In order to enforce an arbitral award in a specific country, the award must be recognized by that country’s national courts. Among common law countries in particular, arbitral awards were sometimes said to have been “converted to judgments” under the doctrine of merger. Such judgments could generally be enforced elsewhere in the same jurisdiction. But typically, the doctrine of merger did not prevent enforcement of a foreign award in circumstances where a foreign court judgment would have been unenforceable.
Prior to a recent German Federal Supreme Court decision, a successful claimant seeking arbitral enforcement in Germany could pursue one of two options. The claimant could request the court to enforce the award itself or to apply for enforcement of the foreign judgment. Different procedures and forums were available to the claimant, depending upon which option was selected. In light of the Court’s recent decision, however, that choice is no longer available.
Until recently, German case law held that, the party seeking to invoke an arbitral award in Germany could choose to enforce either the arbitral award or the US judgment confirming that award (BGH, decision dated March 27, 1984, ref. no. IX ZR 24/83; BGH, decision dated May 10, 1984, ref. no. III ZR 206/82). The Federal Supreme Court had reasoned that under the doctrine of merger, the arbitral award was converted into a court judgment. In the Court’s view, this judgment not only recognized the arbitral award but amounted to an independent ruling on the merits of the underlying case, although proceedings under the New York Convention typically do not include review of the facts and findings of the arbitral tribunal. Such independent ruling was enforceable in Germany under the same conditions as any other US judgment.
In addition, the Court had previously held that the arbitral award remained valid and could be enforced under the New York Convention. The Federal Supreme Court’s findings had several advantages for a claimant seeking to enforce his or her claim in Germany.
Under German law, the recognition and enforcement of a foreign arbitral award is subject to different rules than enforcement of a US judgment. While a foreign arbitral award can be recognized and rendered enforceable under the rules of the New York Convention, a similar treaty does not exist between Germany and the United States for court rulings.
A US court decision, like most other foreign court decisions outside of the European Union, is rendered enforceable in Germany pursuant to section 328, 723 of the German Code of Civil Procedure. Preconditions for the enforcement of an arbitral award under the New York Convention and a US judgment under the German Code of Civil Procedure differ vastly, however, as shown in the following table:
If the claimant chose to enforce the foreign judgment, the German courts merely assessed whether the preconditions for enforcement of a foreign judgment were fulfilled. In contrast, German courts would not review the foreign judgment and check whether the decision of the foreign court to confirm the arbitral award was correct. In other words, the German court did not attempt to determine if the foreign court had correctly applied the terms of the New York Convention. Nor did it determine if the award would otherwise have been enforceable in Germany. In theory, then, the claimant could circumvent the preconditions of the New York Convention in Germany by seeking enforcement of the foreign judgment.
In addition, the claimant had two chances to enforce its claims: It could first initiate recognition and enforcement proceedings for either the arbitral award or the judgment. If that action failed relative to one of the elements — the award or the judgment — the claimant could initiate a second proceeding to enforce the other element.
German law no longer permits this practice. In its landmark decision dated July 2, 2009, the German Federal Supreme Court reversed its prior stance, determining that a foreign judgment confirming an arbitral award can no longer be recognized in Germany (BGH, decision dated July 2, 2009, ref. no. IX ZR 152/06).
The Federal Supreme Court reasoned that a foreign judgment recognizing a third country’s court decision cannot be applied in Germany. This is because such a finding circumvents the conditions required by German law for recognition of the third country’s judgment.
The Court held that the same reasoning must apply to arbitral awards, as otherwise the conditions necessary for recognition and enforcement of the arbitral award in Germany can be circumvented and the scope of the New York Convention can be eroded.
According to the Court, moreover, the party against whom the award or judgment is invoked should not be confronted with more than one recognition procedure in Germany and from an opposing perspective, the claimant should not be given the opportunity to seek enforcement in two separate and independent proceedings.
Finally, the Court noted that Germany’s higher regional courts have exclusive jurisdiction to rule on the recognition and enforcement of a foreign arbitral award. In contrast, recognition and enforcement proceedings for foreign judgments are conducted by local courts. This division of competences between local courts and higher regional courts will be circumvented if the claimant can freely choose either to enforce the arbitral award or to apply the US judgment confirming the arbitral award.
The Federal Supreme Court’s decision has far-reaching consequences. Today, a claimant wishing to enforce a foreign arbitral award in Germany can no longer gain advantage by initiating recognition proceedings in a foreign court in the hope of enforcing the foreign judgment recognizing the arbitral award (as distinct from the arbitral award itself). Such a judgment will be of no help to the claimant, as it will not be enforceable in Germany. To successfully compel an award against assets located in Germany, then, a claimant should initiate recognition and enforcement proceedings based on the arbitral award under the New York Convention.