In a decision of 9 March 2023, the German Federal Supreme Court (BGH) decided on several issues of high relevance for arbitration practitioners. The decision, inter alia, discusses the impact of foreign insolvency proceedings, a court decision at the place of arbitration refusing the annulment of a foreign arbitral award on exequatur proceedings in Germany, the applicability of arbitration agreements to non-parties and whether German arbitration law provides for a preemptive remedy against the recognition of foreign arbitral awards. All in all, the decision constitutes an arbitral treasure trove.
I. Facts of the case
The dispute involved a German entrepreneur (i.e. the Applicant) active in Russia and his longtime business partners. The Defendants are independent companies of a group of companies active in the fruit juice business headquartered in Germany.
In March 2007, the following set of contracts was concluded:
- Three Operational Contracts between a Russian company (OGR) in which the Applicant held shares and the position as CEO and a Russian company (EGR).
- An Option Agreement between a consulting company for which the Applicant acted as general representative (i.e. the Consulting Company) and the German holding company of EGR.
- An Agreement on the settlement of mutual claims (i.e. the Settlement Agreement) between EGR and OGR, on the one hand, and the Consulting Company and another company represented by the Applicant and the Applicant himself, on the other.
All of the above agreements contained arbitration clauses. The Settlement Agreement provided for arbitration before the Chamber of Industry and Commerce seated in Moscow with a three-member tribunal to be conducted in the German language and with German law applicable to the merits. The Operational Contracts also provided for arbitration before the Chamber of Industry and Commerce seated in Moscow before a three-member tribunal in the German language, but with applicable Russian law. The Option Agreement provided for DIS arbitration with seat in Frankfurt and applicable German law.
At the end of 2007, EGR notified OGR of the termination of the Operational Contracts. Hereinafter, insolvency proceedings were opened for the estates of EGR and OGR.
At the end of 2016, the Applicant initiated arbitration proceedings against the Defendants exclusively based on the arbitration clause contained in the Settlement Agreement, alleging a fraudulent stripping of the assets of EGR and requesting damages of approximately EUR 70 million. The Defendants objected to the jurisdiction of the arbitral tribunal. The arbitral tribunal assumed jurisdiction and rendered an Arbitral Award, granting the Applicant damages in the amount of about EUR 50 million. The Defendants initiated annulment proceedings in Russia, which were unsuccessful.
In May 2020, the Defendants filed a request for denial of recognition of the Arbitral Award in Germany before the Higher Regional Court Koblenz. Later in the proceedings, they added a subsidiary request for declaratory relief. In his response to the original request, the Applicant applied for a declaration of enforceability (i.e. exequatur) of the Arbitral Award. On a subsidiary basis, the Applicant requested a judgment ordering the Defendants to render payments as stated in the Arbitral Award. On a further subsidiary basis, the Applicant requested that the matter be referred for decision to the competent Regional Court. In response, the Defendants declared their original request to be moot and requested the rejection of all requests by the Applicant.
After the conclusion of the oral hearing before the Higher Regional Court, it was learned that insolvency proceedings over the Applicant’s estate had been opened in Russia on 4 March 2020. On 24 June 2022, a Russian court refused to invalidate all actions by the Applicant before the Higher Regional Court to the extent they were not approved by the administrator in the insolvency proceedings.
The Higher Regional Court decided that the insolvency proceedings in Russia did not affect the Defendants’ standing in the proceedings before the Higher Regional Court. Furthermore, it held that the Defendants’ original request for denial of recognition of the Arbitral Award had not become moot. Instead, the Higher Regional court took the view that such a request had been inadmissible from the beginning, since German arbitration law does not provide for a preemptive remedy against foreign arbitral awards. Furthermore, the Higher Regional Court rejected the application for declaration of enforceability and stated that the Arbitral Award was not to be recognised in Germany, holding that the Arbitral Award was not covered by the arbitration clause in the Settlement Agreement, neither ratione personae nor ratione materiae. In this regard, the Higher Regional Court did not consider itself bound by the Russian court decision rejecting the application for annulment of the Arbitral Award. Regarding the subsidiary requests of the Defendants, the Higher Regional Court dismissed the payment claim as inadmissible and refused to refer such a claim to the competent court.
Both the Defendants and the Applicant appealed against this decision before the BGH.
II. Legal Assessment by the German Federal Supreme Court
In a thoroughly reasoned decision, the BGH confirmed the decision of the Higher Regional Court in its essential parts. In doing so, it took the opportunity to clarify several legal issues, which had been the subject of debate in jurisprudence and literature:
1. Impact of the insolvency proceedings in Russia
The BGH confirmed the decision of the Higher Regional Court that the Applicant had standing to sue, holding that this was a matter of Russian law and that under such law the opening of insolvency proceedings did not have any effect ipso iure. In the absence of any decision of the insolvency administrator denying the Applicant’s standing, the court concluded that the Applicant had the power to pursue the proceedings in his own name.
Likewise, the BGH shared the Higher Regional Court’s assessment that the opening of the insolvency proceedings did not lead to an interruption or require a suspension of the exequatur proceedings in Germany. Pursuant to § 352(1) of the German Insolvency Act (InsO), the opening of foreign insolvency proceedings interrupts a pending action before the German courts, which concerns the insolvency estate. In the present case, however, the insolvency proceedings had been opened already before the initiation of the proceedings before the Higher Regional Court, which was not pending at the time of the opening.
2. Subjective scope of the arbitration clause
The German Federal Supreme Court confirmed the Higher Regional Court’s decision that only one of four Defendants was bound by the arbitration clause in the Settlement Agreement and that the other three Defendants that were non-parties were not bound by it. The court concluded that, in the absence of a written arbitration agreement within the meaning of Article II(2) NYC, recognition of the Arbitral Award was to be refused pursuant to Article V(a1)(a) NYC.
The BGH held that the Higher Regional Court was free to determine the validity and scope of the arbitration agreement without being bound by any res judicata effect of the decision by a Russian court in the annulment proceedings or under the principles of equitable estoppel.
a) No res judicata effect of the decision by Russian courts in annulment proceedings
At the outset, the German Federal Supreme Court stressed that a difference had to be made between the recognition of (i) a foreign exequatur decision in Germany; and (ii) the res judicata effect of a foreign decision refusing the annulment of an arbitral award. While it is settled law in Germany that an exequatur decision could not be recognised pursuant to the principle “exequatur sur exequatur ne vaut”, it was a matter of debate to what extent a foreign decision refusing the annulment of an arbitral award could have res judicata effect in German proceedings regarding the declaration of enforceability. For domestic annulment proceedings, § 1060(2) ZPO provides that recognition must be refused if the arbitral award has been set aside with res judicata effect or if the three-month time-limit for initiating annulment proceedings has expired.
However, in the absence of any regulation for foreign arbitral awards, this issue has been a subject of debate in literature and jurisprudence. The following views were expressed:
- The rejection of an annulment application at the place of arbitration automatically results in a preclusion of the respective ground for refusal of recognition.
- The preclusion applies only where the requirements for the recognition of the foreign court decision under § 328 of the German Code of Procedure (ZPO) are fulfilled.
- Foreign decisions on annulment applications do not have any effect on German proceedings in relation to the declaration of enforceability at all. It was argued that otherwise the place of arbitration would be given too much weight vis-à-vis the interpretation of the grounds of refusal under Article V NYC.
The German Federal Supreme Court decided to follow the last view, providing the following reasons:
- It follows from Article III NYC that the courts of the country in which recognition is sought are competent to assess whether the preconditions for recognition are met.
- Pursuant to Article V(1)(e) NYC, the annulment of an arbitral award at the place of arbitration is relevant for the recognition of the award. However, the NYC does not contain any provision for the opposite case in which the annulment of the arbitral award has been refused.
- The foreign court decision cannot be recognised under § 328 ZPO (which is the standard rule for the recognition of foreign court decisions). This is because the application of this provision is excluded by § 1061(1) ZPO, pursuant to which the recognition of foreign arbitral awards is governed by the NYC. Otherwise, the decision of fundamental questions, such as the existence of a valid arbitration agreement, would be entirely left to foreign courts. Contrary to domestic awards, there is no harmonised legal framework that can justify deferring to foreign court decision in annulment proceedings.
- From a procedural point of view, the grounds for annulment at the place of arbitration and the grounds for refusal of recognition are not identical and concern different subject matters, which are governed by different provisions.
b) No equitable estoppel
The German Federal Court further held that the Applicant was not estopped from objecting to the recognition of the Arbitral Award based on the principle of good faith. Notably, the Applicant did not act inconsistently. The fact that the Applicant sought the decision by the Russian court, in the BGH’s view, could not be held against him.
The Higher Regional Court was free to assess the validity and scope of the arbitration agreement under the applicable law or laws without any limitation.
c) Subjective scope and applicable law
The German Federal Supreme Court shared the view of the Higher Regional Court that German law governed the arbitration agreement as a result of an implied choice of law. The court pointed out that this assessment was based on an old version of the German conflict-of-laws rules and expressly left open the question whether the underlying consideration would have also applied for an assessment under Article V(1)(a) NYC.
The Federal Supreme Court then stated that, under German law, an arbitration agreement, in principle, only binds the parties to it. Under German law, a group of companies has no binding effect on its members. Instead, according to the 'severability principle', each relationship must be considered individually.
3. Objective scope
In addition, the German Federal Supreme Court also confirmed the narrow interpretation of the objective scope of the arbitration clause by the Higher Regional Court, under which the Operational Contracts were not covered by the arbitration clause in the Settlement Agreement. In doing so, the BGH stressed that restraint was required in this regard in appeal proceedings.
Based on this assessment, the BGH concluded the Higher Regional Court was right to refuse the recognition of the Arbitral Award on the grounds in Article V(1)(a) NYC.
4. Subsidiary requests by the Defendants
Regarding the subsidiary requests by the Defendants for payment and referral of the matter to the competent court, the BGH held that, pursuant to § 574(2) ZPO, the Higher Regional Court’s decision could not be the subject matter of an appeal and therefore dismissed the appeal.
5. Follow-on appeal
Upon the appeal of the Applicant, the Federal Supreme Court squashed the Higher Regional Court’s decision refusing to declare the initial request for preemptive relief against the Arbitral Award moot. Such a declaration requires that the application was initially admissible and well-founded and later in the proceedings became moot.
In the BGH’s view, these requirements were fulfilled because, contrary to the decision of the Higher Regional Court, German arbitration law does provide for a preemptive remedy against foreign arbitral awards.
According to the BGH, a future defendant in exequatur proceedings regarding a foreign arbitral award has a remedy against such award in analogous application of §§ 1062(1) Nr. 4, 1061(2) ZPO, which is directed towards a declaration that the arbitral award is not to be recognised in Germany. Such a remedy can be exercised until exequatur proceedings are initiated.
The relationship between exequatur and annulment proceedings is traditionally a complex one. In the present case, the matter was further complicated by parallel insolvency proceedings. The case provided the BGH with the opportunity to clarify several controversial legal issues concerning the impact of foreign insolvency and court proceedings on German exequatur proceedings. The key points from the thoroughly reasoned decision are the following:
- The decision of the courts at the seat of arbitration to reject a set-aside application is not binding upon the German courts when they are seized to declare a foreign arbitral award enforceable in Germany.
- Under German law, an arbitration agreement only binds the parties to the agreement and their legal successors. An extension to non-parties is only possible in exceptional circumstances. An extension to non-parties based on a “group of companies doctrine” is not possible under German law.
- Anyone who has reason to believe that a foreign arbitral award is likely to be enforced against him in Germany can seek preemptive relief against an application for declaration of enforceability before such an application is made. This gives the potential defendant in enforcement proceedings the opportunity to obtain legal clarity at an early stage.
The full text of the decision in the German language can be accessed under the following link: http://juris.bundesgerichtshof.de/cgi-bin/rechtsprechung/document.py?Gericht=bgh&Art=en&nr=133316&pos=0&anz=1
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