Old town square romerberg in Frankfurt, Germany at twilight

GERMANY

Ragnar Harbst, Heiko Plassmeier, Jürgen Mark

A. LEGISLATION AND RULES

A.1      Legislation

International arbitration in Germany continues to be governed by the provisions of the Tenth Book of the German Code of Civil Procedure (ZPO) [1], to which no legislative amendment has been made since 1998. A working group tasked with a review of the German arbitration law in 2016/2017 [2] has remained invisible. So far, neither a report on its findings nor any recommendations for reform have been published. This may indicate that a reform of the German arbitration law is not considered necessary.

A.2      Institutions, Rules and Infrastructure

There have been no noteworthy developments regarding the German Arbitration Institute or other arbitral institutions in Germany.

B. CASES

B.1.     No Remission of Dispute to Arbitral Tribunal in the Case of an Evident and Severe Breach of the Right to be Heard

In case of a successful challenge of an award, the question arises whether the dispute is to be remitted to the old arbitral tribunal, or whether a new tribunal has to be appointed. By its order of 18 July 2019, the Federal Supreme Court provided some guidance in this direction.[3]

The respondent had been granted a contract for certain construction works in a nuclear power plant. The works consisted of three lots. Whereas the respondent carried out one lot himself, the respondent subcontracted the other two lots to the claimant. The project became heavily delayed. In connection with this delay, the claimant raised various remuneration claims against the respondent. These claims were successful only to a very limited extent of roughly USD 1.1 million[4] (less than 2% of the claim amount). The respondent’s cost compensation claim amounted to around USD 6.9 million[5]. When the respondent applied for a declaration of enforcement of the award regarding its cost compensation claim, the claimant challenged the award. The challenge was based on the argument that the tribunal had allegedly violated the claimant’s right to be heard. The Court of Appeal dismissed the challenge, arguing that the tribunal had adequately dealt with the claimant’s case. On appeal, the Federal Supreme Court reversed the Court of Appeal’s decision. The Federal Supreme Court held, in line with previous case law, that it is not sufficient for a tribunal simply to take the contract at face value, but that the tribunal also has to take into account the contract’s meaning and purpose. If a tribunal only deals with a party’s case by way of, “empty formulas” without going to the merits of the case. This constituted a violation of the right to be heard. The Federal Supreme Court found that the tribunal had evidently failed to deal with the claimant’s position adequately and therefore decided to dismiss the respondent’s application for enforcement of the award and to set aside the award according to section 1059 ZPO. According to section 1059 paragraph 4 ZPO, the court, when setting aside the award, may in appropriate cases remit the case to the arbitral tribunal. The Federal Supreme Court refused to remit the dispute to the tribunal and argued as follows: first, only the respondent had applied for a remission of the case to the tribunal. The court went on to state that it did not have to rule on the question of whether a remission to the original tribunal is always inappropriate in case of a violation of the right to be heard (due to concerns over impartiality). However, a remission would be inappropriate in cases of obvious and severe violations of the right to be heard, violations that the court found to exist in the present case.

B.2      Jurisdiction of State Courts to Determine Compliance with Agreed Procedure for Appointment of Arbitrators

In a decision of 26 June 2019, [6] the Munich Court of Appeal changed its approach as to whether a state court has jurisdiction under section 1035 paragraph 4 ZPO [7] to determine whether the appointment of arbitrators was valid and whether the parties complied with an agreed appointment procedure. In a previous decision of 21 December 2011, [8] the same court had held that it was so empowered. It then reversed its position in a dispute between two parties to an agreement for the sale of the opponent’s law practice to the applicant. The agreement provided for dispute resolution primarily by conciliation under the rules of the Nuremberg bar association, failing which both parties were entitled to refer the dispute to arbitration before a sole arbitrator to be appointed by the bar association. The applicant claimed that the bar association had not complied with the agreed dispute resolution mechanism by not conducting a conciliation and by appointing a sole arbitrator against his objection. After an unsuccessful challenge of the arbitrator, the applicant brought an application to the Court of Appeal to declare the appointment of the sole arbitrator as void for failure to comply with the dispute resolution regime.

The Munich Court of Appeal dismissed the applicant’s application as inadmissible. It held that section 1035 paragraph 4 ZPO provides for the involvement of a state court only in the event that the parties have agreed on a specific procedure for the appointment of the arbitrator(s) that does not lead to the desired result. However, this provision does not apply if the arbitral tribunal has already been constituted and disputes arise as to whether the constitution was in accordance with the agreed procedure. The court reasoned that according to section 1026 ZPO, a state court may only act within the framework of sections 1025 to 1061 of the ZPO [9] if the act expressly so provides. A state court only has the powers of intervention that the legislator has granted. Under section 1059 paragraph 2 lit. 1.d ZPO, errors in the constitution of the arbitral tribunal may be invoked in proceedings to vacate an award, but only if it is to be assumed that these errors had an effect on the award. This legislative decision would be ignored if the state court could determine in advance whether the appointment procedure complied with the parties’ agreement. Furthermore, the court argued that the possibility to determine compliance with the agreed procedure in advance would constitute an infringement of party autonomy. The Court of Appeal therefore no longer upheld its previous position that a state court can decide a dispute as to whether the agreed procedure for the appointment of arbitrators has been observed under section 1035 paragraph 4 ZPO.

B.3      Personal Scope of an Arbitration Agreement (I)

In a judgment of 23 November 2017, [10] the Saarbrücken Court of Appeal had to determine the personal scope of an arbitration agreement. The parties to the dispute, (the insolvency administrator of a German company and a German bank acting as the leader of a consortium of banks that had granted the insolvent company a credit line against certain securities) had both concluded a complex sale and purchase agreement consisting of several contracts by which parts of the insolvent company’s operating assets and liabilities were transferred to a Chinese purchaser. The bank was a party to the asset deal, particularly because it transferred certain claims against the insolvent company to the purchaser. An overarching “framework agreement” provided that “all disputes arising out of or in connection with this framework agreement and/or the transaction agreements or concerning their validity” were to be referred to arbitration in English with the place of the arbitration being Frankfurt. After the closing of the asset deal, the bank as plaintiff asserted mass debt claims against the insolvency administrator as the defendant, claiming that the defendant had unlawfully mixed proceeds from the sale of securities granted to the plaintiff as collateral with the insolvency estate instead of transferring them to the plaintiff. The defendant applied for the action to be dismissed as inadmissible, relying on the arbitration clause in the “framework agreement.”

At first instance, this defense succeeded. [11] On appeal, the Saarbrücken Court of Appeal reversed this decision and referred the dispute back to the district court. It held that although both parties to the dispute had been parties to the sale and purchase agreement that included an arbitration clause, the dispute was not within this clause’s scope. The court reasoned that only “the parties” to the sale and purchase agreement were bound by the arbitration clause, which it took to refer only to persons involved on different sides of a contract, i.e., in the case of the M&A agreement the seller(s) on the one hand and the purchaser on the other. By contrast, the court did not regard several persons who establish legal obligations with a buyer “in parallel on the seller’s side” as “parties” to this contract in their relationship with each other. The arbitration agreement was held only to apply to the “horizontal” relationship between buyer and seller, but not on a “vertical” level, i.e., between individual sellers, where there is no “contractual performance relationship.” In the court’s view, this construction was in accordance with the purpose of the arbitration agreement to regulate the legal relations only between parties domiciled in different countries to the exclusion of the jurisdiction of domestic state courts. Moreover, the court held that it was not in the interests of the parties to apply the arbitration clause to the procedural relationship between them: the parties would only choose a clause that would provide for disputes to be settled by arbitration without a right to an appeal and in proceedings conducted “exclusively in English” against the background of “the special expertise of the arbitrators in the field of international trade,” for confidentiality reasons and “to exclude the law as far as possible.” Such agreements were “evidently tailored to the particularities of the purchase agreement concluded with the foreign investor,” while there was “no comprehensible reason” for a plaintiff from Stuttgart and a defendant from Saarbrücken to refer their dispute to an arbitral tribunal in Frankfurt, which was “to speak in a foreign language” and against whose decision there was no right of appeal. Had the arbitration clause provided for Beijing or Shanghai as the seat of the tribunal and for Mandarin as the language of the proceedings, “probably nobody would have thought of applying it” to the relationship between the parties. However, the Court of Appeal added that arbitration agreements must be interpreted on a case by case basis and that its ruling cannot be generalized.

The decision of the Saarbrücken Court of Appeal, in particular part of the court’s reasoning – may create the impression of an anti-arbitration bias among the judiciary in Germany. However, it does not reflect the approach of the vast majority of German courts that enforce arbitration agreements wherever legally possible. It seems that the Saarbrücken Court of Appeal sought to achieve a result that is considered to be just and equitable. However, it could have done so without using anti-arbitration rhetoric. Considering the reported facts, the dispute was not about the sale and purchase agreement but about the distribution of the proceeds from the sale in the insolvency proceedings. It would have seemed appropriate for the court to simply follow the reasoning the plaintiff had advanced at first instance, namely that the dispute did not arise “in connection with” the sale and purchase agreement, but rather in connection with the insolvency proceedings and was thus not subject to the arbitration clause. Unfortunately, it is not reported why the court did not consider this approach to be viable.

B.4      Personal Scope of an Arbitration Agreement (II)

The personal scope of an arbitration agreement was also the subject of a decision by the German Federal Supreme Court rendered on 8 November 2018. [12] The dispute related to a fidelity insurance policy between UK and German insurance companies and the former fund management companies of an insolvent German investment company. The policy included an arbitration clause that provided that “at the request of the policyholder, an arbitral tribunal can resolve a dispute concerning insurance coverage.”

The fund management companies had alleged that they had suffered damage due to a fraudulent breach of trust of the former sole shareholder and managing director of the investment company and that this damage was covered by the insurance policy. When the insurance companies refused to accept their obligation to assume liability, the fund management companies initiated arbitration proceedings against the insurance companies after the insolvency administrator of the investment company had confirmed in writing that the arbitration proceedings had been initiated with his consent.

The insurance companies asked the Hamburg Court of Appeal to order that the request for arbitration was inadmissible because, according to the arbitration clause, arbitration proceedings could only be initiated by the policyholder, i.e., the investment company or its insolvency administrator, but not by the fund management companies as insured persons.

Both the Hamburg Court of Appeal and the Federal Supreme Court dismissed the application of the insurance companies as unfounded. In its order, the Federal Supreme Court pointed out that the interpretation of an arbitration clause in an insurance policy for the benefit of a third party shall not stick to the wording of the clause but has to take the statutory provisions governing such contracts and the typical interests of the parties involved into account. In case of a fidelity insurance contract, the policyholder must enforce the rights of the insured person unless in accordance with section 44 (2) of the German Insurance Contract Act the policyholder has expressly authorized the insured person to pursue the claims herself. Since the insolvency administrator had confirmed that the request for arbitration was filed with his consent, the court held that the fund management companies were covered by the arbitration clause and the request for arbitration was therefore admissible.

The court rejected the idea that this interpretation of the arbitration clause would bind insured persons to an arbitration agreement to which they are not a party. The court emphasized that the arbitration clause did not force the insured person to pursue a claim through arbitration but gave a right to choose arbitration as the dispute resolution mechanism. The fund management companies could have pursued their claims in court.

 

[1] The Baker & McKenzie International Arbitration Yearbook, 2007 edition, p. 41-42.

[2] The Baker & McKenzie International Arbitration Yearbook, 2017 – 2018 edition, p. 121.

[3] File No. I ZB 90/18, BeckRS 2019, 23336.

[4] Approximately EUR 1 million.

[5] EUR 6.2 million.

[6] File No. 34 SchH 6/18, SchiedsVZ 2019, 283.

[7] “If the parties have agreed on a procedure for the appointment and a party does not act in accordance with that procedure, or if the parties or the two arbitrators cannot reach an agreement in accordance with that procedure, or if a third party does not perform a task entrusted to him under that procedure, either party may apply to the court to order the necessary measures, unless the agreed appointment procedure provides otherwise to secure the appointment.” section 1035 paragraph 4 ZPO is the equivalent of article 11 paragraph 4 of the Uncitral Model Law.

[8] File No. 34 SchH 11/11, SchiedsVZ 2012, 111.

[9] I.e. the 10th book of the ZPO that applies to arbitration.

[10] File No. 4 U 44/16, SchiedsVZ 2019, 290 with annotation Bryant.

[11] District Court Saarbrücken, judgment of 3 December 2015, file no. 4 O 243/12, SchiedsVZ 2016, 111 with annotation Böcker.

[12] File No. I ZB 24/18, SchiedsVZ 2019, 355.

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