The Higher Regional Court of Frankfurt am Main, Order of 24 January 2019 – 26 Sch 2/18
On 24 January 2019, the Higher Regional Court of Frankfurt am Main (OLG Frankfurt) passed a decision dealing with the scope of an arbitrators' duty to disclose circumstances that could cast doubt on their impartiality and independence, and sheds light on whether a violation of this duty can result in a successful challenge of an arbitrator.
The facts of the case
The dispute arose from a sale and purchase agreement (SPA) for shares in a transport and logistics company. The SPA provided for arbitration in Germany under the rules of the Deutsche Institution für Schiedsgerichtsbarkeit e.V. (DIS Rules) including the DIS-Supplementary Rules for Expedited Proceedings. The buyer under the SPA, the claimant in the case, initiated an arbitration requesting damages from the respondent, the seller under the SPA. The claimant appointed Mr. D and the respondent appointed Mr. B as arbitrators. Mr. D and Mr. B subsequently agreed on Ms. A as the presiding arbitrator.
At the end of January 2018, the arbitration's oral hearing was held (Oral Hearing). Then on 2 February 2018, the claimant challenged the arbitrator appointed by the respondent and the presiding arbitrator over a concern of bias, alleging a violation of the disclosure obligation under § 16.1 DIS Rules 1998 and procedural errors during and after the Oral Hearing. On 16 March 2018, the arbitrators rejected the claimant's challenge, and on 20 March 2018 the arbitral tribunal dismissed the claimant's request for damages in its entirety (Award).
On 13 April 2018, the claimant applied to the OLG Frankfurt for a determination on the challenge of Ms. A and Mr. B under § 1037(3) of the German Civil Procedure Code (ZPO). Following the request under § 1037(3) ZPO, the court received two additional applications relating to the Award: a request by the respondent for a declaration of enforceability of the Award for the respondent's costs of the arbitration (which were to be borne by claimant) under § 1060 ZPO, and an application by the claimant for setting aside the Award under § 1059 ZPO.
The decision by the OLG Frankfurt
On 21 January 2019, the OLG Frankfurt dismissed the claimant's request for a decision on the challenge against the two arbitrators. The court further declared that the Award was enforceable as far as the claimant was ordered to bear the respondent's costs of the arbitration (26 Sch 8/18). In both rulings, the OLG Frankfurt dealt with the reasons on which claimant grounded its challenges against the arbitrators Ms. A and Mr. B.
The court held that the claimant had a legitimate interest in a court decision on the challenge under § 1037(3) ZPO. According to some legal authorities, if an arbitral tribunal renders an award before the expiry of the one month-period for filing a challenge under § 1037(3) ZPO, a challenge against an arbitrator should only be permitted within the proceedings for enforcement or for setting aside an arbitral award according to §§ 1059 et seq. ZPO. The OLG Frankfurt referred to its parallel decision on the request under § 1060 ZPO (26 Sch 8/18) and pointed out that in the event of a successful appeal against the enforceability decision, the case may be remitted to the arbitral tribunal under § 1059(4) ZPO. Thus, the claimant had a legitimate interest in a court determination on the challenge of Ms. A and Mr. B.
Obviously, the court anticipated the scenario where the court of appeal would leave the merits of the challenge open and reject the enforceability of the Award for other reasons than the alleged bias of Ms. A and Mr. B. In this case, there is indeed a risk that the case would be remitted to the arbitral tribunal without a determination of the challenge of Ms. A and Mr. B.
The OLG Frankfurt then turned to the reasons alleged by the claimant in support of the challenge of the arbitrators, and pointed out that while an actual bias is not necessary, a successful challenge requires that there be objective reasons which – when viewed rationally from the position of the affected party – raise concerns that a member of the arbitral tribunal is biased towards the arbitration.
Regarding the presiding arbitrator Ms. A, the court held that she did not violate her disclosure duties under § 16.1 DIS Rules 1998, and emphasized that strict requirements should be placed on arbitrators when it comes to disclosure obligations. Arbitrators should disclose any circumstances that may raise doubts about their impartiality and independence, not only circumstances that could result in a successful challenge. Under this standard, the court held that Ms. A was not obliged to disclose the fact that until 2005 she had worked in the same law firm as the respondent's legal counsel. The fact that an arbitrator and a counsel previously worked in the same law firm long before the arbitration was considered insufficient to raise doubts about the arbitrator's impartiality and independence. The OLG Frankfurt pointed out that Ms. A worked in the law firm's dispute resolution team as an associate lawyer, while the respondent's legal counsel was a partner in the corporate/M&A team. Furthermore, the court noted that the two lawyers worked in different locations and never cooperated in a mandate.
Regarding the arbitrator Mr. B, the OLG Frankfurt held that he breached his disclosure duties under § 16.1 DIS Rules 1998. From 1993 to 2004, Mr. B was a partner in the M&A/private equity team of the same law firm where the respondent's legal counsel was partner from 1994 to 2001. In 1994/1995 and 1999, both lawyers worked in the same office. Therefore, the court noted, Mr. B and the respondent's legal counsel worked over a period of seven years as partners in the same law firm sharing similar financial and economic interests. In the court's view, the fact that the partnership ended 17 years before the arbitration did not exempt Mr. B from disclosing his relationship with his former partner since it is not improbable that contacts between Mr. B and respondent's legal counsel continued or that Mr. B might have an interest in maintaining such contacts.
The OLG Frankfurt clarified that the IBA Guidelines on Conflicts of Interest in International Arbitration (IBA Guidelines) – which are not binding for the court – do not justify a different conclusion. According to para. 3.3.3 IBA Guidelines, the scenario that an arbitrator was, within the past three years, affiliated with any counsel in the arbitration falls in the Orange List of the IBA Guidelines. The court held that para. 3.3.3 IBA Guidelines does not exempt an arbitrator from disclosing a partnership which ended longer than three years before the arbitration. As pointed out by the OLG Frankfurt, the Orange List of the IBA Guidelines is a non-exhaustive list of circumstances which, depending on the facts of the case, may in the eyes of the parties give raise to doubts as to the arbitrator's impartiality or independence. Hence, the court reasoned, the Orange List reflected circumstances which an arbitrator should disclose without saying that such disclosure would automatically result in the arbitrator's disqualification.
Although the court found Mr. B to be in violation of his disclosure duties, it held that the breach of § 16.1 DIS Rules 1998 was not sufficient for a successful challenge of Mr. B. The OLG Frankfurt reasoned that the non-disclosed circumstances did not give rise to justifiable doubts about the impartiality or independence of the arbitrator, pointing out that the partnership-based cooperation between Mr. B and the respondent's legal counsel ended 17 years ago and since then no professional or private contacts exist.
The court further held that the conduct of the proceedings also does not raise justifiable concerns of bias regarding Mr. B or Ms. A. The OLG Frankfurt, inter alia, considered the following two points brought forward by claimant in support of the challenge:
(1) The arbitral tribunal rejected to take on file a memorandum submitted by the claimant's legal counsel in the Oral Hearing. The OLG Frankfurt clarified that the challenge under § 1037(3) is not an instrument for controlling procedural or substantive errors of an arbitral tribunal, but it is rather the procedural ordre public which is supposed to guarantee a minimum level of procedural fairness in an arbitration. By choosing arbitration, the parties waive the jurisdiction of the otherwise competent state courts, including a higher degree of review on the appeal level. State courts should not foil this decision by controlling arbitral tribunals' decisions based on arbitrator challenges. Regarding the rejection of the claimant's memorandum in the Oral Hearing, the court pointed out that:
- the parties had agreed on the application of the DIS-Supplementary Rules for Expedited Proceedings; and
- the arbitral tribunal had decided in Procedural Order No. 1 that it would not take submissions on file, which had not been specified in the procedural calendar. Thus, in the court's view, the rejection of the claimant's brief presented in the Oral Hearing did not raise a justifiable concern of bias for Ms. A or Mr. B.
(2) The arbitral tribunal did not request a state court to place witnesses under oath who had provided contradictory statements in the Oral Hearing. The OLG Frankfurt clarified that it lies within the discretion of the arbitral tribunal to request the assistance of a state court under § 1050 ZPO. The decision not to apply for state court assistance, therefore, was not sufficient to raise justifiable concern of bias. Consequently, an arbitrator challenge, in principle and in respect to Ms. A and Mr. B, should not be considered an instrument to review an arbitrator's decision not to apply for assistance pursuant to § 1050 ZPO.
The decision of the OLG Frankfurt gives a good overview of the applicable standards regarding arbitrator challenges. These standards are of interest for both party counsels and arbitrators where the seat of arbitration is in Germany. The decision of the OLG Frankfurt further deals with the procedural interplay between a request for a challenge under § 1037(3) ZPO and a parallel request for enforcement or for setting aside an arbitral award according to §§ 1059 et seq. ZPO.
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For a summary of a decision by the German Federal Supreme Court (BGH) on the scope of the disclosure duty of experts in international arbitration, see.