Obtaining a favourable arbitral award is just the beginning: a victorious party has to apply to a state court for an enforcement clause to render the decision enforceable. However, even if no objections or corresponding claims were raised by the opposing party previously during arbitration, such claims may appear later on and be used to neutralise an unfavourable award. Thus, some additional patience is needed on the stage of the enforcement.
The question is under what circumstances are any additional defences such as a set-off claim in enforcement proceedings admissible? The general rule is that no defences can be raised that could have been raised in the arbitral proceedings. But this still leaves sufficient room for disputes as two recen decisions of the Higher Regional Court of Frankfurt show.
Facts: DIS Arbitral Award/Franchise agreement
The first case originated from the following facts: In arbitral proceedings under the rules of the German Arbitration Institute (DIS), the applicant had obtained an arbitral award against the defendant, pursuant to which the respondent in the arbitral proceedings was ordered to pay approx. 92.222,09 EUR to the applicant (OLG (Higher Regional Court) Frankfurt, Order of 13 July 2020, 26 Sch 18/19).
In the proceedings about the enforcement of the arbitral award, the defendant (respondent in the arbitral proceedings) declared set-off with a claim against the applicant (claimant in the arbitral proceedings) amounting to 11.515,94 Euro out of an arbitral award, issued in parallel arbitral proceedings. The defendant also declared set-off with a claim for damages based on the the findings of these parallel proceedings. However, no award on these damages had been rendered.
Ruling: Jurisdictional Issue
In the process of enforcement of arbitral awards, a party may declare set-off against claims awarded in a final and binding award.
However, the problem is, if the claims that are set-off are disputed, a state court may examine an issue in theory falling within the scope of an arbitration clause. Thus, if a party invokes a set-off-claim that is itself subject to an arbitration agreement, the set-off cannot be taken into account if the other party objects. Otherwise, a state court could render a final judgment on claims which the parties would wish to be decided by the arbitral tribunal alone. Set-off is therefore only possible to the extent that the set-off claims are not subject to an arbitration agreement or that the arbitral tribunal has already decided on them.
Thus, offsetting with claims awarded in parallel arbitral proceedings was admissibe. This is because the decision-making competence of the arbitral tribunal desired by the parties was preserved.
The off-set with claims for damages derived from the facts of parallel proceedings, on the other hand, was not admissible, since these damage claims were also covered by the arbitration agreement and the arbitral tribunal had not rendered any decision on them.
Facts: ICC Arbitral Award/fish canning machine
The second case resulted from the following facts: In arbitral proceedings under the rules of the ICC, the applicant had obtained an arbitral award against the defendant, pursuant to which the respondent in the arbitral proceedings 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.
The Court declared the set-off with a tort claim inadmissible, since the claim was subject to the arbitration clause. According to the clause
“all disputes arising out or in connection with the contract shall be finally settled under the rules of arbitration of the international chamber of commerce (…)”.
The defendant alleged that the clause did not cover the tortious claim for damages, since tort claims are not contractual claims. However, the Court considered that the arbitration agreement should be interpreted broadly from the perspective of an average contracting party:
It is in the interest of the parties to avoid a division of jurisdictions between an arbitral tribunal and a state court, as it would lead to further disputes and delays in the decision making and a considerable extra workload for the parties.
The court admitted that the allegation that the applicant obtained the cost order in an amount of EUR 450,000 by way of fraught would – in theory – be an objection that could be considered in the enforcement proceedings since it would amount to a violation of public policy to declare enforceable an award obtained by way of fraud. However, in this particular case, the defendant could have raised the objections against the cost order already in the arbitral proceedings so the defendant was barred from raising this objections in the enforcement proceedings.
This objection could only have been raised under the conditions established by § 582 ZPO (Code of Civil Procedure). § 582 ZPO requires that a party was prevented, through no fault of its own, to raise the objection already in the arbitration proceedings. This was not the case here. The objection was hence not admissible.
So, in summary, set-off with claims that are subject to an arbitration clause in the enforcement proceedings is only admissible under very limited conditions, inter alia, that the claims with which set-off is declared has already been awarded by an arbitral tribunal. It should however be noted that the court will only consider the arbitration defence if it is raised by the defendant, not out of its own right.
In addition, any set-off claims or objections may admissibly be asserted only insofar as the grounds on which they are based arose only after the close of the arbitration hearing that was the last opportunity for objections to be asserted, and thus can no longer be asserted by entering a protest (see § 767 II ZPO).