The wind of change: Is a change of heart in ancillary court proceedings possible?

Germany

Higher Regional Court Frankfurt, Decision of 12 April 2019 – 26 SchH 4/18

On 12 April 2019, the Higher Regional Court Frankfurt rendered a decision on the question whether a party, which had invoked an arbitration agreement in relation to its request for appointment of an arbitrator by the court, was free to change its mind and request a declaration by the court that arbitral proceedings between the parties were inadmissible.

Ultimately, the court ruled in favour of this request. In answering this question, the court assessed whether the applicant's behaviour was contradictory and considered the impact of its own preliminary assessment of the arbitration agreement's validity: a ruling that is highly relevant to arbitration-related ancillary proceedings where the validity of the underlying arbitration agreement is uncertain.

The facts of the case

The applicant and the respondent were parties to a construction contract ("Contract"), which provided that any dispute was to be decided by an "expert arbitrator" if the dispute could not be settled through conciliation.

The applicant requested from the respondent repayment of certain amounts, which the applicant had allegedly paid in excess of the amounts owed ("main claim"). Since the parties could not settle this dispute, the applicant proposed that an arbitrator be appointed in accordance with the Contract. The respondent rejected the applicant's proposal arguing that the Contract did not contain a valid arbitration agreement.

The applicant then requested that the Higher Regional Court appoint an arbitrator pursuant to section 1035(3) of the German Civil Procedure Code ("ZPO"). During the proceedings, the court expressed doubts as to the validity of the arbitration agreement, but explained that a final determination of the arbitration agreement's validity in proceedings was not possible under section 1035(3) ZPO.

Instead, such a determination would only be possible based on an application or counter-application to declare arbitral proceedings under the Contract admissible or inadmissible pursuant to section 1032(2) ZPO. Under this provision, a party may, before the arbitral tribunal is constituted, request the court to declare the admissibility or inadmissibility of arbitral proceedings.

Accordingly, the respondent filed a "counterclaim", requesting that the court declare the arbitral proceedings under the Contract inadmissible due to the absence of a valid arbitration agreement. In response, the applicant then requested that the court declare the arbitral proceedings inadmissible (the "primary request") and changed its original request to appoint an arbitrator to include the condition that a decision on this request was only required if the court rejected the request that the arbitral proceedings be declared inadmissible (the "subsidiary request").

The Decision of the Higher Regional Court

The Higher Regional Court found the parties' primary requests for relief to be admissible and well founded, and thus declared the arbitral proceedings under the Contract inadmissible.

The court first assessed the admissibility of the requests for relief. It ruled that – in view of the pending dispute regarding the validity of the arbitration agreement – both parties had a legitimate interest in requesting a declaration pursuant to section 1032 (2) ZPO.

In the court's view, the applicant also had the required legal interest in the declaration (Rechtsschutzbedürfnis) and was not prevented from requesting the court to declare arbitral proceedings inadmissible, even though the applicant had initially argued otherwise. The court held that – at least after it had raised doubts over the validity of the arbitration agreement – the applicant was entitled to a final assessment of the agreement. In short, the court decided that the applicant's primary request did not constitute contradictory behaviour.

The court also rejected the respondent's argument that the applicant's subsidiary request for the appointment of an arbitrator was contradictory. The court reasoned that the subsidiary relief would only become relevant if the applicant's primary request was dismissed and the arbitration agreement was found valid. The court pointed out that changing the request for appointment of an arbitrator to a subsidiary request did not constitute a withdrawal of this request.

Turning to the merits of the primary requests, the court emphasised that there was no need to assess the validity of the arbitration agreement. Instead, the court relied on the principle enshrined in section 307 ZPO that a judgment will be rendered in favour of a claimant, if the respondent acknowledges the claim or parts of it. The court ruled that – by virtue of their corresponding requests for relief – the parties had acknowledged the inadmissibility of arbitral proceedings and the court had to make a corresponding ruling, pointing out that parties to an arbitration agreement are generally free to nullify their agreement and the court could not impose arbitration on the parties against their will.

As to costs, the court set the amount in dispute at one-fifth of the amount in dispute of the main claim. This is the value which the Higher Regional Court Frankfurt generally sets in cases pursuant to Section 1032(2) ZPO and which formed the basis of the statutory fees and thus the recoverable costs of the proceedings in the case at hand.

The court found the applicant liable to bear all costs of the proceedings, reasoning that the respondent had argued from the beginning against the admissibility of arbitral proceedings. According to the court, the respondent had not given any cause for action where the applicant, on the other hand, had given cause by initially arguing that the arbitration agreement was valid and by requesting the appointment of an arbitrator.

Much ado about nothing one might conclude. Not quite. By changing its original request for appointment of an arbitrator into a subsidiary request, the applicant lowered the amount in dispute set by the court. According to Section 45(1) sentences 1, 2 of the Act on Court Fees (Gerichtskostengesetz), the amount in dispute where there are two separate primary requests will be determined by adding the respective values of such requests. On the other hand, the value of a subsidiary request will only be added to the total amount in dispute if the court has to rule on such a subsidiary request.

In the end, if the applicant had pursued the request for appointment of an arbitrator as a primary request, the court would have set the total amount in dispute not only at one-fifth of the main claim (i.e. for the requests for declaring the inadmissibility of arbitral proceedings), but would have added another one-third of the value of the main claim for the additional primary request. However, due to the applicant's decision and since the subsidiary request's condition (that the applicant's primary request is unsuccessful) was not fulfilled, the court did not rule on this request. The subsidiary request thus remained irrelevant to the determination of the amount in dispute and for the calculation of court and lawyers' fees.

Conclusion

The Higher Regional Court clarified that a party may request that arbitral proceedings be declared inadmissible in reaction to a preliminary assessment by the court in arbitration-related court proceedings such as a request for the appointment of an arbitrator, even if this party had invoked the arbitration agreement before. At the same time, a party may pursue its request in support of arbitral proceedings as a subsidiary request conditioned on the request for declaration of inadmissibility being unsuccessful.

While this approach may not relieve a party from bearing the costs of the court proceedings, it could nevertheless decrease the overall costs the party has to bear. For more information on this eAlert, feel free to contact one of the following local CMS experts.

The full text of the decision can be accessed here.