Introduction:
In a recent decision delivered on 2 April 2025, the Bavarian Supreme Regional Court (BayObLG case no. 102 Sch 39/24) set aside an arbitral award in a high-profile dispute concerning milestone-based earn-outs in the life sciences sector. This ruling marks an important clarification on the requirements for due process (rechtliches Gehör) and the standard of reasoning required in arbitral awards under German law. The focus was placed specifically on the factual findings which led to the setting aside of the award.

1. Facts of the Case

The case involved a dispute between a purchaser and sellers of all shares in a biotechnology company. The purchase agreement featured a fixed sales price and further milestone-based additional payments, contingent upon achieving specific clinical milestones during a defined period. Central to the dispute was whether the purchaser had fulfilled its contractual obligations to initiate and provide required support for Phase 1 clinical trials using the acquired company’s biomarker technology to enable the milestone events and payments.

The sellers argued that the purchaser had failed to take economically reasonable efforts as contractually agreed, withholding clinical data and tissue samples necessary for biomarker development and for reaching the milestones. Conversely, the purchaser argued that such obligations were limited and had been negotiated to exclude any absolute duty, especially considering the scarcity and technical characteristics of tissue samples.

After complex arbitration proceedings, the tribunal ruled in favor of the sellers regarding one of the milestone earn-outs, finding a breach of duty and awarding payment. The purchaser sought to set aside the award before the BayObLG.

2. Central Findings Leading to the Setting Aside of the Award

The BayObLG overturned the arbitral award based particularly on the following core findings:

  • Failure to Consider Essential Submissions: The arbitral tribunal failed to properly consider key arguments presented by the purchaser, especially concerning the practical and industry-specific limitations in providing tissue samples. The purchaser had argued that samples could not be reused for multiple developers and that industry practice, as well as technical limitations, made exclusive allocation of samples impossible. These points were not substantively addressed in the award, indicating that critical factual arguments were overlooked.
  • Non-Consideration of Timing Uncertainty: The tribunal also omitted proper discussion of the fact that, at the time of planning and choosing Phase 1 studies, it was not yet clear whether sufficient suitable samples would be available at all. This uncertainty was central to the purchaser’s defense and was not adequately dealt with.

The court found these omissions to be material: the proper understanding of the scope of the contractual obligation—and thus, the finding of breach—depended heavily on industry practice and technical feasibility. If the tribunal had duly considered these points, it might have come to a different conclusion.

3. Deficient Reasoning and Legal Standard Contradictions

Further, the BayObLG criticized the reasoning of the tribunal as insufficient:

  • Contradictory Application of Legal Standards: The tribunal set out a high evidentiary standard (probability “in the ordinary course of events”) for the causality between a breach and the absence of a milestone, but then diluted or ignored this standard in its reasoning. It remained unclear whether the claimants had truly met this standard, or if the tribunal had silently reversed the burden of proof or lowered the standard without justification.
  • Disregard of Expert Testimony and Evidence: The tribunal’s causality finding relied primarily on the evaluation of one biomarker development as “promising” without engaging with detailed submissions and expert evidence on what that term meant in context, or on the likelihood that a biomarker would have been successfully developed and used in the trial period. This failure to grapple with the parties’ central factual and expert arguments made the award’s reasoning insufficient.

These gaps were material since the causal assessment underpinned the decision to award milestone payments.

Summary: What Does This Mean for Practice?

This decision underscores the imperative for arbitral tribunals to truly address significant factual and technical arguments raised by the parties, particularly in complex and specialized sectors where industry custom and scientific constraints are central. Tribunals must provide transparent and comprehensible reasoning and cannot cut short the examination of crucial aspects by generalities or unclear modifications of legal standards.

For parties to arbitration, the ruling demonstrates the importance of thorough documentation and insistence on the tribunal’s engagement with their key arguments. Conversely, it reassures parties that German courts will protect their procedural rights and will not tolerate arbitral awards that fail to meet minimum standards of due process and reasoned decision-making.

In total, it is a very rare example of a German court setting aside an arbitral award.