German Federal Supreme Court, Order of 2 May 2017 – I ZB 1/16
On 2 May 2017, the German Federal Supreme Court (“BGH”) issued a decision dealing with the question when grounds for the challenge of an expert give reason for setting aside an arbitral award if the expert did not disclose the grounds during the arbitral proceedings.
German arbitration law places experts, like arbitrators, under a duty to disclose all circumstances that may give rise to doubts about their impartiality and independence. If an arbitral award is based on the report of an expert who violated his disclosure duties, it could, in principle, be set aside due to a violation of the applicable procedural rules. However, in the past, the BGH had set the threshold for setting aside arbitral awards in such circumstances very high. The present decision has high practical relevance because the BGH departed from this approach, which it found no longer convincing.
The dispute arose from a “consortium agreement” for the construction of trains, which provided for arbitration under the Rules of the German Arbitration Institution (“DIS Rules”) seated in Mannheim, Germany. Following complaints by a purchaser, the two members of the consortium amended the agreement regarding the repair of damage to the trains' floors caused by water ingress. As a result, one member of the consortium repaired a total of 120 trains and the other a total of 276.
Later, one of the consortium members initiated arbitral proceedings claiming damages of EUR 16.7 million for faulty train floor designs against the other consortium member, who had designed the floors. The respondent counterclaimed that the claimant must bear a significant portion of the restoration costs because the damages resulted from faulty workmanship, rather than faulty design.
During the arbitral proceedings, the arbitral tribunal appointed an expert who confirmed that he had no professional or private relationship with the parties. The expert delivered a report and a supplementary report, in which he concluded that the water ingress was due to faults in the respondent's design. Prior to the oral hearing, the respondent challenged the expert, alleging errors in the supplementary report, however the tribunal dismissed the challenge as belated. After closure of the proceedings, the respondent again challenged the expert, alleging that: (i) there was an economic interdependence between the claimant and the expert's employer, and (ii) the expert made impertinent and defamatory statements towards the respondent during the oral hearing. In a procedural order, the chairman also dismissed this second challenge.
In the final award, the arbitral tribunal followed the expert's assessment and ordered the respondent to pay an amount of EUR 5.8 million to the claimant.
The respondent challenged the final award before the Higher Regional Court Karlsruhe. It requested that the Higher Regional Court set aside the award since, inter alia, the arbitral tribunal had violated the respondent's right to be heard by dismissing the second challenge without dealing with the statements made by the expert during the oral hearing. The respondent further argued that the arbitral proceedings had not been conducted in accordance with the applicable arbitration law, as the expert had violated his duty to disclose all circumstances which may give rise to doubts as to his impartiality and independence.
The Higher Regional Court dismissed the respondent's arguments and, upon application by the claimant, declared the award enforceable. The respondent appealed this decision (Rechtsbeschwerde) pursuant to §§ 1065(1), 1062(1) no. 4 Civil Procedure Code (“ZPO”).
The Decision of the BGH
The BGH partially followed the respondent's arguments, reversed the Higher Regional Court's decision and referred the matter back for a new decision to the Higher Regional Court.
1. Violation of the Right to Be Heard
The BGH held that the tribunal did not violate the respondent’s right to be heard. The court confirmed the Higher Regional Court's decision that the respondent was precluded in this regard, since it had not raised the purported violation during the arbitral proceedings, but only in the setting aside proceedings. The BGH pointed out that, under § 41 DIS Rules as well as § 1027 ZPO, a party loses its right to invoke a violation of the DIS Rules and non-mandatory provisions of the German arbitration law, respectively, if it fails to object without undue delay, adding that the time-limit provided in § 1027 ZPO constitutes a reasonable limitation of the parties' right to be heard for the benefit of the effectiveness of arbitral proceedings.
The BGH confirmed the Higher Regional Court’s finding that the respondent had the possibility to invoke the violation of the right to be heard during the arbitral proceedings, and not only in the setting aside proceedings, as it could have raised its arguments in the written submission following the chairman’s decision on the second challenge.
The BGH held that the respondent could not appeal the chairman’s decision before state courts, noting that such recourse was only open against decisions on the challenge of an arbitrator. While, pursuant to § 1049(3) ZPO, the provisions on the challenge of arbitrators also apply to challenge of experts, such reference is limited to the challenge as such (§ 1037(1) and (2) ZPO) and does not comprise the recourse against the arbitral tribunal’s decision before state courts (§ 1037(3) ZPO).
However, the BGH further held, the respondent could have raised its objection before the arbitral tribunal which would have been free to revise its decision. In particular, the court clarified, the arbitral tribunal would not have been bound by its decision on the challenge of the expert, since this decision has no quasi-res judicata effect, as is the case for decisions dismissing the challenge of an arbitrator if such decision is not timely appealed before state courts under § 1037(3) ZPO. The BGH added that the arbitral tribunal's decision and reasoning on the first challenge did not show that an objection to the second challenge decision would have been obviously unsuccessful.
2. Proceedings Not in Accordance with German Arbitration Law
The BGH then turned to the respondent's second argument that the arbitral award was to be set aside pursuant to § 1059(2) no. 1 lit. d ZPO, as it violated the applicable procedural rules. In this regard, the BGH held that the Higher Regional Court's legal reasoning and the underlying factual findings did not suffice to dismiss the respondent's argument.
According to the respondent, the proceedings had not been conducted in accordance with the applicable procedural law, since the expert had violated his mandatory disclosure duties under §§ 1049(3), 1036(1) ZPO. The respondent argued that the expert should have disclosed that his immediate superior had been employed by the claimant before he moved to the expert's employer after the commencement of the arbitral proceedings and before the appointment of the expert.
The Higher Regional Court dismissed the respondent's request to set aside the award, relying on jurisprudence of the BGH which was developed under the former German arbitration law. This case law required courts to weigh the severity of the violation of the procedural rules (in this case non-disclosure) against principles of legal certainty and peace in order to determine whether to set an arbitral award aside. As a result, an award would only be set aside if the non-disclosure was so fundamental as to taint the entire arbitral procedure. This was considered to be the case in instances of clear partiality, but not where an arbitrator or expert who considered himself impartial failed to disclose certain circumstances because he did not expect that the relevant circumstances would raise any concerns.
In the case at hand, the Higher Regional Court held that the circumstances of the employment history of the expert's superior did not constitute an obvious case of partiality and that, therefore, it did not need to assess whether these grounds were generally sufficient to give rise to doubts as to the expert's impartiality and independence and whether the expert had violated his disclosure duties under §§ 1049(3), 1036(1) ZPO.
The BGH rejected the Higher Regional Court’s reasoning and found that arbitral proceedings violate §§ 1049 (3), 1036 (1) ZPO, if an arbitral tribunal bases its decision on the opinion of an expert who, during the arbitral proceedings, was subject to challenge for circumstances which were not disclosed.
Deviating from its previous case law, the court noted that, under § 1055 ZPO, an arbitral award carries the same effects as a final and binding court judgment and must thus equally provide for legal certainty and pacification. However, in the BGH’s view, the consequence is not that courts are free to weigh these principles against an expert’s violation of his disclosure duties. Rather, the Court pointed out, an arbitral award can only carry the same effect as a final and binding court judgment if there are no grounds to set the award aside under § 1059 ZPO.
At the same time, the BGH clarified that it did not abandon the principle that arbitrators and experts can generally not be challenged after an arbitral award has been rendered and that grounds for a challenge can generally not be raised in setting aside or enforcement proceedings. Only if an arbitrator or expert has failed to disclose relevant circumstances pertaining to his impartiality and independence, thus depriving a party of the possibility to challenge him during the arbitral proceedings, state courts will assess whether a challenge would have been successful because such circumstances give indeed rise to justifiable doubts as to his impartiality and independence. Only in this case and if the arbitral award is based on the expert’s opinion, the award will be set aside.
Based on these considerations, the BGH ruled that the question whether the expert had violated his obligation to disclose his superior's employment history was relevant and should have been answered by the Higher Regional Court. The BGH, therefore, reverted the case to the Higher Regional Court.
The BGH expressly moved away from its previous approach on the violation of disclosure duties by experts. If an expert fails to disclose circumstances that give rise to justifiable doubts about their impartiality and independence then the arbitral proceedings are not conducted in accordance with §§ 1049(3), 1036(1) ZPO, and an arbitral award which is based on that expert’s opinion, consequently, is subject to challenge under § 1059(2) no. 1 lit. d ZPO.
The BGH clarified however, that this decision does not mean that parties can generally challenge arbitrators and experts after an award has been made. It explained that grounds for challenge can only be raised in setting aside or enforcement proceedings where an arbitrator or expert failed to disclose relevant circumstances during the arbitral proceedings thus depriving the party of its possibility to challenge the arbitrator or expert during the arbitral proceedings.
The 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=79246&pos=0&anz=1