I. German Federal Supreme Court, Order of 2 March 2017 – I ZB 42/16
The decision of the German Federal Supreme Court ("BGH") deals with the limits of the competence of arbitral tribunals to decide on the arbitrators' fees in the context of determining and allocating the costs of the arbitration.
Referring to settled case law, the BGH emphasized the distinction between two distinct issues: the right of the arbitrators to be remunerated for their services by the parties, on the one hand, and the allocation of the costs of the arbitration between the parties, on the other. While arbitral tribunals under German law cannot create a legal title for the enforcement of the arbitrators' fees – as in this case, they would act as "judges in their own affairs" – they are competent to allocate the costs of the arbitration by ordering one party to compensate the other. In the present case, the BGH had to decide whether an arbitral award could be declared enforceable in Germany with regard to the allocation of costs even though the arbitral tribunal had also determined the amount of the arbitrators' remuneration in the award.
II. The Facts of the Case
The parties entered into a "cooperation agreement" which contained an arbitration clause providing for ad hoc arbitration seated in Geneva, Switzerland. Following termination of the agreement by the respondent, the claimant initiated arbitral proceedings and requested a declaration by the arbitral tribunal that (i) the termination of the agreement was invalid, (ii) the cooperation agreement remained in force between the parties, and (iii) the claimant was entitled to damages to be further specified in a second phase of the arbitral proceedings. The claimant further requested that the arbitral tribunal order the respondent to bear the costs of the arbitration as well as the claimant's legal costs.
At the end of the first phase of the arbitration, the arbitral tribunal rendered an interim award ruling that the agreement had been validly terminated but that the claimant was, on the merits, entitled to damages. In respect of the costs and legal fees, the operative part of the interim award reads in its relevant part as follows:
"3. The costs of the arbitration until now are fixed at an amount of CHF 282,149.10 (including CHF 1,706 for the room in which the hearings took place) as follows: (i) Fees for Prof. P., co-arbitrator, in the amount of CHF 76,500 and expenses in the amount of CHF 519.50; (ii) fees for Dr. E., co-arbitrator, in the amount of CHF 70,250 and expenses in the amount of CHF 87.00; and (iii) fees for Prof. M., presiding arbitrator, in the amount of CHF 131,750 and expenses in the amount of CHF 1,336.60.
4. As far as the costs of the arbitration are concerned, [respondent] owes to [claimant] the reimbursement of an amount of CHF 54,041. The arbitral tribunal will reimburse [claimant] an amount of CHF 17,851.
5. [Respondent] is ordered to pay to [claimant] the amounts of KRW 231,347,966, CHF 20,785, EUR 24,179, and GBP 1,380 for the legal and other costs incurred by [claimant] during the first phase of the arbitral proceedings.
6. [Claimant] is ordered to pay to [respondent] the amount of EUR 116,071 for its legal and other costs incurred during the first phase of the arbitral proceedings."1
Upon application of the claimant, the Higher Regional Court Jena declared the interim award enforceable with regard to an amount of EUR 170,289.69.2 Against this decision, the respondent filed an appeal (Rechtsbeschwerde) pursuant to §§ 1065(1), 1062(1) no. 4 Civil Procedure Code ("ZPO").
III. The Decision by the BGH
Pursuant to § 574(2) ZPO, an appeal is admissible only if (i) the legal matter is of fundamental significance or (ii) the further development of the law or the interests in ensuring uniform adjudication requires a decision.
In the appeal, the respondent argued that this was the case as (i) the Higher Regional Court, by ignoring the respondent's argument that the arbitral tribunal was not allowed to fix its own hourly rates in no. 3 of the operative part without an agreement by the parties and despite the respondent's objection, had violated the respondent's right to be heard, (ii) the Higher Regional Court's decision was in conflict with previous rulings of the BGH and (iii) the Higher Regional Court had failed to hold an oral hearing.
The BGH dismissed the appeal as inadmissible on the following grounds:
- No Violation of the Right to Be Heard The BGH rejected the respondent's position that the Higher Regional Court had violated its right to be heard. The BGH held that in its decision, the Higher Regional had dealt with all of the respondent's arguments relevant to the decision of the case, in particular the respondent's position that the arbitral award violated the public policy because, in the award, the arbitral tribunal had fixed its own fees. The Higher Regional Court had decided that the determination of the arbitrators' fees in the arbitral award exclusively concerned the obligations between the parties, rather than between the parties and the arbitral tribunal.3 The Higher Regional Court further reasoned that, as far as the amount of the fees was concerned, the parties could still refer the question whether this amount was excessive to the national courts and seek repayment from the arbitrators.4 In support of its decision, the Higher Regional Court referred to case law of the BGH5 and the Higher Regional Court of Munich6 in which the courts had adopted a similar reasoning with regard to cases in which the arbitrators' fees were to be calculated on an ad valorem basis and the amount in dispute had been determined by the arbitral tribunal in the arbitral award. The BGH found that, in light of this reasoning, the respondent's further argument that the arbitral tribunal was not allowed to fix its own fees in no. 3 of the operative part was not relevant for the Higher Regional Courts decision and the Higher Regional Court therefore did not need to address it.
- No Conflict with BGH Jurisprudence The BGH also rejected the respondent's further argument that the decision by the Higher Regional Court was in conflict with BGH jurisprudence, in particular an order of 25 February 2016 (docket no. I ZB 111/14). In this decision, the German BGH had held that an arbitral tribunal may only fix the amount of its own fees as part of the costs of arbitration if the amount of such fees is predetermined. In the BGH's view, this is the case where (i) the arbitrators' fees are calculated ad valorem and the dispute concerns a quantified claim, (ii) the parties and the arbitrators have previously agreed on a specific amount of the arbitrators' fees or (iii) in case of an ad valorem calculation, the amount in dispute is undisputed between the parties and the arbitrators' fees are fully covered by the advance on costs paid by the parties. The respondent took the view that the Higher Regional Court had deviated from this decision by allowing arbitral tribunals to fix the arbitrators' fees based on hourly rates in the absence of an agreement between the parties and despite the objection of the party which had only partially paid the advance on costs. In this regard, the BGH adopted a rather formalistic approach by reasoning that the Higher Regional Court did not rule on the question whether the arbitral tribunal had the power to fix its own fees in no. 3 of the operative part of the arbitral award, but exclusively dealt with the enforceability of nos. 4 and 5 of the operative part of the arbitral award. In the BGH's view, the question whether the arbitral tribunal was allowed to fix the arbitrators' fees in no. 3 of the operative part was irrelevant to the decision on the enforceability of nos. 4 and 5 of the operative part of the arbitral award. The court observed that under no. 4 of the operative part, the tribunal had ruled on the costs of the arbitration which predominantly consisted of the arbitrators' fees. However, the court stressed that no. 4 of the operative part neither constituted a legal title for the arbitrators' fees vis-à-vis the parties nor did it preclude the parties from raising objections against the amount of fees fixed by the arbitral tribunal. In this regard, the court noted that, should it turn out that the arbitrators' fees were excessive, no. 4 of the operative part would not hinder the parties from lodging a claim against the arbitrators before state courts for repayment of any overpaid amounts. The court further noted that such right to repayment remained unaffected by the allocation of the advance on costs between the parties. The BGH added that, in any event, German international public policy did not oppose a declaration of enforceability of no. 4 of the operative part. This would only be the case if the arbitral proceedings were conducted in a manner contrary to the basic foundations of justice and procedural fairness. The BGH interpreted the arbitral tribunal's decision, under this item of the arbitral award, to merely allocate the burden and the risk of reclaiming among the parties in respect of the advance on costs according to the parties' respective success in the arbitration. The BGH considered this to be equitable and in line with general principles of justice and fairness. The BGH expressly rejected the respondent's argument that the question whether the tribunal had the power to fix its own fees in no. 3 of the operative part had, at least, an indirect impact on the decision of the Higher Regional Court pursuant to the principle underlying § 139 of the German Civil Code ("BGB"). Pursuant to this provision, if a part of a transaction is invalid, the entire transaction is to be considered invalid, unless such transaction would have been undertaken without the invalid part. The BGH held that the declaration of enforceability of the foreign arbitral award had to be assessed exclusively against the grounds set out in Art. V of the New York Convention and that § 139 BGB thus was inapplicable.
- No Need for Oral Hearing The BGH finally confirmed that the Higher Regional Court was right in refusing to hold an oral hearing. Under § 1063(2) ZPO, a court dealing with the request for declaration of enforceability of an arbitral award shall conduct an oral hearing if grounds for setting aside in terms of § 1059(2) ZPO are to be considered which, according to the BGH's analysis, was not the case for the interim award under consideration.
The decision of the BGH confirms the court's previous case law on an arbitral tribunal's right to fix the arbitrators' fees. Except for the specific instances outlined by the BGH, an arbitral tribunal's decision fixing the arbitrators' fees violates the principle that nobody may act as judge in its own affairs and thus public policy.
However, the BGH's decision shows that such a violation does not necessarily results in the rejection of enforcement of the entire arbitral award. Whilst the decision fixing the arbitrators' fees as such is not enforceable, it may leave other parts of the arbitral award unaffected. In this regard, the BGH further clarified that, where the recognition and enforcement of foreign arbitral awards is governed by the New York Convention, there is no room for the application of domestic principles as the one laid out in § 139 BGB.
The original full text of the decision can be accessed under the following link: http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=en&nr=78008&pos=0&anz=1