German Federal Supreme Court, Decision of 9 May 2018, I ZB 77/17
In a 9 May 2018 decision, the German Federal Supreme Court (BGH) addressed the question of which arbitral awards can be challenged in a two-tier arbitration procedure.
Facts of the case
The dispute arose out of a contract for the supply of five truckloads of jars of sour cherries. The contract provided for arbitration under the rules of the Waren-Verein der Hamburger Börse e.V., a Hamburg-based association that promotes wholesale trade of canned, dried and deep-frozen goods and has acted as an arbitral institution for more than 100 years.
Under the arbitration rules of the Waren-Verein, either party may lodge an appeal against the arbitral award before a Higher Arbitral Tribunal (Oberschiedsgericht). With an appeal, the appellant is required to nominate an arbitrator for the appeal instance. If the formalities for filing an appeal (including the nomination of an appeal arbitrator) are not met and the Higher Arbitral Tribunal is not properly constituted, the permanent legal advisor of the Waren-Verein may reject the appeal as inadmissible.
In the present case, the seller failed to fulfil his duties under the purchase contract. The buyer therefore sought payment of additional expenses for obtaining the purchased goods elsewhere and initiated arbitration proceedings with the Waren-Verein. In the arbitral award dated 27 June 2016 (First Award), the arbitral tribunal ruled in favor of the buyer and held the seller to be liable for payment of the additional expenses.
At this point, the seller lodged an appeal against the arbitral award, but failed to nominate an arbitrator for the appellate instance. In an order of 24 August 2016 (Appeal Order), the permanent legal advisor rejected the appeal as inadmissible.
The buyer moved to enforce the payment obligation and applied to the competent Higher Regional Court of Hamburg (OLG Hamburg) to declare the First Award enforceable, as required under German law. In return, the seller asked the OLG Hamburg to set aside both the First Award and the Appeal Order. The OLG Hamburg held that the Appeal Order issued by the permanent legal advisor was to be considered equivalent to an arbitral award rendered by the Higher Arbitral Tribunal. OLG Hamburg declared the First Award enforceable and rejected the application for setting aside the two decisions. The defendant filed a legal complaint against the decision of the OLG Hamburg with the BGH.
The BGH decision
The buyer argued that the legal complaint by the seller was inadmissible because it was directed against the OLG Hamburg’s rejection of the application for setting aside the First Award, but not directed against the Court’s rejection of the application for setting aside the Appeal Order. The BGH therefore had to decide which decisions in the case of a two-tier arbitration procedure need to be challenged in setting-aside proceedings. The BGH used this opportunity to make some general remarks on the legal nature of two-tier arbitration proceedings.
As a preliminary remark, the BGH stated that only an arbitral award that has the effect of a final court decision between the parties can be recognized and enforced under German arbitration law. In this regard, the BGH followed the OLG Hamburg’s classification of the Appeal Order as being equivalent to an arbitral award.
The BGH further found that in a two-tier arbitration procedure, the first-instance arbitral award only becomes final once the appeal tribunal has dismissed the appeal as inadmissible or unfounded, or the appeal was not lodged in time.
According to the BGH, the losing party can seek annulment of the first-instance award or the appeal award or both. The two awards are not to be treated as one uniform decision. Yet the possible grounds of annulment differ between the two instances.
If a party seeks annulment of the appeal award, it can only rely on the grounds for annulment that relate to the appellate tribunal’s decision not to grant the appeal. For example, the seller in the present case was entitled to argue that the permanent legal advisor erred in rejecting the appeal as inadmissible for formal reasons, but it could not rely on annulment grounds relating to the first-instance proceedings.
The BGH also commented on the possible outcomes of annulment proceedings regarding the appeal award: if the application for annulment of the appeal award is successful, the first-instance award cannot be declared enforceable as it is not yet final and the proceedings before the appellate tribunal must be resumed. If the application for annulment of the appellate award is unsuccessful, however, the first-instance award becomes final and can be declared enforceable.
Yet the fact that a German court previously upheld the appellate tribunal’s decision to confirm the first-instance award does not preclude a party from seeking annulment of the first-instance award. In such cases, the party can advance all annulment grounds pertaining to the first-instance proceedings.
Finally, the BGH ruled on the relationship between the different applications if a party seeks annulment of both awards, holding that courts must first deal with the annulment of the appeal award before turning to the annulment of the first-instance award. The reason: if the first application for annulment is successful, the appellate tribunal would need to resume its proceedings and can then review the first-instance award.
The BGH held the legal complaint against the OLG Hamburg’s rejection of the application to set aside the First Award to be admissible but rejected it as unfounded on its merits.
Under German arbitration law, a party that has participated in a two-tier arbitration procedure should consider seeking annulment of both the appellate and the first-instance award.
Relatively few arbitration rules provide for an appellate instance by default (e.g. the rules of the European Court of Arbitration). By contrast, several arbitral institutions have adopted optional rules on appellate arbitral proceedings that parties can agree upon in the initial arbitration agreement or even in the course of the arbitral proceedings. Examples of such rules include the Optional Appellate Arbitration Rules of the American Arbitration Association (AAA), the International Centre for Dispute Resolution (ICDR) and the JAMS Optional Arbitration Appeal Procedure. Similarly, the Guidelines on WIPO FRAND Alternative Dispute Resolution include an optional model clause providing for an appellate procedure.
While far from common, there may be good reasons for parties in specific circumstances to tone down the principle of finality of arbitral awards and to opt for an appeal before another arbitral tribunal. Notably, this can be the case where the decision of the arbitral tribunal has high precedential value and the accuracy of its reasoning is paramount, e.g. in IP cases. The BGH’s decision provides guidance on how to structure setting-aside proceedings following a two-tier arbitration procedure.
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