McDermott Will & Emery – Tobias Meyer and Matthias Distler
GERMANY / April 22 2024
In a recent decision, the German Federal Court of Justice considered whether a party convicted in the course of arbitral proceedings can demand the annulment of an arbitral award by a state court if the same party has in the meantime already unconditionally fulfilled the obligation pronounced by the arbitral tribunal.
In this decision, the Federal Court commented for the first time on the extremely practical question of whether the right to apply for the annulment of arbitration awards by state courts requires the applicant to have grievance.
The Decision of the German Federal Court
In the aforementioned case, a party ordered by an arbitration tribunal to pay an amount in the millions of euros applied for the annulment of this arbitration award after it had (perhaps acting in haste to avoid further interest payments) already settled the arbitral payment obligation to the other party.
Under German law, arbitration decisions can only be set aside by state courts within the narrow limits listed out in Section 1059 of the German Code of Civil Procedure (ZPO). It is always necessary for the party requesting the annulment of the arbitration award to be formally authorized to file an application.
The question of whether this right to file an application requires the applicant to have grievance, i.e. a decision by the arbitration tribunal that is detrimental to the applicant, has been controversial in the literature and case law to date.
The prevailing opinion in the literature is that the claimant must be adversely affected by the arbitration award. The German Federal Court has now endorsed this view.
In the present case, this opinion means that the applicant is no longer entitled to file an application, as they have presumably eliminated any grievance as a result of their unconditional payment. This is because in this case, according to the Federal Court, the arbitration award has already been irrevocably fulfilled and no longer has any negative effect on the convicted party. A different result could only be assumed if the payment had been made with the express reservation of a further review of the arbitration award.
What are the Practical Implications of this Decision?
The ruling underpins what was already good business practice anyone obliged to make a monetary payment in arbitration proceedings should carefully check whether the decision is correct in all respects before paying. If this cannot (yet) be said with certainty, payment should at best be made expressly subject to the proviso that an internal review proves the correctness of the decision. Otherwise, the payer – even if they are able to pay immediately and in full – risks losing the opportunity to have the validity of the arbitration award reviewed by a state court as a result of the unconditional payment and is thus bound by the arbitration award.
If payment has already been made and a dispute arises as to whether or not this was made conditionally, there should be careful examination of whether the arbitration court or a state court has jurisdiction for this dispute. This is especially important in the instance of a state court having jurisdiction as the principle of production of evidence applies, i.e. the party claiming to have made a conditional payment must precisely state and, if necessary, prove whether a conditional payment has been made.
