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At the end of last year, we commented on the decision of the lower court in this matter in our blog. The Frankfurt Higher Regional Court (order of 7 September 2020 – 26 Sch 2/20 – “Fish Can Filling Machine”) focused on the issue of set-off in enforcement proceedings. Today, we write about the appeal against this order and the question whether the arbitration defence (exceptio arbitri) was raised in a timely manner before the Higher Regional Court.

Facts: DIS Arbitral Award

The parties disputed the delivery of a fish can filling machine to Sweden, which led to ICC arbitration. According to the arbitral award the respondent was ordered to pay 246.245,12 EUR to the applicant (OLG (Higher Regional Court) Frankfurt, Order of 07 September 2020, 26 Sch 2/20). The tribunal found that the fish canning machine delivered by the respondent was defective and that the claimant rightly declared the contract avoided.

At the enforcement stage, the defendant (respondent in the arbitral proceedings) claimed an offset in tort under § 823 BGB (German Civil Code). The defendant based its claim on the fact that the machine was damaged through gross negligence, in particular as a result of improper outdoor storage close to the sea. Allegedly, the salty air destroyed electronic components of the control system and the robotics and the components made of stainless steel were corroded. At best, the machine would have scrap value. The defendant also claimed that the legal fees awarded to the opposing party in the arbitral proceedings were the result of a fraudoulos agreement between the counsel and the claimant. The opposing party had claimed legal fees of EUR 450,000, whereas it had only incurred total costs of approximately EUR 150,000.

Set-off: An Obstacle in Enforcement of Arbitral Awards?

Ruling of the Frankfurt Higher Regional Court

The Court declared the set-off with a tort claim inadmissible, since the claim was subject to the arbitration clause. The arbitral award was declared enforceable.

Federal Supreme Court

The respondent appealed against this decision. It was of the opinion that the case had to be clarified up to which point in time the arbitration defence could be asserted in enforcement proceedings without an oral hearing.

The Federal Supreme Court dismissed the appeal. The question raised by the appeal did not confer any fundamental importance on the case because it was not relevant to the decision in the dispute. Moreover, the question could be left open, because the respondent never invoked the lateness of the arbitration defence. In its written pleading it merely argued that the claim for damages was not covered by the arbitration agreement. On the other hand, it did not complain that the claimant had raised the arbitration defence out of time contrary to § 1032 (1) of the Code of Civil Procedure.

Nevertheless the Federal Supreme Court provided clear guidance for practice. The court first stated that in appeal proceedings, it can be generally argued as an error of law that the lower court wrongly took into account an arbitration defence despite the fact it was raised out of time.

If the lower court wrongly accepts a late arbitration defence and therefore dismisses the action as inadmissible or – as here – does not take into account a set-off objection in the enforcement proceedings, it in fact denies the party access to the state courts.

Practical note

The Court notes that the requirements depend on whether an oral hearing takes place: In general it is sufficient to raise the arbitration defence before the beginning of the oral proceedings (§ 1032 (1) of the Code of Civil Procedure). If there is no oral hearing in the enforcement proceedings, the objection must be raised before the next court decision.

The following statements are relevant for practice:
(1) Anyone who believes that the opposing party did not raise the arbitration defence in time must expressly object to this in order not to be deprived of this objection in the next instance.
(2) If such a complaint is raised in the enforcement proceedings before the Higher Regional Court, the Federal Supreme Court may review the decision of the Higher Regional Court on the arbitration defence in the appeal proceedings.