Arbitrations seated in Germany: Due to the dynamics within arbitral tribunals, an award can be set aside even if only one of the arbitrators was successfully challenged in the German courts and the decision was made unanimously

In a recently published decision, the German Federal Supreme Court ("Bundesgerichtshof") ruled that an arbitral award can even be set aside if one of the arbitrators was successfully challenged in the courts only after the tribunal reached a unanimous decision and the award has been handed down. Further, the Bundesgerichtshof held that the mere possibility that the arbitral tribunal may have ruled differently without the participation of the challenged arbitrator suffices to have the award set aside. Since the relevant provisions of German law are based on the 1985 UNCITRAL Model Law on International Commercial Arbitration, this decision is potentially of general interest (decision of 11.12.2014; docket number: I ZB 23/14).

Facts

The parties to the proceedings had concluded a lease contract for a thermal bath. The contract contained an arbitration clause, calling for a three member arbitral tribunal seated in Germany. After both parties had appointed one arbitrator, the two party-appointed arbitrators agreed on and appointed a chairperson. One of the parties (the "Applicant") challenged the chairperson's appointment invoking doubts as the chairperson's impartiality and independence. The arbitral tribunal dismissed the challenge. Whilst the arbitral tribunal, including the challenged chairperson, continued the arbitral proceedings, the Applicant pursued its challenge before the German courts. In April 2013, the arbitral tribunal, with the participation of the challenged arbitrator, handed down its award. In January 2014, the German court seized with the challenge of the chairperson found the challenge to be justified. The Applicant now sought to have the arbitral award set aside since the composition of the arbitral tribunal was not in accordance with the provisions of the German Code of Civil Procedure ("ZPO") governing arbitral proceedings. In the proceedings for setting aside the arbitral award, a statement made by the two party-appointed arbitrators was submitted in which they declared that the arbitral tribunal had reached its decision unanimously and that an identical award would be rendered even with a new chairperson.

Decision

The Bundesgerichtshof set the arbitral award aside. It applied sec. 1059(2)(d) ZPO providing that an arbitral award may be set aside if the composition of the arbitral tribunal or the arbitral procedure was not in accordance with a provision of the rules governing arbitration in the ZPO or with an admissible agreement of the parties and this presumably affected the award. This provision of German law is largely based on Art. 34(2)(a)(iv) of the UNCITRAL Model Law. The Bundesgerichtshof reasoned its decision as follows:

The composition of an arbitral tribunal is not in accordance with the provisions of the ZPO if the arbitral tribunal was constituted with an arbitrator which was successfully challenged in the courts. This also applies, according to the Bundesgerichtshof, in a situation where the arbitral tribunal had rendered its award before the challenge proceedings in the state courts were successful.

As regards the issue whether this non-compliance with provisions of the ZPO "affected the award", the Bundesgerichtshof found that it has to be assumed that the flawed composition of the arbitral tribunal affected the award. The Bundesgerichtshof sets out that the standards for this test should not be very high. The purpose of the required causal link between the flawed composition of the arbitral tribunal and the award is merely to prevent arbitral awards from being set aside for pure formal reasons which would necessitate a retrial with the exact same result. The flawed composition of the arbitral tribunal, however, has an impact on the award if the award was rendered with the involvement of the arbitrator which was successfully challenged in the courts.

The court goes on the reason that this finding is neither altered by the fact that the decision was reached unanimously nor by the contention that an arbitral tribunal with another chairperson would render the same award (because the two party-appointed arbitrators could uphold the outcome by majority vote). The Bundesgerichtshof argues that this is the case because an arbitral tribunal which is composed of more than one arbitrator will deliberate before it comes to a vote on the tribunal's decision. If, however, an arbitral tribunal only votes following a deliberation, it can never be excluded that a specific decision has been reached because a particular arbitrator was involved in the arbitration. There is always the possibility that one arbitrator influences the other arbitrators in their judgment and deliberation. Therefore, the Bundesgerichtshof concludes, it is neither required to substantiate the causal link between the flawed constitution of the arbitral tribunal and the award nor has a court to make specific findings in this respect. For the same reasons, the Bundesgerichtshof found that the statement by the two party-appointed arbitrators that they would issue the very same award even with a new chairperson was irrelevant.

Comment

The decision of Bundesgerichtshof points to dilemma arbitral tribunals regularly find themselves in when one of their members has been challenged. Whilst in Germany, as suggested in Art. 13(3) of the 1985 Model Law on International Commercial Arbitration, arbitral tribunals, including the challenged arbitrator, may continue the arbitration and make an award while the challenge proceedings before the state courts are pending (sec. 1037(3) ZPO), an arbitral award may become unenforceable and set aside once the challenge proceedings were successful. Therefore, many arbitral tribunals prefer to stay the arbitration proceedings for the duration of the challenge proceedings. However, arbitral tribunals, at the same time, have to be cautious not to be instrumented by an obstructive party which embarks on stalling tactics.

Against the background of the arbitral tribunal's statutory competence to continue the proceedings and make an award, it is consequent that the Bundesgerichtshof did not dismiss the challenge proceedings as inadmissible since the award had already been made. Otherwise, arbitral tribunals could pre-empt a review of their decision on a challenge by acting quicker than the state courts.

The decision is to be welcomed in that the Bundesgerichtshof shows the appropriate sensitivity with respect to the dynamics in arbitral tribunals. Since arbitrations regularly turn on the facts of a case, and the weighing of the evidence before the arbitral tribunal, it can indeed not be excluded that even one arbitrator out of three may change the dynamics in the arbitral tribunal in a way that influences the outcome of the entire arbitration.

For further information, please contact Mathias Wittinghofer, Partner, Tilmann Hertel, Senior Associate, Friso Heukamp, Senior Associate or your usual Herbert Smith Freehills contact.