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Both the setting aside of arbitral awards and the impartiality and independence of arbitrators and experts are recurring topics in international arbitration. They particularly converge when facts giving rise to doubts about impartiality and independence become known only after an arbitral award has been rendered. In a recent decision, the German Federal Court of Justice abandoned long-standing German case law and set aside an award after an expert nominated by the arbitral tribunal had failed to disclose facts relating to his impartiality and independence. As the relevant statutory provisions apply to both experts and arbitrators, the decision will be highly relevant for challenge and enforcement proceedings in Germany.
As in other jurisdictions, German arbitration law allows parties to challenge arbitrators where circumstances give rise to justified doubts as to their impartiality or independence. Arbitrators are obliged to disclose all facts that might justify such doubts. The same holds true for experts appointed by the arbitral tribunal (see sections 1036, 1049 of the German Code of Civil Procedure (“ZPO”)).
Challenges against arbitrators and tribunal-appointed experts must usually be made during the arbitral proceedings within strict time limits. Problems arise when a party learns of the relevant circumstances only after an award has been rendered. The only available remedies – challenging the award and resisting its enforcement – require exceptional grounds exhaustively listed in sections 1059 et seqq. ZPO. For decades, German scholars and practitioners hotly debated to what extent challenges can be invoked under these provisions, particularly based on the argument that the arbitral tribunal’s composition was not lawful.
Long-standing case law dating back to the former German Imperial Court of Justice (Reichsgericht – “RG”) and adopted by the German Federal Court of Justice (Bundesgerichtshof – “BGH”) and most appellate courts held that an arbitrator’s failure to disclose facts that might cast doubt on his or her impartiality or independence did generally not constitute sufficient grounds to challenge the award. Weighing the severity of the procedural irregularity, the need for legal certainty and the risk of abuse, courts would permit such petitions only in rare cases where the doubts were “severe and evident” (see, e.g. RG, 9 April 1935 = RGZ 148 1, 3; BGH, 4 March 1999 = NJW 1999, 2370, 2371 et seq.; Higher Regional Court (Oberlandesgericht – “OLG”) Naumburg, 19 December 2001 = SchiedsVZ 2003, 134, 138; OLG Frankfurt, 29 October 2009 = SchiedsVZ 2010, 52, 54; OLG Munich, 24 August 2010 = NJOZ 2011, 413, 420). Most scholars supported this restrictive standard.
With a recently published decision of 2 May 2017 (Docket No. I ZB 1/16), the BGH abandoned this restrictive approach. The challenged award was based in part on an expert opinion. The tribunal-appointed expert had failed to disclose several ties to the opposing party that potentially cast doubts on his impartiality. When annulling the appellate court’s dismissal of the application to set aside the award, the BGH explicitly renounced its previous practice and held that arbitration awards can be set aside under section 1059 para 2 no. 1 d ZPO if:
(i) the expert fails to disclose facts that might call his or her impartiality or independence into question, thereby depriving the parties of the opportunity to raise objections during the proceedings;
(ii) due disclosure would have led to the refusal of the expert; and
(iii) the expert opinion influenced the arbitral tribunal’s decision.
In the case at hand, the appellate court had not collected and considered sufficient facts in that regard, prompting the BGH to refer the case back for decision.
Given that the relevant statutory provisions apply equally to both experts and arbitrators, the BGH’s decision will have wide significance for arbitration in Germany.
The new case law is to be welcomed. It corresponds with that of other jurisdictions: U.S. courts routinely set aside arbitration awards on the ground of “evident partiality” if arbitrators breached their disclosure duties (see, e.g., Common Wealth Coatings v. Continental Casualties 393 US 145 (Supreme Court); Positive Software Solutions v. New Centura Mortrag et al. (F.2nd 495). Similar decisions have been handed down by the French Cour de cassation (RevArb 2012, 312; see also RevArb 2013, 125), the Swedish Svea hovrätt (21 September 2011, T 1085/11) and the Swiss Bundesgericht (SchwBGE 111 1a 72). In England and Wales, the House of Lords’ landmark decision R v. Bow Street Metropolitan Stipendiary Magistrate, ex parte Pinochet Ugarte ((No 2) [2000] 1 A.C. 119) points in the same direction.
By adopting a similar approach, the BGH did not, however, overly broaden the limited grounds for challenging arbitral awards. On the contrary, it used the opportunity to underline that, where the relevant facts are known during the arbitral proceedings, timely challenges need to be made, and a party needs to raise objections explicitly if it believes that the arbitral tribunal failed to fully consider its challenge; otherwise, the party waives its right to rely on a violation of the right to be heard in the challenge or enforcement proceedings. The BGH thus only allowed for a challenge in exceptional circumstances, where the relevant facts are discovered after the award, thereby protecting the integrity of arbitral proceedings and strengthening the standing of arbitration as dispute resolution mechanism. Furthermore, the new case law avoids lengthy disputes regarding vague legal terms (“severe and evident doubts”) that arose under the previous case law.
Rupert Bellinghausen and Julia Grothaus would like to thank Lars Harzmeier for his assistance in preparing this article.
13 September 2017
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