On December 16 2010 the Federal Supreme Court changed its jurisdiction on preclusion in enforcement proceedings relating to international arbitral awards.(1) The court decided that a debtor is not required to exhaust all available remedies against the award at the (foreign) seat of arbitration to preserve its right to argue in enforcement proceedings in Germany that there is no valid arbitration agreement. In other words, the debtor is not precluded from raising this objection in German enforcement proceedings even though it has not challenged the award at the seat of arbitration. It is uncertain, however, whether the Federal Supreme Court's decision marks a general deviation from the court's former judicature on preclusion in enforcement proceedings relating to foreign international awards so that debtors could rely on all sorts of (recognised) objections in German enforcement proceedings even where they have not made use of the legal remedies in the country of origin.
The applicant, a French corporation, obtained a favourable arbitral award against the German respondent under the rules of the International Chamber of Arbitration for Fruits and Vegetables in Paris for payment of purchase price for the delivery of fruit. The respondent objected to the tribunal's jurisdiction during the arbitral proceedings, but decided not to challenge the award before the competent higher arbitration court or before the French state courts.
While the award was declared enforceable by the Tribunal de Grande Instance de Paris, the request for enforcement in Germany was dismissed by the Munich Higher Regional Court. The applicant relied on a unilateral sales confirmation containing a reference to arbitration and argued that this constituted a valid arbitration agreement. The Munich court found, however, that the applicant had not proven the respondent's receipt of the document. Hence, the applicant could not show a valid arbitration agreement between the parties as required by Article 2 of the New York Convention. The Munich Higher Regional Court accepted the respondent's objection that there was no valid arbitration agreement, even though the respondent had not initiated setting aside proceedings in France.
The Federal Supreme Court rejected the applicant's appeal restricted on grounds of law.
After years of legal uncertainty, the Federal Supreme Court deviated from its position developed under the previous arbitration law, which was valid in Germany until 1998. The former legal regime allowed the denial of the enforcement of foreign arbitral awards if the foreign arbitral award was "invalid". The court ran the validity test under not only the substantive, but also the procedural law of the seat of arbitration. Hence, even in the absence of a valid arbitration agreement, it could conclude that the arbitral award was "procedurally valid" where:
- the award was declared enforceable at the seat of arbitration; and
- the debtor had not made use of the procedural remedies against the award at the seat of arbitration.
By contrast, the new arbitration law provides for the direct application of the New York Convention to govern the enforcement of foreign arbitral awards (Section 1061(1) of the German Code of Civil Procedure). Article 5(1)(a) of the New York Convention allows the denial of recognition and enforcement if the debtor of an arbitral award proves that there is no valid arbitration agreement. It contains no reference to the "validity" of the award as such.
The Federal Supreme Court confirmed the Munich Higher Regional Court's view and heard the respondent's defence that the arbitral tribunal lacked jurisdiction (Article 5(1)(a) of the New York Convention). It decided that the respondent was not precluded with this argument, even though he had not initiated set-aside proceedings in France. The court emphasised that the law governing the enforcement of arbitral awards no longer refers to "valid awards", but rather requires a "valid arbitration agreement". In cases in which there was no valid arbitration agreement, it saw no justification for the concept of preclusion just because a debtor had not taken legal recourse against the arbitral award at the seat of arbitration.
The court also assessed Articles 5(1) and 5(2) of the European Convention on International Commercial Arbitration as a possibly "more favourable" enforcement rule in the meaning of Article 7(1) of the New York Convention. However, the judges found that the respondent was not estopped from raising the plea as to jurisdiction in the German enforcement proceedings because, firstly, he had raised the plea at the beginning of the arbitration proceedings in France and, secondly, Articles 5(1) and 5(2) of the European Convention do not provide for preclusion in case a debtor does not initiate set-aside proceedings.
In addition, the court acknowledged that an applicant's reliance on rights which it did not previously assert in local remedies did not in itself infringe general principles of good faith under the principle of venire contra factum proprium (contradicting one's previous conduct). Rather, the court recognised that there may be good reasons for such a strategy and that there was no evidence for the applicant to believe that the respondent would not challenge enforcement of the arbitral award in Germany.
This decision is highly significant for parties facing the enforcement of an international arbitral award in Germany. It settles a long-lasting controversy that arose in connection with the legislative change in 1998. A considerable number of courts and scholars continued thereafter to hold that the debtor of an international arbitral award that had failed to challenge the award in the country of origin was precluded from raising objections at the enforcement stage in Germany.(2) This opinion mainly relied on Section 1060(2) of the Code of Civil Procedure, which provides, in view of the enforcement of national arbitral awards, that the debtor is precluded from bringing certain objections once the deadlines for initiating setting aside proceedings have lapsed. To avoid a bifurcated enforcement regime and to reflect the 'most favourable' principle enshrined in Article 7(1) of the New York Convention, this school of thought applied identical preclusion standards to the enforcement of international arbitral awards.
The opposite position – which the Federal Supreme Court has now taken – is to be supported.(3) The wording of the New York Convention does not provide for preclusion. The formulation "enforcement may be refused" in Article 5(1) of the convention does not sufficiently justify the severe limitation of the debtor's rights with the tool of preclusion. On the contrary, one of the main aims of agreeing to arbitration is to avoid state court jurisdiction. Under this assumption, it appears to be contrary to the parties' agreement to force them into set-aside proceedings at the seat of arbitration, even though enforcement is likely to take place in another state where state court (enforcement) proceedings would have to be conducted, anyway. At least, there is no conceivable reason to "teleologically reduce" Article 5(1)(a) of the New York Convention by introducing the concept of preclusion,(4) as the supporters of this view assert. The mere desire to have an identical (and more streamlined) enforcement regime for both national and international arbitral awards is no sufficient reason not to apply the written law. On the contrary, the Federal Supreme Court's decision is in line with the German legislature's obvious intention to allow different legal regimes for the enforcement of national and international arbitral awards.
From the perspective of German enforcement proceedings, the debtor of an arbitral award with hardly any assets at the seat of arbitration now enjoys tactical discretion on whether to challenge the arbitral award at the seat of arbitration. In certain circumstances it may be a reasonable strategy not to challenge the award at the seat of arbitration in order to save on costs, and to wait to see whether, in fact, enforcement proceedings in Germany are ultimately initiated. At the very least, the following risk factors must be considered:
The challenge of the arbitral award at the seat of arbitration might still be a condition to preserve defence rights in other enforcement forums than Germany.
- The Federal Supreme Court expressly stated that the decision is confined to the "lack of a valid arbitration agreement" as addressed by Article 5(1)(a) of the New York Convention.(5)
- The court noted that it formerly used the tool of preclusion in German enforcement proceedings also in view of objections only applicable at the seat of arbitration (but not in Germany), and when issues of German public policy were raised although it was imminent that the public policy restrictions at the seat of arbitration were comparable to the standards in Germany.(6) It is well possible that the Federal Supreme Court will continue to request from a debtor to challenge the award at the seat of arbitration in such cases in which the foreign courts appear to be better suited to rule on the respective objection than the German courts.
- A party must still raise the objection as to lack of jurisdiction in a timely manner in the arbitral proceedings. Any failure to object in the arbitral proceedings entails the risk of preclusion under Articles 5(1) and 5(2) of the European Convention on International Commercial Arbitration.(7)
- A party must avoid creating the impression that it might not invoke the objection as to the validity of the arbitration agreement. The Federal Supreme Court is likely to reject any objection raised in conflict with the general prohibition of venire contra factum proprium.(8)
For further information on this topic please contact Tim Schreiber at Clifford Chance LLP by telephone (+49 89 216 32 0), fax (+49 89 216 32 8600) or email ([email protected]).
(1) Federal Supreme Court Decision III ZB 100/09, December 16 2010. Available on the Federal Supreme Court website at http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=en&sid =6b06170f9d933c1cdde29821caccd903&nr=54605&pos=0&anz=1.
(2) For a comprehensive overview see Federal Supreme Court Decision III ZB 100/09 at Paragraph 7 and Kröll in Arbitration in Germany, Part II, Böckstiegel/Kröll/Nacimiento, Section 1061, Note 50.
(3) Positive reception also by Burianski/Skibelski, BetriebsBerater 2011, p338.
(4) Higher Regional Court of Karlsruhe, SchiedsVZ 2006, p281 et seq.
(5) Federal Supreme Court Decision III ZB 100/09, Paragraph 9.
(6) Ibid, Paragraph 8 et seq.