Is there a process for challenging awards seated in Germany in the courts of this jurisdiction?
Market Insight 07 February 2022 07 February 2022
UK & Europe
This is the first article in a series focusing on the process and procedure for challenging arbitral awards within various national jurisdictions within Europe, as prepared by Clyde & Co’s European international arbitration team. This first piece is on the procedure in Germany and is written by Georg Scherpf, Antonios Politis, and Juliane Köhler, from Clyde & Co’s Hamburg Office.
In Germany, arbitration proceedings are regulated by sections 1025 to 1066 Code of Civil Procedure (“CCP”). These sections adopt nearly verbatim the 1985 UNCITRAL Model Law on International Commercial Arbitration (“UNCITRAL Model Law”). In addition, the recognition and enforcement of foreign arbitration awards are governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, commonly known as the New York Convention (“NYC”), to which the CCP explicitly and conclusively refers in its section 1061. The implementation of both instruments means that there are hardly any surprises in arbitrations conducted in Germany when compared to other Model Law jurisdictions.
Arbitral awards are in general binding as if they were a judgment (“rechtskräftiges Urteil”, section 1055 CCP) and cannot be reviewed on the merits, unless the parties agreed to a second instance individually or through the selection of arbitration rules providing for such a review.
Under German arbitration law, only domestic awards (seated in Germany) can be set aside (annulled), per section 1059 CCP. German courts do not assume setting-aside competence for foreign arbitral awards (cf. Zöller/Geimer, section 1059, para. 1 b). The grounds for setting aside domestic arbitral awards are almost identical to those listed in Article V NYC with the exception that the application of the ordre public interne (instead of the ordre public internationale) may lead to slightly different results (cf. Baumert, SchiedsVZ 2014, 139).
There are three main procedural routes to challenge an award or partial award under German law:
- Challenging the final award because of an invalid arbitration clause or other serious irregularity affecting the tribunal, the proceedings, or the award, under section 1059 CCP. This corresponds to Art. 34 (2) of UNCITRAL Model Law);
- Challenging a partial award on jurisdiction under section 1040(3) CCP. This largely corresponds to Art. 16 (3) of UNCITRAL Model Law, with the only difference that, under German law, the decision of the state court is open to appeal (sections 1065 (1) sentence 1 and 1062 (1) no. 2 CCP); and
- Section 1060 (2) CCP, in addition, hinders a domestic award from being declared enforceable if grounds exist pursuant to section 1059 (2) no. 2 CCP. This largely corresponds to Art. 36 (1) of UNCITRAL Model Law.
The most common route is the application under section 1059 CCP. Under this section, any domestic award can be set aside in case of an (i) invalid arbitration clause/agreement; (ii) denial of the right to be heard; (iii) excess of mandate; (iv) procedural irregularities; (v) lack of arbitrability; or (vi) violation of the ordre public interne. Any procedural irregularities must have had a causal impact on the award for it to be set aside (section 1059 (2) no. 1 (d) CCP).
Interestingly, although the parties are free to apply for the annulment of the arbitral award, they cannot waive setting aside proceedings from the outset, as section 1059 CCP is not dispositive. Therefore, the parties cannot effectively agree that no legal remedies should be admissible against the arbitral award. This question is handled differently in some other jurisdictions, where at least those parties who are not from the respective jurisdiction can waive recourse to setting aside procedure.
A particularity of German arbitration law – and one of the very few deviations from the Model Law – is the possibility of applying for a decision to assess the admissibility or inadmissibility of arbitral proceedings at any time before the constitution of the arbitral tribunal (section 1032(2) CCP). While those proceedings are pending before the court, arbitration proceedings may still be initiated or continued and an award may even be issued. This unique feature has recently attracted attention internationally, after the Netherlands filed a section 1032 (2) CCP application relating to the arbitrations brought against them by RWE and Uniper to have those proceedings declared inadmissible considering the judgment in Slovak Republic v Achmea BV. The application is still pending. However, as these are delocalised proceedings under the ICSID Convention and generally not under the purview of local courts, the application will most likely be rejected. Although section 1032 (2) CCP is not a setting aside procedure, we consider it worth mentioning in this context as it addresses the fundamental question of admissibility, which encompasses topics also relevant to the grounds for setting aside an award.
What is the legal form of the process? Are there limits on the grounds of challenge and what are they?
The legal form of the process depends on which route is taken to challenge an award.
Partial Award, section 1040 (3) CCP
To apply for a review of a partial award on jurisdiction under section 1040 (3) CCP, the party must file an application at a Higher Regional Court (Oberlandesgericht) where the arbitration is seated. The application must be filed within one month of having received the partial award on jurisdiction. While such a request is pending, the arbitral tribunal can continue the arbitral proceedings and issue an award.
In this context, it was previously disputed whether a court seized with an application under section 1040 (3) CCP may render a decision, if a final award was issued whilst the application was still pending. Until 2017, the jurisprudence considered that there would be a lack of legal interest/standing (Rechtsschutzbedürfnis) because the rendering of the final award meant that there was no longer a partial award on which to decide. However, the German Federal Court of Justice (Bundesgerichtshof – “BGH”) decided in 2017 that a court may nevertheless decide on the admissibility of the arbitral proceedings (BGH, decision dated 09.08.2016 – I ZB 1/15). Previously, the proceedings under section 1040 (3) CCP would have had to be discontinued and setting aside proceedings initiated.
Final award, section 1059 CCP
For a decision pursuant to section 1059 CCP, which corresponds to Art. 34 (3) UNCITRAL Model Law, the party must file an application at the Higher Regional Court (Oberlandesgericht) where the arbitration is seated (if the competent Higher Regional Court is not designated in the arbitration agreement). The application must be filed within a period of three months, beginning on the day the applicant received the award. An application is inadmissible if the award has already been declared enforceable by a German court. Another slight deviation from the Model Law lies in the fact that, if the court concludes that the award is in fact to be set aside, it will not suspend the setting aside proceedings for a period of time pursuant to Art. 34 (4) UNCITRAL Model Law giving the tribunal time to “eliminate the grounds for setting aside”.
Instead, it will directly annul the award, thereby reviving the arbitration agreement (section 1059 (5) CCP). As a result, an arbitral tribunal is once again competent to decide on the merits of the case. However, if a motion is filed and the proceedings are "suitable", the court has discretion to remand the proceedings back to the original arbitral tribunal (section 1059 (4) CCP). A case is suitable for remand if, for example, there is a procedural error that the arbitral tribunal can easily remedy, e.g. by carrying out the procedural act that was erroneously omitted.
If the court rejects the application under section 1059 CCP, the grounds for setting aside the award considered by the court cannot be reasserted in the recognition and enforcement proceedings (section 1060 (2) CCP, see below).
Objecting to Enforcement, section 1060 CCP
Where a party applies for a declaration of enforceability (Vollstreckbarerklärung, section 1060 CCP), there are several grounds for refusing the declaration of enforceability, e.g. those listed in section 1059 (2) CCP applicable to the setting aside of final awards (see above).
However, a ground for setting aside cannot be relied on if an application under section 1059 (2) CCP was rejected and is no longer open to appeal. In this case, a court has already finally decided that there is in fact no ground for setting aside. This decision is legally binding and must not be circumvented through a process for declaration of enforceability.
In addition, one cannot raise the objection against the enforceability of an award based on the grounds for setting aside set forth in section 1059 (2) no. 1 CCP, if the time period of section 1059 (3) CCP – regularly three months – lapses without an application having been made. In this case, the declaration of enforceability can only be denied if the subject matter of dispute is not arbitrable under German law, or if recognition or enforcement of the award would be contrary to the ordre public.
Does the challenge involve a rehearing of some or all of the merits?
German courts will not review the merits of an arbitral award. In particular, there is no de-novo review of the merits. Furthermore, the arbitral tribunal's assessment of the evidence cannot, in principle, be replaced by a state court's own assessment of the evidence in setting aside proceedings due to the prohibition of a révision au fond.
In this context, a court might set aside an award, in part or in full, but will never “correct” an award by modifying it.
In summary, what is the process and how does it work?
The main way to challenge an arbitral award is to file an application for the setting aside of a final award in a German-seated arbitration under section 1059 CCP. The application requires an interest in legal protection (Rechtsschutzinteresse). Usually only the party that (wholly or partially) lost the arbitral proceedings has such an interest.
An application to set aside an arbitral award must be filed with the competent court within three months of the award being received (section 1059 (3) CCP). Jurisdiction for these applications lies with the Higher Regional Court (Oberlandesgericht) designated in the arbitration agreement or, if no competent court for the application was agreed upon, with the Higher Regional Court at the seat of arbitration, section 1062 (1) CCP.
There are relatively few formal requirements for applying to set aside an arbitral award:
- An attorney is not required at the outset to file the application (sections 1063 (4), 78 (3) CCP), but must do so when the date of the oral hearing is fixed.
- Also, the terms "setting aside" or "annulment" do not have to be used explicitly. It is sufficient if it is clear from the application that the arbitral award as such is challenged and that its judicial review is requested, stating the grounds for setting aside (OLG Hamburg, decision of 12 December 2019 - 6 Sch 12/18).
- The application to set aside an arbitral award must be in German and a translation of the award should be attached if it is in a foreign language. The court may require a certified translation of the award by a sworn translator (section 142 CCP). Some courts are willing to accept awards in English without translation, but this needs to be clarified prior to filing an application.
- In addition, the applicant must pay an advance for the court costs calculated according to the amount in dispute (sections 10 et seqq. German Court Costs Act – GKG).
Although the factual findings of the arbitral tribunal are not binding, no new procedural material may be introduced, and the assessment of evidence is excluded.
The setting aside proceedings have no suspensive effect. However, the German courts may stay any recognition and enforcement proceedings initiated by the other side pending the setting aside decision (section 148 CCP).
If the Higher Regional Court sets aside the arbitral award, the arbitral tribunal's award is thereby annulled. As a result, the arbitration agreement is revived (section 1059 (5) CCP) and an arbitral tribunal is once again competent to decide on the merits of the case. However, if a motion is filed and the proceedings are "suitable", the proceedings may also be referred back to the arbitral tribunal (section 1059 (4) CCP).
The decision can be appealed to the BGH, which only allows an appeal if the dispute is of “fundamental importance” or if the further development of the law or the uniformity of jurisprudence requires its decision (sections 574 (2), 1065 (1) CCP).
Are there any legal thresholds before the process can be commenced?
A party commencing setting aside proceedings must issue a written application while observing the legal deadlines. The deadlines are (i) the constitution of the tribunal (proceedings under section 1032 (2) CCP), (ii) one month after having received a partial award on jurisdiction (section 1040 (3) CCP) or (iii) three months after receipt of the final award (section 1059 (3) CCP).
The person entitled to file an application for setting aside is the one who is adversely affected (by the award, not by the ground for setting aside), i.e. mostly the parties, but also a third party like e.g. an intervener. Importantly, the claimant in arbitration lacks an interest in legal protection (Rechtsschutzbedürfnis) if he has fully prevailed - because he can simply choose not to make further use of the award.
If the application for setting aside is based on procedural violations (section 1059 (2) no. 1 lit. d alternative 2 CCP), it must be remembered that each party is obliged to complain to the arbitral tribunal as soon as they become aware of a violation. If they fail to do that, it impossible to raise the procedural violation at a later stage (section 1027 CCP). The party adversely affected can then no longer invoke the procedural violation in the setting aside proceedings.
Roughly what is the cost and timescale to complete the process? Is the challenge itself appealable?
Costs can vary significantly depending on the amount in dispute, the complexity of the case and whether the decision is appealed. Even though it is common to charge on an hourly fee basis in setting aside proceedings, the total fees charged for representing a client may not be below the statutory fees payable under the Act on the Remuneration of Lawyers (Rechtsanwaltsvergütungsgesetz). These fees are a good indication as to what the base fees and court costs will be.
German statutory cost law calculates court costs and lawyers' fees according to the amount in dispute, which is why no specific calculation can be made here. However, it can generally be said that the higher the amount in dispute of the setting aside proceedings (i.e. the value of the arbitral award to be set aside), the lower the costs of the proceedings will be, relatively speaking.
A forthcoming study of applications for setting aside (section 1059 CCP) and recognition of enforceability (sections 1060 and 1061 CCP) filed between 2012 and 2016 indicates that the average duration of proceedings is 5.68 months at each level, although 2 – 4 months should be added to take into account the mandatory oral hearing for the motion to set aside (section 1063 (2) CCP) (see in detail Wolff, SchiedsVZ 2021, 328 with reference to the study "Schiedsstandort Deutschland - Eine Erhebung zur Schiedsgerichtsbarkeit und zur Spruchpraxis der Gerichte", to be published in 2022).
Our experience is that it usually takes between 5-8 months to obtain a decision at first instance.
The court’s decision on the challenge itself is open to appeal under section 1065 (1) and 574 et. seq. CCP within one month of service of the decision. This also applies to procedures under section 1040 (3) CCP - contrary to Art. 16 (3) UNCITRAL. It should, however, be noted that the scope of review is restricted.
Roughly what proportion of challenges are successful?
The study mentioned above has estimated the success rate of applications for setting aside under section 1059 CCP at approximately 11%, with the setting aside grounds "lack of an effective arbitration agreement" and "deficiencies in the constitution of the arbitral tribunal" dominating the successful applications. In light of the overall low number of applications and in order to achieve greater statistical reliability, the study combined these cases with applications for declarations of enforceability (as far as the objections raised were comparable to the setting-aside grounds) to provide a combined success rate for setting-aside applications and resisting enforcement of 4.19 % (see in detail Wolff, SchiedsVZ 2021, 328 with reference to the study "Schiedsstandort Deutschland - Eine Erhebung zur Schiedsgerichtsbarkeit und zur Spruchpraxis der Gerichte", to be published in 2022).
Are there any other points of interest that you would like to highlight in relation to challenges in the jurisdiction in which you operate?
Since German arbitration law is based on the UNCITRAL Model Law and New York Convention, it contains very few surprises. The most unusual aspect of it is perhaps the possibility, already mentioned, of having a court review the admissibility (or otherwise) of arbitral proceedings before the tribunal is constituted, pursuant to section 1032 CCP
Below we briefly highlight three interesting setting aside cases.
The Higher Regional Court of Frankfurt (Main) noted in 2020 that it considers dissenting opinions in German-seated arbitrations to violate the procedural ordre public, hence opening the door for possible setting aside applications pursuant to Sec. 1059 (2) no. 2 (b) CCP. In its obiter dictum, it stated that the issuing of dissenting opinion is likely to violate the principle that deliberations ought to remain secret. However, this decision is not yet binding, since it is currently being appealed to the BGH. This obiter dictum was criticised heavily in the German arbitration community as it does not reflect arbitral practice within Germany (OLG Frankfurt, Decision of 16 January 2020 – 26 Sch 14/18).
Violation of Party Agreement on Procedure
The Higher Regional Court of Frankfurt (Main) decided in 2011 to set aside an award because it deviated from party agreement on procedural and evidentiary matters. This decision is interesting because the court found a party agreement cloaked in a procedural order rendered by the tribunal. The later deviation from this order/party agreement by the tribunal was a violation of section 1059 (2) no. 1 (d) CCP because the arbitral proceedings were not in line with the agreed procedure. The procedural order stated that the tribunal confirms the procedure for certain evidentiary issues, which were previously agreed between the parties. This decision shows that arbitrators must distinguish carefully between their own decisions and party agreements. Even if the parties are “merely” invited to comment on draft procedural orders, the comments made can later amount to a party agreement (OLG Frankfurt, Decision of 17 February 2011 - 26 Sch 13/10).
Impartiality and independence of expert witness
The BGH has clarified that an arbitral award is to be set aside if the expert who gave evidence in the arbitral proceedings did not disclose material circumstances which could give rise to the appearance of bias and the award is based on the expert's opinion. Pursuant to section 1049 (3) CCP, experts (as well as arbitrators) have the obligation to disclose any circumstances that could raise doubts as to their independence and impartiality, both before and during an arbitration. Before the BGH’s clarification, if the non-disclosure of such circumstances only became known after the arbitral award was rendered, this only constituted grounds for setting aside in cases of particularly grave violations of disclosure obligations. The threshold has now been lowered (BGH, Order of 2.5.2017 - I ZB 1/16).
In Germany, as in many other jurisdictions, an arbitral award may not be appealed or revised after it has been issued. Only in the event of serious procedural irregularities or a violation of fundamental principles of law ("ordre public") can domestic arbitral awards be set aside by state courts. These requirements – which are largely in step with the requirements of the UNCITRAL Model Law – pose high hurdles for the annulment of arbitral awards, as demonstrated by the low success rate of such applications.
An application for annulment should therefore be well thought out and, above all, prepared and managed by experienced counsel.
This series will continue next week with our second article on the English law perspective of challenging arbitral awards in the courts of England and Wales.