In a recent decision, the Higher Regional Court of Frankfurt defined the requirements and limits in which the losing party in an arbitration can defend itself against the arbitral award with counterclaims at the stage of enforcement proceedings in Germany.[1]

Facts of the case:

The Higher Regional Court Frankfurt had to deal with an application to declare an ICC award enforceable in Germany. The background to the dispute was a contract concerning the purchase of a general cargo filling machine for canning fish.

The defendant (“Y“) had sold and delivered the filling machine to the applicant (“X“). The contract included X’ general terms and conditions (“GTCs“) which contained the standard ICC arbitration clause: “All disputes arising out of or in connection with the contract shall be finally settled under the rules of arbitration of the international chamber of commerce by one or more arbitrators appointed in accordance with the set rules“.

Upon delivery of the machine, X argued that the machine was defective and ultimately declared the contract avoided. This gave rise to an arbitration held in Frankfurt. During the arbitration proceedings, the (arguably defective) machine remained with X. Y picked up the machine only after the end of the arbitration in January 2020.

In the award, the tribunal ruled largely in favor of X, inter alia granting X payment claims against Y. Regarding the cost decision, the tribunal accepted the full amount of the attorney fees claimed by X. To this end, the parties had agreed – as is usual – that (only) the cover pages of the attorneys’ invoices be submitted as evidence for the costs incurred. The parties were given the opportunity to comment on the costs claimed by the other party in the arbitration.

In the proceedings before the Higher Regional Court, X requested to declare the award enforceable pursuant to Sections 1060, 1062 (1) No. 4 German Code of Civil Procedure (“ZPO“). Y defended itself against the claims decided upon in the award by offsetting them against a tort claim for damages pursuant to Section 823 (1) of the German Civil Code (“BGB“). Y based the set-off on the allegation that X had severely damaged the machine while in X’ possession. Allegedly, after the last oral hearing in the arbitration in September 2019, X had stored the machine improperly until its return to Y in January 2020.

In addition, Y objected to the enforcement of the arbitral award, arguing that the tribunal’s decision on costs was based on an alleged fraudulent use of process by X. Y alleged that the amount of the claimed and awarded attorney fees (approx. 2,000 attorney hours) was completely unrealistic considering the limited scope of the arbitration and Y’s significantly lower attorney fees. Y had already raised this objection in the arbitration (to no avail).

Decision:

The Court declared the award enforceable, rejecting both the declared set-off and the objection of fraudulent use of process.

The Court decided – in line with previous case law – that a party can object to declaring an award enforceable by offsetting the awarded claims against a counterclaim only under two cumulative requirements: (i) The counterclaim must have arisen after the arbitration ended so that it could not have been raised in the arbitration (analogous to Section 767 (2) ZPO). And (ii) the counterclaim must not itself be covered by an arbitration clause.

The second requirement was not met in the case at hand: the Court ruled that the ICC arbitration clause was to be interpreted broadly as to include also Y’s (alleged) tort counterclaim. The Court stated that “[t]he interpretation of the arbitration clause […] shows beyond doubt that the claim for damages put forward by the defendant for set-off is subject to the arbitration agreement “.[2] The decisive factor, according to the Court, is that “the wording of the clause covers not only all disputes arising ‘from the contract’ but also, alternatively (‘or’), all disputes arising ‘in connection’ with the contract and thus […] makes it clear that the scope of the arbitration agreement is not limited to contractual claims but also covers other claims for which a connection with the contract can be established“.[3]

The Court held that Y’s tort counterclaim for the allegedly improper storage of the machine did have a sufficient connection with the contract as it concerned the parties’ duties in the stage of unwinding the contract. The avoidance of the contract by X did not eliminate this connection because the return of the machine (and its storage until then) was inextricably linked to the contract as a typical consequence of its avoidance.[4]

Besides, the Court also rejected Y’s fraud objection regarding the attorney fees claimed and awarded in the award. In essence, the Court argued that Y had the opportunity to raise this objection in the arbitration (and in fact seized that opportunity as well in its submission on costs). The Court held that once given such an opportunity during the arbitration, a party is barred from raising the same objection before a state court in an enforcement proceeding.[5]

Conclusion:

Arbitral awards are final and binding. German courts accept and regularly underline this primacy of arbitration where parties have submitted their dispute to arbitration in the first place. Raising objections against an arbitral award at the stage of enforcement proceedings before state courts is thus permissible in limited circumstances only.

The judgement of the Higher Regional Court Frankfurt  confirms this general approach under German law. The Court defined in more detail under which requirements the losing party in an arbitration can defend itself in enforcement proceedings by way of offsetting the awarded claim against counterclaims. The Court holds that such defense is only permissible (i) if the respective counterclaim arose only after the arbitration had ended and (ii) if the counterclaim is not itself covered by an arbitration agreement.

On a side note, the Court also confirms that the standard ICC arbitration clause is to be interpreted broadly and in particular covers tort claims that are factually connected to the relevant contract.

 

[1] OLG Frankfurt am Main, decision of 7 September 2020 – 26 Sch 2/20.

[2] Ibid, para. 29.

[3] Ibid, para. 29.

[4] Ibid, para. 31.

[5] Ibid, para. 36.