The decision of the Bavarian Higher Regional Court (Bayerisches Oberlandesgericht - BayObLG) strengthens confidence in the recognition and enforceability of foreign arbitral awards. 

Introduction

The decision of the Bavarian Higher Regional Court (BayObLG) of 26 June 26 2024 (Ref. 101 Sch 116/23 e), is a noteworthy decision dealing with the recognition and enforceability of a foreign arbitral award.

Arbitration proceedings offer companies the opportunity to resolve disputes through alternative dispute resolution. Instead of going before a state court, conflicts can be settled before a contractually appointed arbitral tribunal. Arbitration proceedings are particularly relevant in international contractual relationships. For example, rulings by German courts are not enforceable in China and vice versa. By contrast, the rulings of foreign arbitration tribunals can be enforced in both Germany and China because both countries are parties to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Übereinkommen der Vereinten Nationen über die Anerkennung und Vollstreckung ausländischer Schiedsprüche - UNÜ). Almost all states have joined the UNÜ.

For example, in order for a Chinese arbitral award to be enforced in Germany, it must be declared enforceable by a German court. In doing so, a German judge may not review the substantive correctness of the arbitral award (known as prohibition of révision au fond). However, the recognition of a foreign arbitral award is excluded in exceptional cases based on the grounds listed in Article V UNÜ. These grounds include, for example, the absence of an arbitration agreement, a violation of the right to be heard, or if the arbitral award results in an outcome that is manifestly incompatible with fundamental principles of German law.

However, this incompatibility does not already exist in the event of a violation of mandatory German law, but only if the content of the foreign judgment is so strongly in conflict with the basic principles of German law (ordre public) and the ideas of justice contained therein that it appears unacceptable according to domestic opinion. This is derived from Section 1061 (1) sentence 1 of the German Code of Civil Procedure (Zivilprozessordnung – ZPO) in conjunction with Article V (2) (b) of the New York Convention (UNÜ). The ordre public acts as a safeguard to ensure that foreign judgments do not violate fundamental principles of German law.

German courts tend to be generous when it comes to recognizing foreign arbitral awards.

The order under review in this article addresses the balance between the recognition of international arbitral awards and the protection of national legal principles, using the example of hearings conducted exclusively by videoconference and the imposition of an increased contractual penalty.

The facts

In the present case, two companies based in China applied to the Bavarian Higher Regional Court (BayObLG) for a declaration of enforceability of arbitral awards issued by the China International Economic and Trade Arbitration Commission (CIETAC). The arbitral awards related to claims for damages and other costs against a company based in Germany.

Due to the COVID-19 pandemic, no in-person hearing was possible for an unforeseeable period of time, so the arbitration hearing had to be conducted online.

The German company objected to the recognition of the arbitral award on the grounds that the hearings by video conference and the imposition of a contractual penalty of 10 percent constituted a violation of ordre public. It argued that the hearings by video conference did not allow it to assert defenses due to pandemic-related travel restrictions. It was necessary to attend in person to present technical details and witness evidence.

Decision of the BayObLG

The BayObLG ruled that the arbitral award does not violate ordre public and is therefore to be recognized. It determinedthat neither the requirement to participate in a video conference during the COVID-19 pandemic nor the imposition of a 10 % contractual penalty of the contract value constitutes a violation of ordre public.

In its guiding principle, the BayObLG made it clear that incorrect decisions on the merits are to be accepted. In doing so, it consistently applied the principles of the New York Convention (UNÜ) and continued the case law of the Federal Court of Justice (BeckRS (Beck-Rechtssachen/Beck Lagal Cases) 2023, 41676; para. 79). It stated that in proceedings before state courts, an arbitral award is not to be reviewed for substantive correctness. An incorrect application of the law by the arbitral tribunal alone is not a reason to refuse recognition and a declaration of enforceability.

The BayObLG ruled that conducting the hearings via video conference does not violate the fundamental principles of German law and thus does not constitute a violation of ordre public. The right to a fair hearing under Article 103 (1) of the German Constitution does not directly imply an entitlement to oral proceedings in person. Rather, it establishes the right of the party to express themselves in the proceedings.

The court emphasised that the right to a fair hearing is a fundamental principle of German law that must also be respected in an international context.

However, the German company had not been able to demonstrate any significant technical or practical obstacles that would have made its participation in the video hearing unreasonable. The mere possibility of participating in the hearings and presenting the arguments is sufficient for the right to a fair hearing. The use of video conferencing is sufficient to safeguard procedural rights during the pandemic. A hearing by means of video and audio transmission offers a constitutional way to combine the rights to effective law enforcement and a fair hearing, especially in the event of a potential standstill in the administration of justice due to a pandemic.

Furthermore, according to the court, the first-time assertion of the hearing complaint in the enforcement proceedings is excluded if the party already had the opportunity to complain about the hearing in the arbitration proceedings and there was the possibility to remedy this violation.

The BayObLG also decided that the ordre public was not violated by the awarding of an excessive contractual penalty. The German company argued that the contractual penalty of 10% of the contract sum was unreasonably high and endangered its economic existence.

The BayObLG rejected the objection.

The court found that a contractual penalty of 10% of the main performance due to default did not violate the ordre public. Even a contractual penalty of 40% of the principal sum would not violate the ordrepublic solely on the basis of its amount. Rather, further circumstances would have to arise. The amount of contractual penalties alone therefore does not generally constitute a strong contradiction to German legal concepts that would make the recognition and enforcement of the arbitral award as a whole untenable. 

Conclusion

The decision of the BayObLG once more confirms the reluctance of the courts to refuse recognition of a foreign arbitral award. This demostrates that strict standards are to be applied to the grounds for refusal. In particular, the ordre public provided for in Article V(2)  (b) UNÜ is to be interpreted narrowly.

This decision therefore strengthens confidence in international arbitration and promotes the recognition and enforcement of foreign arbitral awards in Germany.