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German court sets aside award where tribunal did not adhere to what the court held to be the parties' agreed procedure
Practical Law UK Articles 2-519-2776 (Approx. 4 pages)
German court sets aside award where tribunal did not adhere to what the court held to be the parties' agreed procedure
by Stephan Wilske (Partner) and Claudia Krapfl (Associated Partner), Gleiss Lutz
| Published on 03 May 2012 • Germany |
In a rare decision, the Higher Regional Court of Frankfurt am Main set aside an arbitral award because the arbitral tribunal had not followed the procedure agreed for submission of briefs and terms of reference for an expert that the court held had been agreed by the parties as set out in procedural orders by the tribunal. The decision has implications for arbitrations with their seat in Germany.
Title
The principles of party autonomy and choice form the bedrock of most modern arbitration laws and the German law is no exception. A decision of the Frankfurt am Main Higher Regional Court highlights the consequences that may flow from an arbitral tribunal's failure to adhere to the procedure agreed by the parties. The arbitration in question took place under the arbitration rules of the DIS (Deutsche Institution für Schiedsgerichtbarkeit).
German law and DIS Rules
Section 1042 paragraph 4 of the German Code of Civil Procedure (Zivilprozessordnung, ZPO) reads as follows:
"(4) Failing an agreement by the parties, and in the absence of provisions in this Book, the arbitral tribunal shall conduct the arbitration in such manner as it considers appropriate. The arbitral tribunal is empowered to determine the admissibility of taking evidence, take evidence and assess freely such evidence."
Section 1059 paragraph 2 no. 1 d) ZPO reads as follows:
"(2) An arbitral award may be set aside only if:
1. the applicant shows sufficient cause that:
d) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with a provision of this Book or with an admissible agreement of the parties and this presumably affected the award."
Section 24.1 of the DIS Arbitration Rules reads as follows:
"Statutory provisions of arbitral procedure in force at the place of arbitration from which the parties may not derogate, the Arbitration Rules set forth herein, and, if any, additional rules agreed upon by the parties shall apply to the arbitral proceed-ings. Otherwise, the arbitral tribunal shall have complete discretion to determine the procedure."
Sections 27.1 and 27.3 of the DIS Arbitration Rules read as follows:
"The arbitral tribunal shall establish the facts underlying the dispute. To this end it has the discretion to give directions and, in particular, to hear witnesses and experts and order the production of documents. The arbitral tribunal is not bound by the parties' applications for the admission of evidence.
Unless otherwise agreed by the parties, if a party so requests or if the arbitral tribunal considers it necessary, the expert shall, after delivery of his written or oral report, participate in an oral hearing where the parties have the opportunity to put questions to him and to present expert witnesses in order to testify on the points at issue."
Facts
The arbitral proceedings concerned a dispute between a North American automotive supplier (respondent) and a German automotive supplier (claimant), with the arbitration seated in Frankfurt. The parties had agreed on a sale and purchase agreement (SPA), whereby the respondent was to purchase a subsidiary of the claimant. Under the SPA, specific elements of the purchase price were to be calculated at the time of closing. After the signing of the SPA, a dispute arose between the parties and the transaction did not proceed to closing. This led the claimant to initiate arbitral proceedings requesting damages for nonfulfilment of the SPA. In its final award, the arbitral tribunal granted the claim and ordered the respondent to pay to the claimant a sum of more than €210 million.
The respondent then requested that the award be set aside. It based its request, among other things, on the ground that the arbitral tribunal had not followed the agreements of the parties on procedure reached during the arbitral proceedings and that this presumably affected the award (section 1059 paragraph 2 no. 1 d, ZPO). The respondent argued that in the course of the arbitral proceedings the arbitral tribunal had set out agreements between the parties reached in the course of the proceedings in a procedural order and in terms of reference for the expert, but had then deviated from these party agreements in the further proceedings.
In particular, the arbitral tribunal had discussed with the parties specific parameters for the taking of evidence and the parties had agreed that all submissions by both parties were to be substantiated in detail by providing written witness statements and expert evidence. Additionally, the parties agreed with the tribunal that all documents provided to party-appointed experts were to be provided to the other side, regardless of whether these documents were relied upon by the party-appointed expert or not. The tribunal provided for such wording in one of its procedural orders, explicitly referring to the party agreement on these points.
Furthermore, the terms of reference for a tribunal-appointed expert agreed upon between the arbitral tribunal and the parties provided that the tribunal-appointed expert was not to rely on the calculation basis used by the party-appointed experts, but was to provide independent calculations.
In the course of the proceedings, the claimant did not fulfil these prerequisites and did not submit all documents provided to its party-appointed expert, and the tribunal-appointed expert did not perform independent calculations, but relied on the basis for the calculations provided by the claimant. Despite objections by the respondent in the arbitral proceedings, the arbitral tribunal did not insist that these procedures be followed, but continued the proceedings and rendered a final award.
Decision
The Higher Regional Court of Frankfurt am Main held that the arbitral award was to be set aside because the arbitral tribunal had not adhered to the party agreements on procedure. It held that the procedural order agreed upon between the tribunal and the parties, as well as the terms of reference for the expert agreed upon in the same manner, were to be treated as party agreements and not as rules on procedure determined by the tribunal according to sections 24.1, 27.1 and 27.3 DIS Arbitration Rules, as well as section 1042 paragraph 4 ZPO.
The court explained that it is principally up to the parties in arbitral proceedings to determine the procedure of the arbitration within the limits of mandatory law. Such agreements can be reached prior to a dispute arising or at any point during the proceedings and can be reached in writing or even implicitly. If such an agreement between the parties exists, it will always have priority over determinations by the arbitral tribunal on procedure.
The court further held that the agreements reached between the parties and set out by the arbitral tribunal in its procedural order and in the terms of reference for the expert were to be treated as such party agreements from which the arbitral tribunal was not allowed to deviate. Since the tribunal had not insisted on this procedure being followed and it was possible that a different decision in the arbitral proceedings would have been reached had these party agreements been adhered to, the court set aside the award.
Comment
This decision by the Higher Regional Court of Frankfurt is one of the rare cases where an arbitral award was set aside because the procedure agreed upon between the parties was not followed by the arbitral tribunal. The decision is surprising in that the tribunal in this case had followed international standard procedure in discussing procedural orders and terms of reference for the expert with the parties and setting out in such documents that the parties agreed with the content of these procedural rules. The court held that by doing so the tribunal was bound by party agreement and no longer had the discretion to deviate from such procedural rules in the further course of the proceedings, even if this means that an tribunal has no means to stop one of the parties from obstructing the proceedings indefinitely.
This poses quite a dilemma for arbitral tribunals with their seat in Germany, since they will want to continue to have the parties agree with them on the content of procedural orders in line with international best practice. On the other hand, the tribunal needs to maintain its flexibility to react to obstructive behaviour by one of the parties. One possible way forward may be for the tribunal to continue to consult the parties prior to issuing procedural orders, but to ensure that the wording of the procedural order makes clear that the procedure is being ordered by the tribunal "after consultation with the parties" and not as a "procedural order by consent". Alternatively, the tribunal might add language to a "procedural order by consent" allowing it to deviate from the agreed procedure where necessary at its reasonable discretion. It remains to be seen whether this will be accepted by German courts.