The Highest Regional Court of Bavaria (“BayObLG“) has recently strengthened Germany’s position as a recognition-friendly jurisdiction in international arbitration. In its decision, the court confirmed the declaration of enforceability of two related foreign arbitral awards despite allegations of a violation of the right to be heard due to severe illness and poverty. This decision is in line with the German courts’ general position to only decline enforceability in exceptional cases. Thereby, Germany provides foreign parties with a reliable and predictable arbitration-friendly forum.
Factual Background
The parties had entered into a preliminary share purchase agreement, which provided for an English-language arbitration seated in Denmark under the Rules of Arbitration of the Danish Institute of Arbitration. The claimant filed a Request for Arbitration and paid its share of the arbitration deposit. As the respondent declared he was unable to pay his share of EUR 45,000, the claimant took over this share and requested a separate arbitral award seeking reimbursement of the EUR 45,000.
The arbitral tribunal first issued a separate award and granted the claimant reimbursement of the deposit. In a second award, the tribunal ordered the respondent to make certain payments to the claimant. The claimant applied for a declaration of enforceability of these two arbitral awards in Germany. The respondent objected and claimed a violation of the right to be heard mainly due to the following grounds:
- The respondent ‘s submissions and the final awards were not properly and timely served, but only sent via email. Nevertheless, the respondent made submissions in the arbitration proceedings, yet mainly in German.
- Due to severe illness (cancer treatment), the respondent was not in a position to fully exercise his rights in the arbitration proceedings.
- In particular, the respondent argues that he was unable to participate in the oral hearing, despite the fact that (i) he could have sent a representative and (ii) he was allowed to participate remotely via videoconferencing. The arbitral tribunals decided by default judgment.
- The arbitral tribunal had violated the procedural equality of arms by unreasonably restricting respondent ‘s right to be represented by an attorney of his own choice as the tribunal did not examine whether due to poverty he is entitled to a “public defender”.
The Decision
The BayObLG declared both arbitral awards enforceable and ordered the defendant to pay the costs of the enforceability proceedings. In the court’s view, the respondent ‘s right to be heard was not violated so that there was no reason for declining enforceability based on Article V New York Convention.
In detail:
Violation of the Right to be Heard has to be Substantiated
A violation of the right to be heard constitutes a violation of public policy which would allow refusing recognition and enforcement of a foreign arbitral award (Art. V para. 2 lit. b of the New York Convention (“NYC“)). Compliance with public policy is to be examined ex officio in German enforceability proceedings. However, the BayObLG stresses that the party claiming a violation of the right to be heard nevertheless has to properly substantiate its allegations. In the case at hand, the respondent failed to take that hurdle.
Respondent was Given Proper Notice of the Arbitration Proceedings
The BayObLG found that recognition and enforcement cannot be denied based on Art. V para. 1 lit. b NYC (no proper notice of arbitration proceedings) because the Request for Arbitration was not formally served. First, the chosen Rules of Arbitration did not require formal service but provided for communication via email. Second, the fact that the respondent made submissions in the proceedings showed that he was aware of the proceedings.
No Ground for Refusal Because Awards were Not Formally Served
According to the chosen Rules of Arbitration, formal service of an award was no requirement for its effectiveness. Therefore, Art. V para. 1 lit. e NYC (award has not yet become binding on the parties) did not hinder recognition.
No Violation of the Right to be Heard or Public Policy
According to German case law, the right to be heard (which is enshrined in Art. 103 para. 1 of the Basic Law for the Federal Republic of Germany) encompasses, inter alia, the following:
- A tribunal is obliged to take notice of the factual and legal submissions of the parties and has to take them into account in making its decision.
- A prerequisite for granting the right to be heard is that the parties to the proceedings are able to recognize which facts may be relevant to the decision. They must be able to inform themselves about the entire subject matter of the proceedings by exercising due diligence.
- The right to be heard does not necessarily require an oral hearing. However, if an oral hearing takes place, the right to be heard establishes the party’s right to make statements at the hearing. Therefore, it constitutes a violation of the right to be heard if a request to postpone a hearing is obviously rejected incorrectly so that the party cannot properly exercise its right to participate.
In the case at hand, the respondent did not show that specific submissions or exhibits would not have been available to him. Rather, he only generally claimed that he would not have been duly informed about the course of the proceedings because correspondence had only been made by email and in the English language. The BayObLG held that this is was not sufficient to substantiate a violation of the right to be heard. First, email communication was expressly foreseen in the chosen arbitration rules. Second, English was chosen as the language of the arbitration.
The fact that the arbitral tribunal decided by default did not violate the right to be heard either. The respondent did not claim that he would not have been informed about the date of the hearing. Also, the respondent did not request to postpone the hearing or to stay the proceedings. Rather, he only generally claimed that due to illness he could not participate. Yet he failed to substantiate why he could not participate remotely and/or send a representative. In particular, the respondent did not substantiate that due to poverty he was not able to send a legal representative. Also, the arbitral rules did not provide for a “public defender”. This in itself, according to the BayOblG, does not constitute a violation of public policy because the consequences of poverty were dealt with by the law of the arbitration agreement. If, according to that law, poverty was not relevant to the arbitration agreement and the proceedings, this could not be corrected via public policy considerations.
Moreover, and this may have been decisive in the end, the respondent made a submission with arguments on the day of the hearing. This probably indicated to the BayObLG that an assumed illness did not make it impossible for the respondent to exercise his rights, for example by requesting a postponement of the hearing.
Finally, the respondent failed to substantiate that the arbitral tribunal had not taken into account certain aspects of his submissions. Again, the respondent only made general complaints that the arbitral tribunal ignored his arguments.
A Violation of Public Policy could Result from the Accumulation of Several Circumstances
In the case at hand, the respondent failed to substantiate that (i) due to severe illness he was incapable of exercising his rights and that (ii) due to illness or poverty it was impossible for him to mandate a lawyer. However, the BayObLG, in an obiter dictum, states that the fact that a party is severely ill and not represented by a lawyer could, in combination, result in a violation of public policy.
Conclusion
The last aspect, i.e. making up a violation of public policy by cumulation of several circumstances, is interesting. However, despite the fact that also in the case at hand the situation was somewhat unique, the BayObLG stayed in line with the German courts’ recognition-friendly attitude. The hurdles for successfully invoking a violation of the right to be heard remain high. The same applies for setting aside requests in arbitration proceedings seated in Germany. Thus, parties can rely on the German courts’ restrictive approach when reviewing arbitral awards regarding an alleged violation of the right to be heard.
By way of a side note, the decision can also be regarded as endorsing videoconferencing as an adequate way to hold hearings. The BayObLG does not seem to have an issue with the right to be heard in that respect. To the contrary, it emphasizes that the arbitral tribunal had expressly allowed videoconferencing in order to make it easier for the respondent to participate in the hearing despite his illness. Especially in international proceedings, digital hearings save costs and reduce emissions without jeopardizing the right to be heard.
