal and recognition of the award under Art. V(1)(e) NYC. According to the BGH, German courts are then required to take into account a foreign decision even if they were to find that under their analysis there is no violation of the grounds for refusing an award under Art. V(1)(a) to (d) NYC.
However, the NYC is silent on the unsuccesful attempt to annul the award at the seat. Court decisions and legal literature provide have no uniform answer for this question.
(1) Some argue that an unsuccessful setting aside proceeding at the seat precludes a party from invoking the refused setting aside grounds in the enforcement proceedings before German courts.
(2) Others argue that the decision refusing to set the award aside is binding on a German enforcement court only under the conditions of § 328 of the German Code of Civil Procedure, which govern the recognition of foreign judgments in Germany.
(3) Another view is that German courts are not bound by a foreign court’s decision to refuse the setting aside of an award. Therefore, the unsuccessful party should not be precluded from invoking the same grounds when defending against the enforcement in Germany.
The BGH agreed with the third view for the following reasons:
First, the New York Convention does not contain any provision according to which an unsuccessful set aside application would displace an independent examination of the grounds for refusal of enforecement under Art. V NYC. Nothing in the NYC suggests that an unsuccessful application to set an award aside at the seat would lead to an automatic enforcement of the award in another state. Instead, Art. III NYC provides that the recognition and enforcement of foreign arbitral awards depends of the fullfilment of the requirements contained in the NYC.
While is true that German Courts should consider a decision setting an award aside at the seat of arbitration according to Art. V(1)(e) NYC, Art. V(1)(e) NYC is not applicable for unsuccessful setting aside proceedings.
Second, setting aside proceedings have a different subject matter from enforcement proceedings. This is even truer when the proceedings take place in different states since the setting aside proceedings are subject to the lex arbitri, while enforcement proceedings are subject to the NYC. As a result, the setting aside proceedings cannot be binding for the enforcement proceedings.
Third, § 328 of the German Code of Civil Procedure shall not be applicable because the recognition and enforcement of foreign awards is governed by the NYC.
II. The law governing the Arbitration Agreement
The Higher Regional Court of Koblenz ruled that the law governing the arbitration agreement shall be determined according to Art. V(1)(a) NYC, which provides that an arbitration agreement is governed by the chosen law or, in the absence of a choice, the law of the seat. The Court held that the parties made an implied choice in favour of German law by choosing the substantive law governing the contract in which the Arbitration Agreement is included. The Higher Regional Court of Koblenz also considered that the Claimant is German and entered into a contract with the First Defendant, a German company registered under German law, and the Holding Company, the Russian subsidiary of the German fruit juice manufacturer. All parties signed the contract in Germany. Although the seat of arbitration was Moscow, the language of the proceedings was German.
The BGH held that – in the particular case at hand – the Higher Regional Court of Koblenz was wrong in applying the conflict of laws rule contained in Art. V(1)(a) NYC. A resort to a conflict of laws rule other than German Private International Law is only possible after the revocation of Art. 27 to 37 of the Introductory Act of The Civil Code (EGBGB a.F.). The provisions were into force until 16 December 2009. Since the Parties entered into the Arbitration Agreement on 5 March 2007, Art. 27 to 37 of the Introductory Act of The Civil Code have to be applied in order to determine the applicable law. Unter these provisions, the Arbitration Agreement is governed by the law chosen by the parties. The choice of law must be express or be reasonably certain from the terms of the contract or the circumstances of the case. The BGH then considered the circumstances of the case taken into account by the Koblenz Higher Regional Court and confirmed that German law governs the Arbitration Agreement.
III. No Arbitration Agreement between Claimant and Respondents 2-4 even in case of a piercing of the corporate veil under substantive law
Art. V(1)(a) NYC allows refusal of recognition and enforcement of a foreign arbitral award if, among others, the arbitration agreement is not valid under the law governing it. The same is true if an arbitation agreement does not exist in the first place.
The BGH held that in the case at hand, no arbitration agreement existed between Claimant and Respondents 2-4.
The BGH found that even if a parent company or shareholder is directly liable because of fraud, wrongdoing, or injustice to third parties (= piercing of the corporate veil), this does not warrant the extension of the arbitration agreement to such parent company or shareholder. According to the BGH, the substantive law aspects – direct liability of the parent company or shareholder – has to be separated from the procedural aspect – the extension of the arbitration agreement to non-signatories. Art. 101 I 2 of the German Constitution safeguards the right to the lawful judge, which is equivalent to a fundamental right. Submitting a dispute to arbitration means waiving the right to the lawful judge. A valid waiver requires a clear expression of a wish to go to arbitration. An arbitration agreement therefore only binds the contracting parties, their legal successors, and, exceptionally, the liable partners of a partnership. An extension to third parties (Drittwirkung) is a priori excluded and may only exceptionally be justified based on a party’s conduct that can be interpreted as an acceptance of the arbitration agreement in a contract signed by a subsidiary or group company.
The BGH found no indications that Respondents 2-4 accepted the extension of the Arbitration Agreement to them.
