On December 21, 2023, the German Federal Court of Justice (Bundesgerichtshof, BGH) – in overturning a decision by the Cologne Higher Regional Court (Oberlandesgericht, OLG Köln) – clarified the standards for the recognition and enforcement of foreign arbitral awards in Germany, emphasizing the principle that limits the scope of review by German courts to the prohibition of révision au fond, which precludes a review of the merits of the case. (BGH, I ZB 37/23)
Further in this article, we explore how this stance contrasts with English law, offering a comparative analysis of the two jurisdictions’ approaches to arbitral award enforcement.
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Facts of the Case:
The dispute originated from a contract entered into on February 10, 2015, between a Chinese company (Applicant) and a German company (Respondent) concerning a production line designed for the hot tinning of copper and copper alloy strips. The contract, valued at €4.45 million, included a clause designating arbitration under the rules of the China International Economic and Trade Arbitration Commission (CIETAC) with Shanghai as the arbitration venue.
Following the payment of two installments totaling €3.56 million, the Applicant refrained from paying the final installment, which was contingent upon the successful commissioning and acceptance of the production line, challenging the production line’s ability to mass-produce defect-free products. Subsequent negotiations and attempts at resolution failed, leading to arbitration. The Applicant sought a reduction in the contract price and damages, arguing that the production line did not meet the agreed specifications.
One piece of evidence presented during the arbitration was a video recorded on-site by a notary, which documented the production process.
The position of the OLG Köln, however, raised serious concerns about the arbitral award. The court was particularly critical of the arbitral tribunal’s supposed reliance on the video evidence. The OLG Köln argued that this video represented a disputed claim about the production line’s inability to function properly and that the tribunal should not have based its decision solely on this evidence without further technical assessment. According to the OLG Köln, the complexity of the technical issues involved necessitated an independent expert analysis, which the tribunal failed to obtain.
Furthermore, the OLG Köln noted that the arbitral tribunal had concluded that the production line was defective based merely on the visual appearance of the output as shown in the video. This decision was reached without consideration of technical expert testimony regarding whether the line had been operated correctly or the qualifications of the operating personnel, an aspect of the dispute that was undisputed by the Respondent but not properly evaluated by the tribunal.
Overturning the OLG Köln’s Decision
The BGH significantly corrected the understandings held by the OLG Köln regarding the enforcement of a foreign arbitral award.
The BGH highlighted that the OLG Köln had incorrectly evaluated the significance of a video recorded by a notary documenting the production process. Contrary to the lower court’s view, the arbitral tribunal did not consider this video critical for its ruling. Instead, the tribunal based its decision on acknowledgments from both parties regarding the plant’s deficiencies, which were well-documented and uncontested in their communications. This rendered any additional expert assessment unnecessary for the decision-making process, contrary to what was assumed by the OLG Köln.
In its judgment, the BGH emphasized the principle of non-révision au fond, which prohibits German courts from reassessing the merits of the case as determined by the arbitral tribunal. The BGH pointed out that the OLG Köln had inappropriately ventured into evaluating the “limited evidentiary value” of the video, an action that contravenes the prohibition against revising factual or legal findings made in arbitration.
The BGH reaffirmed that substantive errors identified by the tribunal, unless they constitute grounds for annulment under §1059 Abs. 2 ZPO, do not warrant a refusal to recognize and enforce an arbitral award. Additionally, it is beyond the remit of German courts to re-evaluate the evidential assessments made by the tribunal.
The BGH decisively stated that the state court’s role in reviewing foreign arbitral awards is strictly limited to verifying procedural adherence and statutory grounds for annulment. This aligns with international standards that favor the finality and enforceability of arbitral decisions, thereby supporting the efficacy and predictability of arbitration as a mode of dispute resolution in international commerce.
Through this ruling, the BGH reinforced the framework within which German courts must operate when dealing with the recognition and enforcement of foreign arbitral awards, ensuring adherence to the established principle of non-révision au fond and therefore maintaining the integrity of the arbitration process.
Comparative Analysis: Prohibition of Révision au Fond in Germany vs. Substantive Review in England
The German legal approach to the enforcement of foreign arbitral awards, as recently affirmed by the Bundesgerichtshof, is centered on the principle of non-révision au fond. This principle prohibits German courts from re-evaluating the merits of the case as determined by the arbitral tribunal. The German courts’ review is confined to assessing procedural adherence and statutory grounds for refusal of enforcement under the New York Convention and the German Code of Civil Procedure (ZPO). This sharply constrains the courts’ interference in the substance of the arbitration award, fostering a pro-arbitration environment that enhances the finality and international enforceability of arbitration decisions.
In stark contrast, – and highly debated during it’s drafting process – English law, under Section 69 of the Arbitration Act 1996, provides a somewhat different approach. Unlike Germany, English law permits an appeal on a point of law arising out of an arbitral award. However, this right is neither absolute nor automatic; it is contingent upon the parties’ agreement or the court granting leave for such an appeal. The criteria for granting leave are stringent, requiring that the question of law significantly affects the rights of the parties and that the decision of the tribunal on that point is at least open to serious doubt.
Furthermore, the parties involved in arbitration under English jurisdiction have the flexibility to opt out of this provision altogether. They may do so explicitly by contractual agreement or implicitly by selecting institutional rules that exclude the right to appeal, such as those of the ICC or LCIA.
The English opt-out system reflects a totally unique aspect of arbitration law, providing parties with significant autonomy over the arbitral process but also positioning England somewhat distinctively compared to other jurisdictions that generally do not allow substantive appeals on arbitral awards.
While English courts may entertain appeals on points of law, they remain barred from reviewing factual findings, however hard it may be to establish the difference between the two. Despite the availability of appeals on points of law in England, the actual rate of successful appeals is quite low. For example, during the court year of 2018-2019, none out of the 37 appeals were successful. Appeals on points of law are 1. Very rare and 2. Highly unlikely to succeed. This is, in part, due to the restrictive approach taken by the UK Courts out of an underlying respect for the arbitration process.
In summary, while both Germany and England provide robust frameworks for the recognition and enforcement of arbitral awards, they embody fundamentally different philosophies regarding judicial intervention. Germany’s strict prohibition against revising the merits of an arbitration award contrasts with England’s more flexible, albeit limited, allowance for legal appeals.
Conclusion:
In its recent decision, the German Federal Court of Justice (BGH) has firmly upheld the principle of non-révision au fond, significantly limiting judicial review of foreign arbitral awards to procedural checks and statutory grounds for refusal. This reaffirms Germany’s alignment with international norms favoring the finality and enforceability of arbitration decisions, enhancing its appeal as a pro-arbitration jurisdiction.
Contrastingly, English law permits limited appeals on points of law, providing parties with greater flexibility but maintaining a strong respect for the arbitral process. While both Germany and England support robust arbitration frameworks, Germany’s strict adherence to the non-revision principle clearly differentiates its judicial approach from England’s more nuanced allowance for legal review.
The BGH’s decision reinforces the restricted role of German courts in reviewing foreign arbitral awards, aligning with international principles that favor the enforcement of arbitration agreements and awards. By upholding the prohibition of Révision au fond, the court demonstrates Germany’s commitment to being an arbitration-friendly jurisdiction, ensuring that procedural imperfections do not undermine the finality of arbitration.