In its decision of May 2017, the Federal Supreme Court of Germany (Bundesgerichtshof) laid down a new principle for setting aside an arbitral award based on the infringement of the disclosure obligation of a tribunal-appointed expert (Decision of 02 May 2017, I ZB 1/16). The decision constitutes a change in German and Model Law case law.
Claimant and Respondent (hereinafter the “Parties”) formed a consortium for the joint manufacture of trains. After 400 of their manufactured trains were damaged by water ingress, Claimant had to refurbish the trains for the customer. Claimant argued that Respondent was liable for the extra costs because the damages were caused by a design fault. Respondent argued that only Claimant had to bear the costs of the refurbishment because the damages were based on an error during the manufacture of the trains. The parties submitted the dispute to arbitration in accordance with the Arbitration Rules of the German Institution of Arbitration (DIS).
The arbitral tribunal appointed an expert, “S”, to analyze the root cause for the damage and to prepare an expert opinion. The expert confirmed that he did not entertain any business or personal contact with the Parties. In both his opinion of August 2012 and his complementary opinion of December 2012, S concluded that the damage was caused by a design flaw on Respondent’s side.
After the last hearing, Respondent objected against S and argued that S was biased. Respondent contended that between Claimant and “Company T” – the company that employed S – existed economic ties. Respondent further argued that S had made defamatory statements in the last hearing. The tribunal rejected this objection by way of procedural order. In its order, the tribunal did not specifically address Respondent’s argument that S made defamatory statements during the hearing. In its final award, the tribunal followed the expert opinion and ultimately ordered Respondent to pay € 5.8 million to Claimant.
After the arbitration, Respondent lodged an action for annulment of the award with the Higher Regional Court Karlsruhe (10 Sch 12/13), which, however, declared the award enforceable. The present decision is about Respondent’s subsequent appeal on a point of law (Rechtsbeschwerde) before the Federal Court of Justice Germany (hereinafter the “Court”). In that appeal, Respondent brings forward two arguments: Firstly, Respondent submits that the tribunal violated Respondent’s right to a fair hearing when it rejected the second objection without even addressing Respondent’s argument that the tribunal-appointed expert made defamatory statements. Secondly, Respondent contends that S infringed his disclosure obligation by concealing that his direct superior had worked for Claimant for years before working for Company T and that Claimant and Company T had extensive and significant business relations in the past. Respondent argued that this would constitute a ground for setting aside the award.
The appeal was partly successful. The Federal Court of Justice did not annull the award but the decision of the Higher Regional Court and referred the case back to the lower instance.
The Federal Court of Justice rejected Respondent’s submission that the tribunal violated Respondent’s right to a fair hearing (1.), Respondent’s argument that the tribunal-appointed expert should have made a more detailed disclosure was justified (2.).
1. Complaint about infringement of the right to a fair hearing was belated
The Court rejected Respondent’s argument on the infringement of the right to a fair hearing according to Section 1059 II no. 2 lit. b ZPO (German Code on Civil Procedure, hereinafter “CCP”) because Respondent did not raise an immediate objection in the arbitration proceedings.
The Court held that Respondent was precluded from raising the objection before the state courts pursuant to Section 1027 CCP. The Court stated that “a party to an arbitration procedure, which omitted to immediately claim an infringement of its right to a fair hearing, cannot usually plead such infringement at a later point in time if the party did have the opportunity to claim the infringement in the arbitration and if it had been possible for the tribunal to remedy this infringement“.
The Court found that Respondent had the opportunity to complain about a violation of the right to be heard in the arbitration, namely in the next brief after Respondent had received the procedural order dismissing its challenge of the tribunal-appointed expert. Respondent could not have reasonably assumed that it was pointless to raise such complaint.
2. Infringement of the disclosure obligation by a tribunal-appointed expert constitutes a ground for setting aside the arbitral award
Respondent’s appeal was successful with its argument that the tribunal-appointed expert was obligated to make a more detailed disclosure.
In that respect, the Federal Court of Justice even changed its case law. Pursuant to former case law (BGH, III ZR72/98, BGHZ 141, 90), it was not sufficient to show that an arbitrator or an expert failed to disclose circumstances which could give rise to justifiable doubts as to his / her independence and impartiality. Pursuant to former case law, a court had to balance the gravity of the violation against the public interest in legal certainty and the finality of awards. An award was only annulled in case one party could show a particularly severe violation of a tribunal’s / expert’s disclosure obligation.
In the present case, the Court abandoned this case law and decided that “if a tribunal-appointed expert did not disclose all circumstances which may have given rise to doubts as to its impartiality, the arbitral proceedings are not in accordance with Sections 1049 III, 1036 I CCP [= the disclosure obligation]“. In other words, if an arbitrator / expert does not comply with his / disclosure obligation, this is a violation of the provisions of the German arbitration law.
However, under German law, a “mere” violation of the applicable law and the applicable arbitration rules is not sufficient. The Court therefore further addressed the additional requirement of causality between the violation of the disclosure obligation and the final award, which is not included in Article 34 (2) (iv) Model Law but is exclusive to German Law (in Section 1059 II no. 1 lit. d CCP). The Court held that a violation of the disclosure obligation “ normally affects the arbitral award in the sense of Section 1059 II no. 1 lit. d CCP if the award was based on the expert opinion and if the undisclosed circumstances would have given doubts as to the expert’s impartiality and thus would have been sufficient for its refusal” (emphasis added).
The Federal Court of Justice referred the case back to the lower instance because the Higher Regional Court had failed to determine whether the fact that the expert’s direct superior had worked for the claimant was sufficient to cause justifiable doubts as to the expert’s impartiality and independence.