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Stephan Wilske and Claudia Krapfl
Gleiss Lutz, Stuttgart
stephan.wilske@gleisslutz.com
claudia.krapfl@gleisslutz.com

 

The German Federal Court of Justice has made clear that it takes the right to be heard very seriously. In a recently published decision,^[1] it set aside an arbitral award for violation of the right to be heard because the arbitral tribunal had not sufficiently addressed the essential core of a party’s submissions in the reasons of the arbitral award.

Although the tribunal had correctly and completely reproduced the claimant’s requests, and had stated in the arbitral award that it had taken into consideration the parties’ entire submissions, the Federal Court of Justice concluded that, in reality, the arbitral tribunal had ignored the essence of the claimant’s submissions and had instead based its decision on a submission not made by the claimant. As a result, the court refused to declare the arbitral award enforceable and set it aside. It even declined to remit the case to the arbitral tribunal because it found that a remittal would not be appropriate due to the manifest and serious violation of the right to be heard.

This decision is remarkable because that the Federal Court of Justice looked very closely into both the claimant’s submissions and the grounds of the arbitral award in order to determine whether the arbitral tribunal had sufficiently addressed the essential core of the claimant’s submissions. The court therefore dealt in detail with the submissions on the merits in the arbitration, which is quite unusual in German enforcement proceedings.

Background of the dispute

The underlying dispute concerned remuneration issues in relation to the construction and installation of pipelines for a nuclear power plant in Finland. The claimant, a sub-contractor in the power plant project, initiated arbitral proceedings seated in Düsseldorf, Germany, against the respondent (another sub-contractor in the project). The claimant filed several payment requests and substantiated them. The arbitral tribunal rejected them, with the exception of a small part of the claim.

The respondent then applied to the Higher Regional Court of Düsseldorf to declare the arbitral award enforceable in order to enforce its claim for reimbursement of the costs of the proceedings. The claimant objected and requested that the arbitral award be set aside, arguing that the arbitral tribunal had disregarded its reasoning on one of its main requests and had instead decided on the basis of a submission not made by the claimant.

The Higher Regional Court of Düsseldorf rejected the objections raised by the claimant and declared the arbitral award enforceable. The claimant then appealed to the German Federal Court of Justice.

The Federal Court of Justice allowed the claimant’s appeal and set aside the arbitral award. It ruled that the Higher Regional Court and the arbitral tribunal had violated the claimant’s right to be heard by not sufficiently dealing with the substance of the claimant’s submissions.

Arbitral tribunal needs to address the essence of the parties’ submissions

The Federal Court of Justice clarified the prerequisites of the right to be heard.

The arbitral tribunal (or any court of first instance) must ascertain the essence of the parties’ submissions and must address it in the reasons on which the ruling is based. This obligation is breached if the decision of the arbitral tribunal is based only on a repetition of the words used by the party to explain its position, without it becoming apparent that the arbitral tribunal has taken into account the actual meaning of the party’s submission.

In the present case, the arbitral tribunal had correctly and completely reproduced the claimant’s requests and had stated in the arbitral award that it had taken into account the parties’ entire submissions. However, the Federal Court of Justice found this to be mere boilerplate language which did not show that the arbitral tribunal had seriously considered the claimant’s arguments. The Federal Court of Justice looked closely into both the claimant’s arguments and the arbitral tribunal’s reasoning. It concluded that the arbitral tribunal had not only disregarded the essential core of the claimant’s submissions but had based its decision on a submission not made by the claimant.

According to the court, neither the simple reproduction of a party’s requests nor the mere repetition of a party’s submission can replace the necessary substantive discussion of the essential core of a party’s submission in the reasoning of the arbitral award. Otherwise, the floodgates would be open to a practice that would significantly impair the procedural rights of the parties. The court stated that the arbitral tribunal’s assertion that it had taken into account the parties’ entire submission was irrelevant because the arbitral award proved the contrary.

Enforcement of arbitral award in conflict with public policy

The Federal Court of Justice refused to declare the arbitral award enforceable. It decided to set aside the arbitral award because its enforcement would lead to a result contrary to public policy (ordre public) according to section 1059(2) of the German Code of Civil Procedure.^[2]

No remittal to arbitral tribunal

Finally, the Federal Court of Justice refused to remit the case to the arbitral tribunal because:

• it had only been requested by one of the parties, the respondent; and

• a remittal would be inappropriate in such a case of a manifest and grave violation of the right to be heard.

The parties will have to constitute a new arbitral tribunal and repeat the entire arbitral proceedings if they wish to re-arbitrate the dispute.

Implications for conducting arbitral proceedings and enforcing arbitral awards in Germany

This new case law may provide parties to an arbitration with extended possibilities to challenge an arbitral award, particularly before the German courts.

The international practitioner should therefore be aware of this case law and the importance attached by the German Federal Court of Justice to the right to be heard. As a fundamental right of the rule of law, the Federal Court of Justice takes the right to be heard very seriously and will not accept arbitral tribunals or courts only paying it lip service.

Arbitral tribunals will have to be more careful in the future: the boilerplate language that can often be found in arbitral awards asserting that the arbitral tribunal has considered all of the parties’ submissions will no longer suffice. Rather, arbitral tribunals must show by way of the reasoning of the arbitral award that they have taken at least the essence of the parties’ submissions into account.

 

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