Obedience without order - Application of res judicata where not applicable as a ground for setting aside an arbitral award

I. German Federal Supreme Court, Order of 11 October 2018 – I ZB 9/18 

The decision of the German Federal Supreme Court (“BGH”) deals with the question whether the application of res judicata beyond its scope constitutes a ground for setting aside a later award for violating ordre public.

II. The Facts of the Case

The claimant acted as a commercial agent for the respondent based on a contract concluded in 1993 (“Contract”). In June 2011, the parties included an arbitration clause into the Contract. Following the respondent's termination of the Contract, the claimant initiated arbitral proceedings and requested (i) payment of outstanding commissions as well as (ii) the disclosure of certain information by the respondent under the Contract. Initially, the request for payment concerned commissions for the period of 1 January 2011 until 10 July 2013. In the course of the arbitration, the claimant partially withdrew its payment claim and limited it to commissions for supplies incurred in 2012. In the final award of 14 September 2015 (“Award 2015”), the Claimant’s requests were all dismissed as unfounded. The arbitral tribunal expressly declared that the partial withdrawal of the claimant’s payment request were valid and effective. At the same time, in the reasoning of the Award 2015, the arbitral tribunal noted that the request for commission payments from January 2011 until 10 July 2013 was unfounded.

In October 2016, the claimant initiated new arbitral proceedings requesting the respondent to consent to an audit of business transactions from January 2012 until the rendering of an award. In July 2017, the arbitral tribunal ruled in favor of the claimant regarding the period from 11 July 2013 until the rendering of the award (“Award 2017”). The arbitral tribunal, however, dismissed claimant’s request for an audit concerning the time between January 2012 and 10 July 2013, stating that claims regarding this time period had already been rejected with legally binding force by the Award 2015. According to the arbitral tribunal, auxiliary claims – such as the claim for an audit – directed at establishing the amount of commission payments due to the claimant, could not be granted as claimant’s request for commission payment had already been dismissed in the Award 2015.

The claimant’s claim at the Higher Regional Court of Cologne (“OLG Köln”) for setting aside the Award 2017 was dismissed. The OLG Köln reasoned that the Award 2017 did not constitute a violation of the ordre public in terms of § 1059(2) no. 2(b) of the German Civil Procedure Code (“ZPO”). The court argued that the arbitral tribunal in the Award 2017 correctly assumed that the Award 2015 had rejected the claimant’s request for commission payment for the period between 1 January 2011 and 10 July 2013. The OLG Köln referred to the limited scope of review by state courts under § 1059 ZPO and held that the dismissal of the claimant’s auxiliary claim for auditing business transactions for the period January 2012 until 10 July 2013 based on the res judicata of the Award 2015 was justifiable and did not violate the ordre public.

The claimant filed an appeal (Rechtsbeschwerde) against the decision of the OLG Köln before the BGH pursuant to §§ 574, 1065(1), 1062(1) ZPO.

III. The Decision by the BGH

On 11 October 2018, the BGH (i) set aside the OLG Köln’s ruling as far as it dismissed claimant’s request for setting aside the Award 2017 with regard to the ruling on the claim for audit of business transactions in the period from 1 January until 10 July 2013 and (ii) set aside the Award 2017 as far as it dismissed claimant’s request for audit for the same time period.

The BGH held that the Award 2017 violated the national ordre public as established by § 1059(2)(No.2)(b) ZPO as the arbitral tribunal clearly misjudged the scope of the res judicata of the Award 2015. According to the Court, the principle of res judicata belongs to the fundamental values of German procedural law as it is indispensable for the guarantee of legal concord and thus forms part of the national ordre public.

The BGH referred to § 1055 ZPO, pursuant to which an arbitral award has the effect of a final and binding judgment between the parties of an arbitration. The court pointed out that arbitral proceedings are dominated by the principle of party autonomy and the parties are therefore not prevented from waiving res judicata. However, as long as there are no indications of such a waiver, an arbitral tribunal must respect the res judicata of an earlier award.

The BGH further stated that due to the limited scope of review under § 1059 ZPO, an ordre publicviolation based on the principle of res judicata may only be assumed if the scope of res judicata in the arbitral award can be determined without any doubt and does not require an interpretation of the award’s reasoning.

The BGH found that there was an apparent error in assessing the scope of res judicata, pointing out that the subject-matter (Streitgegenstand) of the arbitration leading to the Award 2015 was clearly defined by the final request for relief of the claimant, which was included in para. 70 of the Award 2015. Accordingly, commission payments from 1 January until 10 July 2013 did not form part of the subject matter and the arbitral tribunal was not entitled to rule upon them. As a result, the res judicata of the Award 2015 did not concern commission payments from 1 January until 10 July 2013. 

The BGH held that an apparent violation of the res judicata of an earlier arbitral award is not only given when an arbitral tribunal wrongly fails to take into account the res judicata of an earlier award, but also when it wrongly considers itself bound by an earlier award due to the application of res judicata beyond its scope. Otherwise, a party to an arbitral agreement may be exempted from effective protection by the law with the erroneous argument that an arbitral tribunal has already dealt with the matter.

The BGH noted that the OLG Köln incorrectly determined the res judicata scope of the Award 2015 by only focusing on the arbitral tribunal's finding that the claim for commission payments from January 2011 until 10 July 2013 was unfounded. This finding did not take into account the partial withdrawal of the claimant’s claim and was thus irrelevant in determining the res judicata of the Award 2015.

The BGH added that the OLG Köln was entitled to partially set aside the Award 2017 as far as this award dismissed claimant’s request for an audit for the period from January 2011 until 10 July 2013. A partial setting aside established a “minus” to the claimant’s request for setting aside the entire award and was thus covered by this request, according to § 308(1) ZPO.

IV. Conclusion

The BGH’s decision underlies the essential importance of the principle of res judicata in German procedural law. The finding that a misjudgment on the res judicata effect of an earlier award may constitute a ground for setting aside a later award due to ordre public violation is in line with the case law of the Swiss Federal Supreme Court (see BGE 141 III 229, 234).

The BGH’s ruling is a reminder to all legal practitioners of the importance of caution when determining the subject matter of a dispute, especially in cases in which the initial requests for relief have been subject to amendment. At the same time, arbitral tribunals and party counsels should keep in mind that by virtue of party autonomy in arbitration, the parties to an arbitration are free to agree to waive the res judicata effect of a final award.