Challenge of Arbitral Awards in Germany

You are general counsel of a U.S. corporation resident in the State of California. You were responsible for overseeing arbitration proceedings arising out of a license agreement (“Agreement”) with a Greek licensor (“Claimant”). Your client as respondent (“Respondent”) lost the arbitration. The arbitral award (“Award”) orders your client to pay €10 million to the Claimant and to return to the Claimant certain cell cultures that your client has developed under the Agreement. The seat of the arbitration is in Munich, Germany. The Agreement is governed by German substantive law. The Respondent has substantial assets in Germany, including some of the cell cultures at issue.

You are not satisfied with the Award because, in your view, the arbitral tribunal (“Tribunal”) made procedural mistakes and misapplied German substantive law, notably European competition law. You have recommended to your client to consider challenging the Award. You also expect the Claimant to enforce the Award in Germany; it has already stated that it is concerned that your client might move assets out of Germany and neglect the cell cultures at issue, which would render them worthless.

You want to know what needs to be done to have the Award vacated and to prevent the German courts from issuing an order recognizing the Award and permitting enforcement of the Award in Germany (exequatur, hereafter also “Enforcement Order”). You are familiar with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 7 June 1958 (the “New York Convention”) but you worry that the Claimant may obtain an Enforcement Order ex parte, i.e. without your client being heard, before you have even moved for the Award to be set aside by a German court (vacatur), and you wonder what you could do to prevent that from happening.

THE LEGAL BASIS

  • Under German procedural law, which is codified in the German Code of Civil Procedure (ZPO), the New York Convention is the legal basis for assessing the recognition and enforceability of awards where the seat of the arbitration is outside Germany. The legal basis for assessing exequatur and vacatur of awards where the seat of the arbitration is in Germany (“German Awards”) is a localized German version of Article V of the New York Convention.

  • You are satisfied that your client will be able to show that it was “unable to present his case” within the meaning of Article V (1) (b) of the New York Convention and that because of the misapplication of European competition law by the Tribunal, the recognition or enforcement of the award may be found to be “contrary to the public policy” of Germany within the meaning of Article V (2) (b) of the New York Convention.

VACATUR

  • Petitions to vacate a German Award are to be filed with the Higher Regional Court (OLG)  agreed in the arbitration agreement. If no court is specified, the petition is to be filed with the Higher Regional Court having jurisdiction over the place of arbitration. The petition must be in German, regardless of the language of the arbitration.

  • The petition for vacatur should be first on your agenda because it must be received by the Higher Regional Court within three months from the date on which your client received the Award. If that deadline is missed, your client will have to live with the Award: It will no longer be able to defend itself by relying on any ground for vacatur if Claimant moves for an Enforcement Order.

DEFENDING AGAINST EXEQUATUR

  • Expect the Claimant to move for an Enforcement Order in the same Higher Regional Court where your client would move for vacatur. There is no deadline for moving for an Enforcement Order, so the Claimant could even wait for the three-months’ timeline mentioned above to expire to be sure that your client will no longer be able to rely on any ground for vacatur. The Enforcement Order would be tantamount to an enforceable judgment issued by a German court. The Enforcement Order can be appealed on a point of law only.

  • The Enforcement Order can be enforced even if it is appealed without the Claimant being required to post security. If, however, the Claimant enforces the Enforcement Order and exequatur is denied upon appeal, the Claimant will be liable in damages to the Respondent. The Enforcement Order may also state that the Respondent is given leave to post security to pre-empt the enforcement.

  • The costs of the exequatur procedure depend primarily on the value of the matter, normally the amount of the claim to be enforced in euros. The losing party will be required to indemnify the winning party for all court and lawyers' fees incurred in accordance with the statutory fee schedule (but not for any additional legal fees which the winning party may have agreed to pay to its lawyers).

  • The exequatur proceedings may take a year or more.

THE PRELIMINARY ORDER

  • If the Claimant wishes to proceed faster, it will move for a Preliminary Order. A Preliminary Order allows the Claimant to seize your client’s German assets quickly, without waiting for a decision in the exequatur procedure.

  • A “Preliminary Order” could permit (i) either the preliminary enforcement of the Award (e.g. the preliminary freezing of assets to satisfy a claim for payment) or (ii) the enforcement of certain preliminary measures designed to facilitate the enforcement of the Award (such as maintaining the cell cultures in the case at issue) if the award requests such measures to be taken.

  • The motion for a Preliminary Order will be heard by the judge presiding over the panel of judges at the Higher Regional Court that will hear the petition for the Enforcement Order. The presiding judge should render a decision within a few days. The respondent need not be heard.

  • The presiding judge has discretion whether or not to issue a Preliminary Order. The claimant will normally move for a Preliminary Order only if it has a specific reason to do so, e.g. if it can show that the respondent is moving assets abroad or, in the case at issue here, neglecting the cell cultures.

  • The fact that the Preliminary Order can, and often is, granted ex parte obliges the Claimant to state all relevant facts, whether advantageous or disadvantageous. If it turns out that the Claimant omitted relevant facts, it may be accused of having obtained the Preliminary Order by fraud.

  • If your client expects the Claimant to move for a Preliminary Order it may file a protective brief to advise the court of the reasons it may have to oppose a petition for a Preliminary Order. If the protective brief states (credible) facts that speak against issuing a Preliminary Order, the motion may be rejected.

  • The Preliminary Order will normally state that the Respondent is entitled to post security to pre-empt the enforcement, and will fix the amount of such security.

  • If the Claimant makes use of the Preliminary Order and it is later withdrawn or exequatur is denied, it would normally not be liable in damages to the Respondent.

  • The Preliminary Order is not a judgment. Therefore, the presiding judge may reconsider the Preliminary Order upon petition of either party, but the Preliminary Order cannot be appealed.

  • No specific fees will be charged by the lawyers or by the court for the Preliminary Order proceedings. These are considered included in the cost of the exequatur proceedings.

INSIGHT

Once you suspect that an arbitration award rendered in Germany against your client could be challenged under Article V of the New York Convention, move fast: Get good local advice, move for vacatur and file a protective brief to minimize the risk of being caught by a Preliminary Order.