German courts emphasise supremacy of party agreements over the arbitral tribunal’s procedural discretion
October 2013 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
In a landmark decision on 17 February 2011, the Higher Regional Court of Frankfurt (OLG Frankfurt) has strengthened the supremacy of parties’ procedural agreements over the arbitral tribunal’s procedural discretion (26 Sch 13/10). The German Supreme Court has rejected the claimant’s appeal and upheld the court’s decision with a resolution dated 2 October 2012 (III ZR 8/11).
In the case before the OLG Frankfurt, a distinguished DIS Arbitral Tribunal had issued a procedural order, containing detailed directions for the taking of expert evidence. Specifically, those directions provided that the parties were to disclose to the other side all information the experts had reviewed in the process of drafting their expert report. The directions contained in the procedural order had been subject to prior extensive negotiations between the parties and the arbitrators, and were referred to in the procedural order as “agreement by the parties”. Later in the proceedings, however, the claimant failed to comply with those parameters, by failing to disclose the information its experts had reviewed, as provided in the procedural order. Overruling the respondent’s objection, the Arbitral Tribunal nevertheless admitted the expert report in question, on which it relied to award damages to the claimant in its final award of €210m.
Upon the respondent’s recourse, the OLG Frankfurt set the award aside in accordance with Section 1059(2)(1)(d) of the German Code of Civil Procedure (ZPO), providing that an arbitral award may be set aside if the arbitral procedure was not in accordance with an admissible agreement of the parties and this presumably affected the award. In its reasoning, the OLG Frankfurt held that the parties’ agreement on issues of expert evidence qualified as a procedural agreement, regardless of whether it had been included in a procedural order. Rather, according to the OLG Frankfurt, the legal nature of a certain direction was to be determined notably taking into account its drafting history, and whether there indeed had been a respective parties’ agreement. If that was the case, the arbitral tribunal could not deviate from such agreement, even if the tribunal had emphasised its discretion over the arbitral procedure in a prior procedural order.
At first glance, the OLG Frankfurt’s decision seems rather straightforward. Following the example of Art. 19 (2) of the UNCITRAL Model law, Section 1042 (2) ZPO provides: “Failing such agreement [between the parties] the arbitral tribunal may, subject to mandatory provisions of this Book, conduct the arbitration in such a manner as it considers appropriate.” In other words, under German law, as under most developed arbitration laws, the parties’ agreement on procedural issues takes priority over the tribunal’s procedural discretion. This bedrock principle was the basis for the court’s decision, holding that the parties’ procedural agreement on the taking of evidence could not be overridden by the arbitrators’ decision.
While the underlying legal principle is clear, the decision of the OLG Frankfurt nevertheless brings about a number of implications and questions with regard to its implementation in practice.
First, against the background of the OLG Frankfurt’s decision, arbitrators should be very careful in qualifying a certain stipulation as ‘parties’ agreement’ in a procedural order. If a directive is hastily labelled as a parties’ agreement, this may lead to a serious restriction of the arbitrator’s flexibility. On the other hand, of course, any parties’ agreement must be respected, and designated as such in any procedural document. The suggestion in legal writing that arbitrators should by all means avoid the possibility of a procedural order being classified as a procedural agreement might well clash with the overall aim in arbitration to reach consensus between the parties to the extent possible.
Second, by strengthening the supremacy of parties’ procedural agreements over the arbitral tribunal’s procedural discretion, the OLG Frankfurt has at the same time also strengthened the important role of the parties and their counsel in arbitral proceedings. Parties and their counsel should be aware of their opportunity to steer the arbitration, and take responsibility for the conduct of the arbitral process. Where possible, counsel should reach out to the other side at an early point in time in order to reach sensible procedural agreements.
Third, the decision of the OLG Frankfurt requires German courts and legal practitioners to develop usable guidelines in order to distinguish mere procedural orders from procedural agreements. In its decision, the OLG Frankfurt held that when procedural directives are drafted by the tribunal, circulated between the parties, revised in accordance with their comments, and then issued as a procedural order, this constitutes a procedural agreement which cannot be overridden by the tribunal. Such procedure is by all means commonplace, and it would represent a serious restriction of the arbitrator’s flexibility if any of such consensual orders were to be considered as overriding procedural agreements only by the fact that both parties approved of, or consented to a certain subject.
Karl Pörnbacher is a partner and Dr. Inken Knief is a senior associate at Hogan Lovells. Mr Pörnbacher can be contacted on +49 89 290 120 or by email: email@example.com. Mr Knief can be contacted on +49 89 290 120 or by email: firstname.lastname@example.org.
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Karl Pörnbacher and Dr. Inken Knief