The German Federal Court of Justice (“BGH”) recently decided that the application to set aside an arbitral award before a German state court is inadmissible if the applicant has already paid the amount stipulated in the award without reservations (BGH, decision of 26 October 2023, case no I ZB 14/23). The decision provides clarity on an issue that had been widely debated amongst scholars and arbitration practitioners in Germany.
Factual Background
The Claimant in the preceding arbitration was awarded a payment of a certain amount by the Respondent. Shortly after receipt of the arbitral award, the Respondent paid the awarded amount to the Claimant without explicitly declaring any reservations. A couple of weeks later, the Respondent filed an application to (partially) set aside the arbitral award before the competent Higher Regional Court. The Higher Regional Court rejected the application as inadmissible. According to the Higher Regional Court, the Respondent had lost its “legal interest” in a setting-aside procedure by fulfilling the award and paying the awarded amount to the Claimant without reservations. The Respondent then appealed the Higher Regional Court’s decision to the BGH.
Legal Background
The legal question that the BGH had to decide was the following: Can the losing party in an arbitration still initiate a setting-aside procedure against the award before a German state court after having fulfilled the award without reservations?
So far, this question had not been decided with regard to an arbitration setting. However, case law exist on a comparable situation before German state courts: Regarding proceedings before German state courts, it is generally acknowledged that the losing party is no longer “burdened” by a judgment if it has paid the awarded amount to the winning party without reservations. In that situation, the unreserved payment ultimately settles the dispute in question. Thus, the paying party loses its legal interest to appeal the concerned judgement, rendering such appeals inadmissible.
The BGH had to decide whether this rationale can be applied in an arbitration setting as well.
Decision of the BGH
The BGH decided that the existing case law on state court proceedings can also be applied in an arbitration setting. In other words: An application to set aside an arbitral award is inadmissible if the applicant has already fulfilled the award and paid the awarded amount to the winning party without reservations.
According to the BGH, the losing party of the arbitration is no longer “burdened” by the arbitral award if that party has made an unreserved payment in response to the arbitral award. By making such unreserved payment, the losing party expresses its intent to accept the arbitral award as final and binding, extinguishing its “legal interest” in initiating a setting-aside procedure against this award.
The decisive (factual) question is whether a payment has indeed been made without reservations in the above sense. According to the BGH, that question must be diligently assessed by the competent state court on a case-by-case basis. In this respect, the court must particularly examine whether any reservations were recognizable to the other party receiving the payment. With regard to state court proceedings, it is usually argued that paying the amount stipulated in a judgement in dubio only serves to avert imminent enforcement of that judgement but should not mean “acceptance” of the judgement as final and binding.
That logic does not fly with regard to arbitral awards: Unlike state court judgements, arbitral awards must be declared enforceable first, i.e. there is no imminent threat of enforcement triggering the immediate payment of the award. In an arbitration setting, the competent court in a setting-aside procedure will need to carefully assess whether the payment of the award was made subject to other reservations. Examples may include that the payment is only supposed to avoid the accrual of further interest or the costs associated with the initiation of enforcement proceedings.
The court shall therefore interpret the purpose of the payment on the basis of the circumstances of the individual case recognizable to the recipient of the payment. In this respect, the wording chosen by the parties in relation to the payment, the intention of the parties, as well as the purpose of the legal transaction must be taken into account. It is up to the parties to provide the court with the information necessary for this assessment.
Conclusion and Practical Relevance of the Decision
The BGH decision settles a discussion that has been ongoing in the arbitration community for a while. As a general rule, the losing party in the arbitration loses its right to initiate a setting-aside procedure against the award if it has paid the awarded amount without reservations. The competent state court shall check on a case by case basis whether a payment has indeed been made without reservations. What can be said with certainty is that losing parties in arbitration proceedings seated in Germany should think twice before paying the amount stipulated in an arbitral award. They might otherwise lose the opportunity to challenge the award before a German state court.
