For a long time, the prospect of enforcing arbitral awards under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 (the “New York Convention”) has set great incentives to comply with arbitral awards voluntarily.[1] One of the often-quoted advantages of arbitration is the perceived certainty that the national courts of the New York Convention member states will enforce an arbitral award unless one of the limited grounds for refusal is met.
However, experience from recent years has shown that voluntary compliance with arbitral awards is no longer a matter of course. Parties, which have lost in arbitral proceedings, are increasingly defending their interests in enforcement proceedings.
A possible defense strategy that was recently argued in a case before the German Federal Court of Justice (BGH)[2] is to assert that the award is not capable of being executed under the applicable domestic enforcement law. In this post, I recommend anticipating and avoiding this problem from the outset when commencing and conducting arbitral proceedings.
The execution pitfall results from the intricate interplay of international law and domestic law when enforcing arbitral awards. International law governs the conditions under which arbitral awards are accorded the status of an enforceable title. Pursuant to the New York Convention, to which the German Code of Civil Procedure refers, there is a duty to declare foreign arbitral awards enforceable, unless one of the exhaustively enumerated reasons for refusal exists.[3] Only this declaration of enforceability and not the arbitral award itself is enforceable in Germany.[4] Once a declaration of enforceability has been rendered, the further execution proceedings are governed by domestic law.[5] In that regard, German law requires that titles be capable of execution. Notably, the operative part of domestic titles must be sufficiently specific.[6]
Does this mean that parties can defend their interests at the recognition and enforcement stage by asserting that the respective arbitral award is incapable of being executed under the applicable domestic enforcement law, because, for example, it is not sufficiently specific?
The New York Convention provides no clear answer to this question. While the New York Convention stipulates that awards have to be enforced “under the conditions laid down in [its] articles”, it also explicitly acknowledges that awards shall be enforced “in accordance with the rules of procedure of the territory where the award is relied upon”.[7]
German courts have also struggled to find an answer to this question. A recent decision of the BGH is highly instructive in this regard.[8]
The facts underlying this decision are the following: The Claimant had sued the Respondent before an arbitral tribunal in Spain. Claimant’s claims were dismissed and Claimant was ordered to bear the costs of the proceedings. In a further award on costs, the arbitral tribunal decided that the costs to be borne by Claimant included the invoiced fees for the arbitral tribunal to the extent they had not yet been paid by Claimant. In addition, Claimant would have to pay the lawyers’ fees of EUR 24,145.15 plus “corresponding” interest from the date a certified request for payment was filed. The exact amount of fees for the arbitral tribunal and the interest rate were not specified in the operative part of the award.
Respondent, who was apparently anticipating potential problems in the execution proceedings in Germany, requested the competent Higher Regional Court of Düsseldorf (OLG Düsseldorf) to recognize the two awards and to amend and supplement the award on costs by declaring the arbitral tribunal’s and lawyers’ fees plus 4% interest rate enforceable. Specifically, Respondent requested a declaration of enforceability for the fees for the arbitral tribunal in the amount of EUR 10,214.73 as well as lawyers’ fees in the amount of EUR 24,145.15 plus 4% interest as of 24 April 2009. In support of this request, Respondent argued that the amount of EUR 10.214,74 for the fees of the arbitral tribunal could be deduced from an invoice issued by the arbitral tribunal. An interest rate of 4% would have to be applied for the lawyers’ fees since this would be the statutory interest rate in Spain. Spanish law would not require an exact quantification of the interest rate owed.
The OLG Düsseldorf recognized both awards and declared them enforceable verbatim but dismissed Respondent’s further request to amend and supplement the award regarding the exact quantification of court fees and interest.[9] The OLG Düsseldorf held that a State court is not authorized to supplement or correct an existing award.
On appeal, the BGH annulled the decision of the OLG Düsseldorf in so far as it was disadvantageous to Respondent.[10] The BGH amended the order of enforcement by declaring the arbitral tribunal’s fees enforceable. According to the BGH, the OLG Düsseldorf had wrongly dismissed the request for substantiation and supplementation of the award.
The reasoning of the BGH can be summarized as follows: German enforcement law requires the enforcement order to identify the creditor’s legal claim and the content and extent of the obligation to perform. Interpretation by the enforcement authority, if necessary, is only possible in case the enforcement order is sufficiently specific. However, the specificity requirement is only applicable to a German decision on enforceability and not a foreign one. In the event that a foreign decision does not meet the standards as applicable to domestic decisions, the foreign decision must be substantiated to cause the same effects as a corresponding German order if needed after taking evidence regarding the foreign law. While a German court would be barred from substituting an arbitral award with its own decision or to amend its content, it would be entitled to clarify it and to make sure it comes into effect.[11] In contrast, in cases where a substantiation or supplementation of the arbitral award would not be possible, a request for declaration of enforceability would have to be rejected. It would be contrary to German public policy to render a declaration of enforceability that is incapable of being executed.
The aforesaid decision of the BGH raises several questions. First, the BGH explicitly acknowledged the competence of State courts to substantiate and clarify foreign arbitral awards. While the BGH underlined that State courts are prevented from substituting the decision of arbitral tribunals with their own decision, the BGH still did not exclude that a clarification and substantiation could imply the taking of evidence regarding foreign law. Are such far-reaching powers of State courts in the enforcement stage consistent with Section 1058 German Code of Civil Procedure and Article 33 UNCITRAL Model Law, pursuant to which it is up to the arbitral tribunal to correct, interpret and amend arbitral awards?[12]
Second, would it really be contrary to public policy, as suggested by the BGH, to render a declaration of enforceability which is incapable of being executed? While the exact boundaries of German public policy are difficult to draw, there is consensus that the mere misapplication or infringement of German mandatory rules is not in itself sufficient to constitute a violation of public policy.[13] Instead, there must be a qualified violation of such rules.
In my view, there are good reasons to argue that rendering a declaration of enforceability that is incapable of being executed in Germany would not constitute a qualified violation of mandatory rules. This is because the question whether a title is capable of being enforced by execution can still be decided in the further execution proceedings. Interestingly, this is exactly the reason why in the past, German courts and the BGH itself have declared arbitral awards enforceable irrespective of whether they are capable of being enforced by execution.[14] Concerning a domestic award, the BGH has held in an earlier decision that the declaration of enforceability served not only to prepare the execution stage, but also to safeguard the award against requests to set it aside. Therefore, the BGH declared an unspecified award enforceable without specifying the operative part.[15]
This earlier German case law is, in my view, the more straightforward solution under the New York Convention, pursuant to which there is a duty to declare foreign arbitral awards enforceable, unless one of the exhaustively enumerated reasons for refusal exists. Arbitration has a private nature. It is the arbitrators’ duty to render an enforceable award and the parties’ risk to achieve a title that is capable of being executed. A correction and improvement of an arbitral award can neither be expected in State court proceedings, nor are State courts the proper forum to second-guess what an arbitral tribunal under foreign law could have meant or should have included in the operative part of an award.
It will be interesting to see how courts in other jurisdictions will decide, when enforcement of a foreign arbitral award is sought that is incapable of being executed under domestic enforcement law. So far, this question does not seem to have gained much attention. In any event, parties should anticipate this execution pitfall and pay the necessary attention to domestic enforcement particularities already in the course of the arbitral proceedings. They should notably make sure that their prayers for relief are sufficiently specific and that the operative part of the award will be capable of being executed under the laws of the country where the award debtor has its assets. This increased care will contribute to ensure that arbitral awards keep their appeal of being easily enforced.
Dr. Inka Hanefeld LL.M. (NYU)
[1] Pursuant to the 2008 survey by Queen Mary University of London entitled “International Arbitration: Corporate attitudes and practices”, there was still a high degree of voluntary compliance with arbitral awards in 2008 (p. 8). The survey is available at: http://www.arbitrationonline.org/docs/IAstudy_2008.pdf (last accessed 30 August 2012).
[2] BGH SchiedsVZ 2012, 41 (41 f.).
[3] Section 1061 German Code of Civil Procedure refers to the New York Convention for the recognition and enforcement of foreign arbitral awards.
[4] Lackmann, in: Musielak, German Code of Civil Procedure, 9th edition 2012, Section 794 German Code of Civil Procedure, margin no. 47.
[5] Cf. S.M. Kröll, in: K.H. Böckstiegel / S.M. Kröll / P. Nacimiento (eds.), Arbitration in Germany, The Model Law in Practice, Introduction to Sections 1060, 1061 German Code of Civil Procedure, p. 481 f.
[6] Lackmann, in: Musielak, German Code of Civil Procedure, 9th edition 2012, Section 704 German Code of Civil Procedure, margin no. 6.
[7] Art. III New York Convention.
[8] BGH SchiedsVZ 2012, 41 (41 f.).
[9] OLG Düsseldorf, decision of 1 March 2011, reference number: I-4 Sch 11/10.
[10] BGH SchiedsVZ 2012, 41 (41 f.).
[11] For a similar approach see Higher Regional Court Rostock, decision of 18.09.2007, reference number: 1 Sch 04/06.
[12] Equivalent provisions can be found in institutional arbitration rules, such as in Article 35 of the Rules of Arbitration of the International Chamber of Commerce (ICC) dated 1 January 2012, which also leaves it in the hands of the arbitral tribunal to correct and interpret arbitral awards and provides for certain procedures (application by the parties, deadlines etc.) that the parties need to observe.
[13] S.M. Kröll, in: K.H. Böckstiegel / S.M. Kröll / P. Nacimiento (eds.), Arbitration in Germany, The Model Law in Practice, Section 1061 German Code of Civil Procedure, p. 553.
[14] BayOblG, SchiedsVZ 2003, 142 (142 ff.); BGH SchiedsVZ 2006, 278 (278 f.).
[15] BGH SchiedsVZ 2006, 278 (278 f.). For a different approach see: KG Berlin, decision of 27 May 2005, reference number: 20 Sch 7/05. See also Voit, in: Musielak, German Code of Civil Procedure, 9th edition 2012, Section 1060 German Code of Civil Procedure, margin no. 5; Münch, in: Munich Commentary on the German Code of Civil Procedure, 3rd edition 2008, Section 1060 German Code of Civil Procedure, margin no. 11.