Hourly Rates in International Arbitration – Recoverable or Not?

Higher Regional Court of Munich, Decision of 4 July 2016 – 34 Sch 29/15

The decision of the Higher Regional Court of Munich deals with the question whether, under German arbitration law, an arbitral tribunal is empowered to order a party to bear the prevailing party’s legal costs even though such costs are based on hourly rates exceeding the statutory fees that would apply under the German Lawyer’s Remuneration Act (Rechtsanwaltsvergütungsgesetz). This question, despite its high practical relevance, has not been settled under German law.

Based on a thorough analysis of the diverging positions taken by legal literature on that point, the Munich court allowed for remuneration of legal costs based on hourly rates. Even though not strictly binding on other courts, the decision constitutes a valuable precedent for future cases.

I. The Facts of the Case

The arbitration underlying the decision of the Munich court concerned a dispute in relation to a gas delivery contract. This contract contained an arbitration agreement providing for arbitration seated in Bamberg. As the arbitration agreement did not refer to any arbitral institution or a particular set of arbitration rules, the arbitration proceedings were conducted pursuant to §§ 1025 et seq. German Civil Procedure Code (“ZPO”). In the arbitral award, the arbitral tribunal granted the claimant’s request in part and reserved the decision on costs to a separate award. In the separate award on costs, the arbitral tribunal ordered the claimant to reimburse the respondent for the majority of its costs, including the fees for legal counsel.

The claimant, hereupon, initiated setting aside proceedings with regard to the cost award at the Higher Regional Court of Bamberg which, in view of the centralized competence for arbitration-related matters in Bavaria,1 transferred the matter to the Higher Regional Court of Munich. The claimant inter alia argued that (i) the cost decision constituted a surprise decision and therefore violated the right to be heard, (ii) the tribunal had acted arbitrarily and disregarded the parties’ right to equal treatment and (iii) referring to § 1059(2) no. 1 lit. d ZPO, the arbitral tribunal had violated the applicable procedural rules, i.e. German arbitration law, in particular § 1057(1) ZPO which provides that “[u]nless the parties have agreed otherwise, the arbitral tribunal is to decide, in its award, on the share of costs of the arbitration that the parties shall bear, including such costs incurred by parties that were necessary in order to appropriately file a request for arbitration proceedings or to defend against such a request.”

II. The Decision by the Court

The Higher Regional Court was faced with a number of arguments raised by the claimant under § 1059(2) no. 1 lit. d ZPO (violation of procedural rules) and § 1059(2) no. 2 lit. b ZPO (violation of public policy).

The court first turned to the alleged violation of the right to be heard, which, as the court pointed out, forms part of public policy and requires an arbitral tribunal to grant the parties to an arbitration sufficient opportunity to present their cases and to adequately inform the parties in order to avoid surprise decisions. The court held that the arbitral tribunal had complied with these requirements and therefore rejected the claimant’s argument.

The court then rejected the claimant’s submission that the tribunal’s cost decision was arbitrary. Under German law, a decision is arbitrary if it is obviously untenable and cannot be legally justified by any means, which, in the court’s view, was not the case with regard to the arbitral tribunal’s cost decision. The court emphasized that the legal situation as to the recoverability of legal fees calculated against hourly rates was not settled and that the arbitral tribunal had rendered its decision based on an assessment of § 1057(1) ZPO and § 91(1) ZPO as well as relevant legal literature.

The court further dismissed the claimant’s arguments pertaining to a violation of the claimant’s right to equal treatment which prevents arbitral tribunals to equate facts and circumstances which are dissimilar. The court could not see any violation of this principle in the arbitral tribunal’s cost decision.

The court then moved on to assess the claimant’s arguments concerning a violation of § 1057(1) ZPO as part of the procedural rules within the meaning of § 1059(2) no. 1 lit. d ZPO. It expressed the opinion that legal costs were to be considered “necessary” (notwendig) within the meaning of the provision “if an economically reasonable party could, from an ex ante perspective, consider the measure causing the respective costs as being pertinent”.2

The court noted that diverging opinions existed in legal literature with regard to what is “necessary” within the meaning of § 1057(1) ZPO. According to one view, the term “necessary” should be subject to the same threshold as in the context of court proceedings where § 91(2) ZPO specifically limits the recoverability of fees for legal counsel to the fees applicable under the statutory regime. The vast majority of legal literature, however, takes the view that the term “necessary” in § 1057(1) ZPO should be interpreted independently of the provisions applicable to court proceedings. Supporters of this view argue that regard must be had to the commonality of hourly fee arrangements in international as well as domestic arbitrations, which often tend to be complex requiring specific knowledge by legal counsel.

The court observed that the legislator’s documentation does not provide any guidance as to the proper interpretation of § 1057(1) ZPO. In the view of the Munich court, the parallel wording of § 91(1) ZPO and § 1057(1) ZPO does not necessarily entail the applicability of the same limitations to the recoverability of fees in arbitration as in court proceedings.

The court then raised the question whether the limitations applicable in court proceedings should be transferred to arbitration as a matter of transparency and predictability. In this regard, the court concluded that, by agreeing to settle their dispute by arbitration, the parties had opted out of the statutory regime protecting them from unpredictable costs. If the parties had wished to increase predictability, they could have provided for specific provisions on the recoverability of legal costs in their arbitration agreement.

Based on this analysis, the court came to the conclusion that the reimbursement of fees based on hourly rates exceeding the statutory fees “at least in the instant case”3 was justified, as the case concerned complex and difficult questions of (antitrust) law. The court reasoned that it would have been virtually impossible for the parties to find specialized legal counsel who would have accepted to be remunerated based on the statutory fee system and that, therefore, the hourly rates were “necessary”.

III. Résumé

Legal literature is split as to the question of whether § 1057(1) ZPO allows arbitral tribunals to order reimbursement of legal fees based on hourly rates exceeding the fees applicable under the statutory regime.

Considering that fee agreements providing for hourly rates are very common in international as well as domestic arbitration, the decision of the Higher Regional Court of Munich is of high practical relevance and provides valuable guidance for future cases. While the court adopted the position of the vast majority of legal literature on the recoverability of legal fees calculated on the basis of hourly rates, the court did not give carte blanche to arbitral tribunals as it subjected the recoverability to the requirement that the legal fees must be necessary in light of the circumstances of the given case.

The original full text of the decision can be accessed under the following link:

http://www.gesetze-bayern.de/Content/Document/Y-300-Z-BECKRS-B-2016-N-12876?hl=true

1 The Higher Regional Court of Munich was competent to decide on the claimant’s request pursuant to § 1062 (1),(5) ZPO and § 7 of the Bavarian Regulation on Court Competencies which centralizes the competence to decide on matters involving arbitral proceedings at the Higher Regional Court of Munich.

2 Para. 63 of the decision.

3 See para. 62 of the decision.