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Recognition and enforcement of foreign arbitral awards in Germany

Fall 2008
InTouch, Association For International Arbitration, Newsletter, p. 3 et seq.

Jan Kraayvanger and Mark C. Hilgard1
Mayer Brown LLP, Frankfurt

Recently German courts have handed down several decisions dealing with the question of whether or not a party against which a foreign arbitral award was rendered is entitled to challenge such award in recognition and enforcement proceedings before the German courts on the grounds of Art. V of the New York Convention2 if the party has failed to challenge the arbitral award in its state of origin3. In essence, these court decisions suggest that the answer to this question depends on whether or not such objections are precluded pursuant to the procedural law applicable in the state of origin:

In its decision dated April 17, 20084 the German Federal Supreme Court ruled on the enforceability of an arbitral award rendered in Denmark. The Danish proceedings to set aside arbitral awards applicable at that time did not provide for preclusion periods; therefore, the Court held that, although the defendant had refrained from challenging the award in Denmark, it was not precluded from raising objections pursuant to Art. V of the New York Convention in the German recognition and enforcement proceedings. The Court argued that such behavior was in line with the principles of good faith because, due to the lack of a prescription period under Danish law, the claimant could not reasonably assume that the defendant would accept the arbitral award only because it had not yet challenged the award in Denmark. However, the Court indicated that its decision might have been a different one if the defendant had been precluded with its objections in Denmark.

Up to now the German Federal Supreme Court has not handed down a final ruling on this issue. However, there exist several lower courts’ decisions wherein the defendant was precluded from raising objections against the enforceability of the arbitral award if the defendant had not initiated proceedings to set aside the arbitral award in the state of origin and if such proceedings were subject to prescription periods.

In a lawsuit brought before the Higher Regional Court of Karlsruhe, the defendant to an Ukrainian arbitral award challenged the enforcement of the award on the grounds that a fair hearing had not been granted and that it considered the award random. In its decision dated March 27, 2006, the Court rejected these objections.5 It held that the defendant’s objections were precluded because (1) the defendant had failed to initiate proceedings to set aside the award in the Ukraine; and (2) Ukrainian law provided for prescription periods for such proceedings which had expired.

The same Court rendered a similar judgment on September 14, 2007, with regard to a Chinese arbitral award.6 The defendant challenged the enforcement of the award before the Court arguing that the arbitral tribunal had no competence to hear the case. It also contested the composition of the arbitral tribunal and the neutrality of its members. The Court held that Chinese law provided for the opportunity to raise these objections in proceedings to set aside the award within a certain period of time that had already lapsed. As a consequence, the Court held the objections to be precluded.

In line with these decisions, the Higher Regional Court of Berlin recently declared another Ukrainian arbitral award enforceable, although the defendant asserted that the statement of claim, as well as the award, had not been duly served.7 Since the defendant had not initiated proceedings to set aside the award in the Ukraine, the Court was not prepared to take these objections into account.

In these three decisions the reasoning of the courts was similar. The courts argued that, under German procedural law, objections against German arbitral awards were precluded in the recognition and enforcement proceedings if they were not brought forward in the proceedings to set aside the domestic arbitral award within a certain period of time. Likewise, foreign arbitral awards should be rendered enforceable without considering objections the defendant could have brought forward in proceedings to set aside the award in the state of origin.8

This reasoning appears to be questionable9, especially in cases where the defendant did not acknowledge jurisdiction of the foreign arbitral tribunal from the outset10, or even was not duly served with the statement of claim. It is doubtful whether in such cases it is just and reasonable to require the defendant to challenge the arbitral award in the state of origin. This is particularly questionable in cases where the state of origin does not provide for a fair and impartial judicial system.11 On the other hand, there is undoubtedly a need for a prescription regime in order to provide legal certainty to the claimant.12 Such a prescription regime could be based on the principles of good faith, as indicated by the German Federal Supreme Court in its decision discussed above.13 If the defendant could have reasonably challenged the arbitral award in the state of origin but missed the prescription periods in such proceedings, the claimant may reasonably trust that the defendant accepted the arbitral award. Hence, the defendant would act in bad faith if it raised objections against the arbitral award in German recognition and enforcement proceedings. On the other hand, if national procedural law in the state of origin does not provide for prescription periods and the defendant could still raise objections in a proceeding to set aside the arbitral award in the state of origin, there is no good reason why the defendant should be precluded with such objections in German recognition and enforcement proceedings.14 The same is true, if, due to the special circumstances of the case, it would be unreasonable to require the defendant to initiate proceedings to set aside the award in the state of origin. If, for example, the state of origin does not provide for fair proceedings, or if the defendant never acknowledged jurisdiction of the arbitral tribunal and refused to participate in the arbitral proceedings, it is not contrary to the principles of good faith if the defendant does not initiate proceedings to set aside the award in the state of origin, but raises his objections only in the German enforcement proceedings.15

Time will show whether the German Federal Supreme Court will be prepared to follow this differentiated approach. In the meantime, from a practical point of view, any defendant is well-advised to initiate proceedings to set aside the award in the state of origin and to raise objections in such proceedings within the prescription periods provided by the national procedural law of this state.16 Otherwise, there is a significant risk that the German courts will consider the objections to be precluded in the German recognition and enforcement proceedings.


1
Dr. Jan Kraayvanger is an attorney (Rechtsanwalt) in the litigation and arbitration practice of Mayer Brown LLP in Frankfurt am Main; Dr. Mark C. Hilgard is a partner of Mayer Brown LLP, attorney (Rechtsanwalt) in Frankfurt am Main and head of Mayer Brown’s German litigation and arbitration practice.
2
U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, of June 10, 1958.
3
BGH SchiedsVZ 2008, 196; OLG Karlsruhe SchiedsVZ 2006, 335; OLG Karlsruhe SchiedsVZ 2008, 47; KG Berlin SchiedsVZ 2007, 108; KG Berlin KGR 2008, 839.
4
BGH SchiedsVZ 2008, 196; Kraayvanger, InTouch Association For International Arbitration, Newsletter 2008, 3.
5
OLG Karlsruhe SchiedsVZ 2006, 335.
6
OLG Karlsruhe SchiedsVZ 2008, 47.
7
KGR Berlin 2008, 839.
8
OLG Karlsruhe SchiedsVZ 2006, 335 (336), OLG Karlsruhe SchiedsVZ 2008, 47 (48); KGR Berlin 2008, 839.
9
Gruber, SchiedsVZ 2006, 283 (285).
10
Kröll, IPrax 2007, 430 (436).
11
Kröll, IPrax 2007, 430 (436).
12
Kraayvanger, SchiedsVZ 2008, 301 (302); Kröll, IPrax 2007, 430 (434).
13
Kraayvanger, SchiedsVZ 2008, 301 (302); Pfeiffer, LMK 2008, 264038.
14
Pfeiffer, LMK 2008, 264038.
15
Kraayvanger, SchiedsVZ 2008, 301 (302); Kröll, IPrax 2007, 430 (436).
16
Kraayvanger, InTouch Association For International Arbitration, Newsletter 2008, 3; Gruber, SchiedsVZ 2006, 283 (285).

Authors

  • Dr. Mark C. Hilgard
    T +49 69 7941 2271
  • Dr. Jan Kraayvanger
    T +49 69 7941 2271
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