It must be an arbitrator’s nightmare: Imagine a high-stake
arbitration that goes on for years, the entire distance, including with
witness hearings and expert evidence, only for the final award to be set
aside on procedural grounds. And this is exactly what the Frankfurt
Court of Appeals (Oberlandesgericht Frankfurt) did in a judgment in February 2011:
The post-M&A dispute between GEA and Flex-n-Gate began in October
2004. There were, for some time, parallel court proceedings in various
jurisdictions. An interim award was made in 2006. The final award,
rendered in 2010, was for EUR 210,658,362. In October 2012, the
Frankfurt judgment which reversed it has been upheld by the Federal
Supreme Court (Bundesgerichtshof). What had happened?
In 2004, German technology group GEA sold one of its subsidiaries to
U.S.-based Flex-n-Gate. The SPA, governed by German law, provided for
DIS arbitration. The transaction was never consummated. The dispute that
followed from that led to arbitral proceedings being commenced. The
arbitral tribunal split the proceedings into a liability phase and into a
quantum phase. During the liability phase, several hearings took place
and witnesses were heard. On that basis, in September 2006, a partial
award was issued. It found defendant liable, and dismissed defendant’s
counter-claim.
In October 2006, the arbitral tribunal turned to the quantum phase.
It sent a draft procedural order to the parties, inviting the parties to
comment on the draft and suggest changes. Taking into account the
parties’ comments, the final version of procedural order defined how the
quantum phase was to be conducted. In particular, under the order, the
parties were to disclose the documents that they had made available to
their own experts. In preamble, the order said that it recorded the
agreement between the parties regarding the conduct of the quantum
phase. Separately, the terms of reference had stated that the expert
appointed by the tribunal was to carry out his own calculations, and
should not rely on the calculations performed by claimant’s expert.
During the quantum phase, the claimant did not disclose all of the
documents set out in the procedural order, nor did the expert appointed
by the panel carry out his own calculations. Nevertheless, a final award
in favour of the claimant was made in March 2010. Respondent then
applied to the Frankfurt Court of Appeals to set the arbitral award
aside. This application was based on various arguments, of which one
ultimately was successful:
Respondent argued that the procedural order, as a result of having
been agreed between the parties, constituted an agreement between the
parties within the meaning in Sec. 1059 German Code of Civil Procedure (ZPO).
Sec. 1059 ZPO provides that an arbitration award may be reversed, inter
alia, if “the arbitration proceedings did not correspond to (…) an
admissible agreement between the parties.” In respondent’s opinion, the
arbitral tribunal was bound by the agreements between the parties as
recorded in the procedural order. The tribunal had no discretion to
unilaterally deviate from the procedural order during the quantum phase.
As the procedural order had not been fully complied with, the arbitral
proceedings did not correspond to the agreement between the parties and
hence; the award had to be set aside.
The Frankfurt Court of Appeals (Oberlandesgericht) was
persuaded by that argument and did set the award aside on that basis.
The Frankfurt court looked through the formal nature of the procedural
order and held, on the basis of the evidence before it, that in
substance the order was an agreement between the parties. The Court gave
particular weight to the fact that the wording had been negotiated in
detail. In reaching this conclusion, it did take, inter alia, evidence
on the content of a telephone conference between the parties’ lawyers
and the tribunal. The Court applied the same analysis to the terms of
reference. Claimant’s application for legal review (Rechtsbeschwerde) to the Federal Supreme Court (Bundesgerichtshof)
was dismissed as inadmissible on procedural grounds, without stating
any reasons (file no. III ZB8/11). The judgment of the Frankfurt Court
of Appeals hence has become full and final.
The Frankfurt judgment was widely discussed in the German arbitration
community, for instance at the DIS Autumn Meeting in October 2012, when
the topic was on the agenda. I believe there is a wide-spread consensus
that the approach taken by the Flex-n-Gate arbitral tribunal was very
much in line with current international practice and the Frankfurt court
decision came quite as a surprise. It was criticized for
over-emphasizing the concept of party autonomy, as unreasonably
interfering with the arbitration process and as sending the wrong
signals to arbitrators by discouraging co-operative approaches to the
conduct of arbitration. But Flex-n-Gate clearly poses a challenge to
that practice for any arbitration with its seat in Germany. What some
commentators have labelled “hybrid procedures”
have, all of a sudden, become risky and may back-fire. Going forward,
arbitral tribunals will need to be very clear in their communication,
and distinguish whether they are in a co-operative modus operandi, or
whether they are issuing procedural orders in their arbitral capacity.
In the first instance, arbitrators will need the parties’ consent if
they want to revise the game plan and deviate from the order, whereas in
the second alternative, arbitrators will retain the liberty to amend
existing procedural orders in their sole discretion.
Source: KluwerArbitation
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