Full, Partial or Plausibility Review? – Public Policy and the Level of Scrutiny Applied by German Courts
Market Insight 02 February 2023 02 February 2023
UK & Europe
This is the last article in Clyde & Co’s international arbitration series covering the scope of court powers on issues or violations of international public policy across various jurisdictions. In this piece, Counsel Georg Scherpf, Associate Antonios Politis, and Research Assistant Benedikt Kaneko from our Hamburg office provide the legal perspective from Germany and highlight a recent judgment, in which the German Federal Court of Justice clarified the level of scrutiny German state courts apply in cases of potential violations of public policy and in case of a violation of antitrust laws (Bundesgerichtshof, decision of 27 September 2022 – KZB 75/21).
A recognized advantage of arbitration is the possibility to enforce arbitral awards in almost any jurisdiction. This nearly universal enforcement is based on the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which is currently signed by 171 parties, including Germany. Under the Convention, the grounds for refusal to enforce and recognize an arbitral award are very limited. Domestic courts can refuse the enforcement and recognition of an arbitral award inter alia under Article V(2)(b) New York Convention, if the recognition or enforcement would be contrary to public policy of that country. The UNCITRAL Model Law, on which Germany’s arbitration law is primarily based, has incorporated Article V(2)(b) of the New York Convention in its Articles 34(2)(b)(ii), 36(1)(b)(ii).
Germany has adopted these provisions in its arbitration law, which provides domestic courts with the authority to set aside arbitral awards stemming from arbitrations seated in Germany and refuse the recognition and enforcement of domestic and foreign arbitral awards, if – among some limited other grounds – the recognition or enforcement of the arbitral award would lead to a result that is contrary to public policy (Sections 1059 (2) No. 2b, 1060 (2) German Code of Civil Procedure – Zivilprozessordnung for domestic awards and Section 1061 German Code of Civil Procedure referring to Article V(2)(b) of the New York Convention for foreign awards). Given that neither the Convention nor the Model Law further define the term, it is left to the State courts to interpret its meaning, which opens it up to diverging interpretations across jurisdictions.
This short article focuses on how German courts understand, interpret and apply the concept of public policy in arbitration-related proceedings and, in particular, what level of scrutiny a German court may apply when examining an arbitral award: If a violation of public policy is suspected, would a German court have to reopen the entire case and possibly even proceed to the taking of evidence stage, or is the review just necessary for “obvious” or manifest violations of public policy? Generally, German courts were strictly limited to reviewing obvious and manifest violations, although there was some debate among several German Higher Regional Courts (Oberlandesgerichte) in the context of antitrust law to broaden the review. A recent and much discussed decision by the German Federal Court of Justice (Bundesgerichtshof – BGH) has for now ended this judicial debate (BGH, decision of 27 September 2022 – KZB 75/21).
The Interpretation of Public Policy in German Arbitration Law
According to the established definition recently confirmed by the BGH (Decision of 16 December 2021 – I ZB 31/21), a violation of public policy occurs if the arbitral award (or its declaration of enforceability) is manifestly incompatible with essential principles of German law, i.e. if it “violates a norm that regulates the foundations of state or economic life, or if it is in intolerable conflict with German perceptions of justice”. Naturally, a violation of mere dispositive law is not included, as deviation from such is a matter of party autonomy. However, not all violations of mandatory law constitute a violation of German public policy either. Rather, the norm in conflict must be an expression of a value decision by the legislator that is fundamental to the legal system. This, however, will only apply in the most exceptional cases (see BGH, decision of 28 January 2014 – III ZR 40/13 and decision of 8 May 2014 – III ZR 371/12).
In terms of examples, such “exceptional” cases are usually divided into substantive and procedural violations of German public policy:
- Substantive violations cover cases in which the contents of the arbitral award are incompatible with the fundamental concepts of the German legal system (see, Higher Regional Court of Munich, decision of 30 July 2012 – 34 Sch 18/10 and Higher Regional Court of Saarbrucken, decision of 30 May 2011 – 4 Sch 03/10). Such a violation has been found if the arbitral tribunal orders a party to undertake an illegal action (see, Higher Regional Court of Munich, decision of 30 July 2012 – 34 Sch 18/10) or to a conduct that would violate antitrust law (see, Higher Regional Court of Dusseldorf, decision of 21 July 2004 – Sch(Kart)1/02). Furthermore, a substantive violation of German public policy is thinkable where a party is ordered to pay gambling debts or punitive damages.
- Procedural violations of public policy have been found if the decision was rendered on the basis of a procedure that deviates from the fundamental principles of German procedural law to such an extent that it cannot be regarded as having been rendered in an orderly procedure governed by the rule of law (see, BGH, decision of 15 May 1986 – III ZR 192/84), even when taking into account that an arbitral proceeding potentially differs significantly from State court proceedings. Procedural violations are often violations of the principle of the right to be heard (Article 103 (1) German Constitution – Grundgesetz), which is also considered a cornerstone of arbitral proceedings. Other fundamental principles of a procedure that, if not met, can lead to a violation of public policy include the independence and impartiality of the arbitrators, the equality of the parties and the right to a fair trial.
Importantly, the above-mentioned standards for procedural law also apply to foreign-seated arbitrations and resulting awards to be enforced in Germany. In this context, however, the BGH distinguishes between an ordre public interne applicable in proceedings concerning domestic awards and an ordre public international for foreign awards. In the interest of international trade, it is well-established court practice in Germany to apply the latter standard when considering whether the enforcement of a foreign award would be against public policy (see, e.g., BGH, decision of 2 March 2017 – I ZB 42/16 and decision of 6 October 2016 – I ZB 13/15). One should not be confused by this distinction: the ordre public international in this context still refers to a public policy assessment from the vantage point of German law. At most, the ordre public international is considered to be a slightly less stringent standard of review than the ordre public interne (BGH, decision of 2 March 2017 – I ZB 42/16, para. 21). In any case, this will only lead to marginally different results under the two standards, if at all.
Level of Review and Scrutiny by German Courts
The most important practical consideration when applying the above definition is what level of scrutiny State courts may apply when examining an award for possible violations of public policy. Internationally, this question is answered in very different ways (see, e.g., the newest developments in France). In Germany, the general rule is that courts will not review the merits of an arbitral award and, in particular, will not conduct a de-novo review of the merits. This so-called prohibition of a révision au fond prohibits courts from replacing an arbitral tribunal’s assessment of the evidence with its own assessment. To prevent a review through the backdoor for factual correctness of the award by way of an extensive scrutiny and review for a public policy violation, the BGH generally requires the violation of ordre public to be obvious or manifest (see, BGH, decision of 28 January 2014 – III ZB 40/13). This was understood to generally limit a court’s level of scrutiny.
However, there was some debate between several Higher Regional Courts on whether this general prohibition of a révision au fond must have a universal application or whether, in relation to particularly significant areas of law, a more in-depth examination should be possible. The debate specifically concerned the area of antitrust law as a result of the public interest in a proper functioning competition. Here, the views ranged from a very far-reaching review of the arbitral award for violations of antitrust law, including not only the legal findings but also the judicial determination of the facts (see, e.g., Higher Regional Court of Celle, decision of 14 October 2016 – 13 Sch 1/15 Ls. 2, at para. 89, and Higher Regional Court of Düsseldorf, decision of 21 July 2014 – VI-Sch (Kart) 1/02, Sch (Kart) 1/02, paras. 24 et seq.), to a review of only the grossest and most obvious violations of public policy (see, e.g., Higher Regional Court of Thuringia, decision of 8 August 2007 – 4 Sch 03/06). Most recently, the Higher Regional Court of Frankfurt held that only a very limited review of an arbitral tribunal’s application of antitrust law was to take place, since a separate antitrust review competence of the State court would be incompatible with the nature of arbitration as a private form of dispute resolution, because the decision of the parties to transfer the power to decide disputes to a tribunal would be undermined (Higher Regional Court of Frankfurt, decision of 22 April 2021 –26 Sch 12/20, para. 79).
In its recent ruling from 27 September 2022 (KZB 75/21), the BGH overturned the Higher Regional Court of Frankfurt’s ruling on the scope of review and thereby put an end to this debate. The BGH held that, at least for certain “core” antitrust law provisions (such as Sections 19, 20, and 21 German Competition Act – “Gesetz gegen Wettbewerbsbeschränkungen”, including prohibitions with respect to the abuse of market power positions and other restrictive behavior) that form part of Germany’s ordre public, the courts are not limited in their review and may scrutinize an arbitral award for a violation of these provisions in fact and in law. Recognition and enforcement of an arbitral award that incorrectly applies elementary foundations of the legal order and the fundamental norms of antitrust law would lead to a result that would be “obviously” incompatible with essential principles of German law. No legal system could accept that violations of its most fundamental standards are confirmed by its own courts, regardless of whether or not these violations are manifest or obvious (see, para. 15 of the BGH’s recent ruling). Therefore, insofar as the application of such elementary rules of the legal system is at issue, the prohibition of révision au fond does not apply, leading to a full review of the award in fact and law (“uneingeschränkte Kontrolle in tatsächlicher und rechtlicher Hinsicht”). In the BGH’s view, this is particularly true for antitrust law, because the rules in question would not only serve the interest of the parties to the arbitration, but the preservation of the public interest in a functioning competition (para. 16). Because an obvious (in the sense of “readily detectable”) violation of antitrust law may only be considered in rare circumstances, courts would often be precluded from conducting an appropriate review taking into account the complexity of antitrust cases (para. 17). Without a full review, this public interest would not be adequately protected.
As a result, as far as the question of a violation of core provisions of antitrust law (such as the prohibition of cartels or abusive practices) is concerned, the state judge may therefore not simply resort to a mere review of plausibility or of readily detectable violations but must conduct a full review in fact and law. Ultimately, one could even argue that this decision institutes a de facto right to appeal arbitral awards if and to the extent they concern the application of antitrust law.
Conclusion and Outlook
Certainly, the BGH’s decision will have significant consequences for arbitral awards in cases with antitrust implications. However, this limitation of the prohibited révision au fond should be seen as confined to the core provisions of antitrust law. Overall, for most potential public policy violations – and in particular all of those that only concern the parties to the dispute (e.g., potential procedural public policy violations) – the scope of German courts’ review will continue to be narrowly limited.
It remains to be seen to what extent this limited suspension will result in a new trend and whether possible violations of other areas of law will soon be subject to full review by German courts, too. Looking ahead, the question will be which norms are to be seen as elementary, the violation of which would automatically be accompanied by an “obvious” incompatibility with the German legal system. However, since the BGH is generally regarded as “arbitration-friendly” and will not want to diminish the special advantages of arbitration proceedings (e.g., finality of arbitral decisions), it is likely that the BGH will tread carefully here.
This Case Comment has first been published on the JusMundi-Blog and was later reprinted.