IBA SUBCOMMITTEE ON RECOGNITION AND ENFORCEMENT OF ARBITAL AWARDS

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Ezra Tyler
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1 IBA SUBCOMMITTEE ON RECOGNITION AND ENFORCEMENT OF ARBITAL AWARDS 2016 Research Project: Comparative Study of Arbitrability under the New York Convention Questionnaire for the Country Reporters by Dr. Torsten Lörcher and Dr. Benjamin Lissner, CMS Germany 1. How do courts in your jurisdiction define the notion of arbitrability when applying the New York Convention? (a) Do they make a distinction in defining the notion for the purposes of Article II (1) of the New York Convention ( a subject matter capable of settlement by arbitration ), of Article II (3) (... unless it finds that the said agreement null and void, inoperative or incapable of being performed ) and of Article ( The subject matter of the difference is not capable of settlement by arbitration under the law of that country )? No, German courts do not make a distinction. Instead, they use the same standard to define arbitrability irrespective of which of the aforementioned provisions they apply. In a decision issued by the Karlsruhe Higher Regional Court on 4 January 2012 (Yearbook Commercial Arbitration 2013, Vol. 38, pp ), the court ruled that there were no grounds to refuse recognition of an arbitral award based on lack of arbitrability. Although the court did not explicitly cite Art. of the New York Convention, it is clear from the context that it was referring to this provision, particularly as it continued to examine the public policy ground pursuant to Art. V (2) (b). When reviewing the claim's arbitrability under Art., the court also referred to Art. II (1) of the New York Convention. It stated that since the dispute was arbitrable under Art., this simultaneously meant that the arbitration agreement had to be recognised pursuant to Art. II (1). In 2007, the German Federal Labour Court (13 November 2007, 9 AZR 135/07) had to decide whether it had jurisdiction over a dispute arising out of an employment contract between a US employer and a German employee although the contract contained an arbitration clause. The court held that it was not prevented by Art. II (3) of the New York Convention from deciding the dispute. To justify its decision, it invoked Art. and argued that an arbitral award would not be enforceable as the dispute was not arbitrable pursuant to this provision. Consequently, it was not obliged to recognise the arbitration agreement under Art. II (3). Both of these decisions demonstrate that German courts are of the opinion that the notions of "arbitrability" in Art. II (1), (3) and of the New York

2 Convention are interchangeable. If arbitrability is affirmed or denied under one provision, the same holds true for the others. (b) Do they make a distinction between subjective arbitrability (capacity of a person to be party to an arbitration) and objective arbitrability (capacity of a subject matter to be resolved by arbitration)? Yes, German courts distinguish between subjective and objective arbitrability. The term 'objective arbitrability' is defined in Sec of the German Code of Civil Procedure ("ZPO"). According to para 1, the general rule is that pecuniary claims and claims that are allowed to be resolved by settlement are capable to be resolved by arbitration. When the capacity of a subject matter to be resolved by arbitration is in question, courts sometimes but not always explicitly refer to the 'objective arbitrability' (e.g. German Federal Court of Justice (Bundesgerichtshof; "BGH"), 19 July 2004, NJW 2004, 2898), although in other cases the issue is simply dealt with under the general designation 'arbitrability' (e.g. BGH, 20 December 2012, Yearbook Commercial Arbitration 2013, Vol. 38, pp ; Karlsruhe Higher Regional Court, 4 January 2012). When a person's capacity to be party to an arbitration is in question, German courts distinctly refer to the problem of 'subjective arbitrability' (e.g. BGH, 8 June 2010, Yearbook Commercial Arbitration 2012, Vol. 37, pp ). Subjective arbitrability is not governed by Sec ZPO (Trittmann/Hanefeld, in: Böckstiegel et al., Arbitration in Germany, 1030 ZPO para 8). Also, there is not a general rule regarding subjective arbitrability but rather several specific statutory rules which restrict a party's capacity to be party to an arbitration, e.g. Sec. 37h of the German Securities Trading Act, Sec No. 12 of the German Civil Code and Sec. 160 Abs. 2 No. 3 of the German Insolvency Code. 2. Do the courts in your jurisdiction consider that arbitrability is a condition of validity of the arbitration agreement, or rather a requirement for the jurisdiction of the arbitral tribunal? German courts consider arbitrability to be a condition of the arbitration clause's validity. Only if the dispute involves an arbitrable subject-matter, courts will give effect to an arbitration clause (BGH, 19 July 2004, NJW 2004, 2898). Otherwise, the arbitration agreement is null and void (Trittmann/Hanefeld, in: Böckstiegel et al., Arbitration in Germany, 1030 para 7). Furthermore, the arbitration clause will be invalid if any party lacked subjective arbitrability. This is because subjective arbitrability forms a special part of a party's legal capacity and if it is missing, the arbitration clause cannot be considered binding (BGH, 8 June 2010, Yearbook Commercial Arbitration 2012, Vol. 37, pp ; BGH, 25 January 2011, NJOZ 2012, 887; BGH, 9 March 2010, BGHZ 184, 365). To assess the legal capacity of a party to participate in arbitral proceedings, German legal authorities apply the same rules as in state court proceedings, namely Sec. 50 et seq. ZPO (cf. Schwab/Walter, Schiedsgerichtsbarkeit, 7 th ed. 2005, chapter 16,

3 para. 14; Saenger in: Saenger, 1029 ZPO, 6th ed para. 8, 9; Schlosser, in: Stein/Jonas, 22 nd ed. 2013, 1042 ZPO, para. 24). Accordingly, a party which loses its legal capacity and thus its subjective arbitrability after concluding an arbitration agreement can only initiate or participate in arbitral proceedings via its legal representative (Schlosser, in: Stein/Jonas, 22 nd ed. 2013, 1042 ZPO, para. 24; Voit, in: Musielak/Voit, 13 th ed. 2016, 1042 ZPO, para. 10). 3. Applicable law (a) Which law do the courts in your jurisdiction apply to assess the arbitrability or non-arbitrability of a dispute at the stage of recognizing and enforcing the arbitration agreement and referring (or not) the dispute to arbitration (Article II NY Convention)? The lex fori (law of the deciding court)? The law of the place of arbitration? The lex contractus? Another law? According to Art. of the New York Convention, the law of the state in which enforcement is sought is applicable to assess a dispute's capacity to be settled by arbitration. Thus, German courts examine the dispute's objective arbitrability by applying German arbitration law, namely Sec ZPO (Hamm Higher Regional Court, 2 November 1983, Yearbook Commercial Arbitration 1989, Vol. 14, pp ; Munich Higher Regional Court, 17 December 2008, Yearbook Commercial Arbitration 2010, Vol. 35, pp ; Federal Labour Court, 13 November 2007, 9 AZR 135/07). Previously, it had been the prevailing opinion that the objective arbitrability needed to be determined by cumulatively applying both the lex fori as well as the law governing the arbitration agreement due to the wording of Art. V (1) (a) of the New York Convention (Schwab/Walter, Schiedsgerichtsbarkeit, 7 th ed. 2005, chapter 44 para. 1). However, this view has been abandoned, as the simultaneous application of different laws could lead to unsurmountable difficulties (Stein/Jonas-Schlosser, 23 rd ed. 2014, Annex to Sec ZPO, Art. V para. 43; Adolphsen in: Münchener Kommentar, 4 th ed. 2013, UNÜ Art. II, para. 11). Instead, German jurisdiction and legal authorities now consider Art. V(2)(a) of the NY Convention to be an exhaustive rule and solely apply the lex fori (Hamm Higher Regional Court, 2 November 1983, IPRax 1985, 218; Kröll, SchiedsVZ 2009, 40, 45). (b) Is there a difference of approach when assessing subjective and objective arbitrability? Yes. According to Art. V (1) (a) of the NY Convention, the capacity of a person to enter into an arbitration agreement is governed by the "law applicable to them". Consequently, German courts faced with the question of subjective arbitrability do not refer to the lex fori, as for objective arbitrability, but rather to the "personal law" of the parties (BGH, 8 June 2010, Yearbook Commercial Arbitration 2012, Vol. 37, pp ). For natural persons, the personal law is determined by the German conflict-of-laws rule of Art. 7 para 1 of the Introductory Law to the

4 German Civil Code (EGBGB), which refers to the law of the party's nationality. For corporations, the subjective arbitrability is governed by the law of the place of its seat or incorporation (Wolff (ed.), New York Convention on the Recognition and Enforcement of Foreign Arbitral Award Commentary, 2012, Art. V para. 105 et seq.). 4. Substantive content of arbitrability/non-arbitrability (a) In your jurisdiction, does statutory or case law set a general standard for assessing whether a dispute is arbitrable or not? Yes. The first general rule in German law is that pecuniary claims are arbitrable. Second, claims not involving pecuniary interests are arbitrable if the parties are entitled to enter into a settlement on the subject matter. (b) If there is a statutory source for arbitrability in your jurisdiction, please indicate it below (if not, indicate non-applicable ): Sec ZPO: " 1030 Arbitrability (1) Any pecuniary claim may be subject matter of an arbitration agreement. An arbitration agreement regarding non-pecuniary claims has legal effect insofar as the parties to the dispute are entitled to conclude a settlement on the subject matter of the dispute. (2) An arbitration agreement regarding legal disputes related to the validity of a tenancy for domestic residential space is invalid. This shall not apply, if the subject-matter is related to residential space pursuant in Sec. 549 subsection (2) no. 1 to 3 of the Civil Code (Bürgerliches Gesetzbuch). (3) Any legal regulations outside of this Chapter, pursuant to which disputes may not be subjected to arbitration proceedings, or may only be subjected to arbitration proceedings, if specific prerequisites have been met, shall remain unaffected." (c) Which disputes are held to be non-arbitrable under the statutory or case law of your jurisdiction? Pursuant to Sec para 1 ZPO claims are non-arbitrable, if they neither involve pecuniary interests nor are allowed to be settled. This includes in particular matrimonial and family matters. Additionally, Sec para 2 ZPO excludes legal disputes concerning the existence of residential lease. Moreover, Sec para 3 ZPO stipulates that the arbitrability of a dispute may also be excluded by a rule of law outside of the ZPO. For example, such a

5 provision is contained in Sec. 101 et seq. of the Labour Court Act regarding employment disputes. Furthermore, disputes related to the revocation of patents and to compulsory licences are considered to be non-arbitrable due to the exclusive state court jurisdiction stipulated in Sec. 65 of the German Patent Act (BGH, 25 January 1983, BB 1984, 561; Münch in: Münchener Kommentar, 4 th ed. 2013, 1030 ZPO, para. 33). 5. Table of cases Please append to the report a table of cases where arbitrability was addressed in the specific context of the New York Convention, based on the following template: Case designation Hamm Higher Regional Court, 2 November 1983, 20 U 57/83 Parties not indicated NY Convention Provision (II (1); II (3); Summary of ground for objecting to arbitrability of the dispute During the arbitral proceedings between a German and an Italian company, the Italian company (defendant) was put under a regime of special administration due to financial difficulties. The defendant objected to the enforcement of the arbitral award by arguing that it had not been duly represented during the proceedings. The court held that pursuant to Art. of the New York Convention the law of the place where enforcement is sought decides upon the question of arbitrability. Arbitrability objection admitted Arbitrability objection rejected Federal Court of Justice, 15 June 1987, II ZR 124/86, German individual / New York corporation II (1) Thus, it applied Sec ZPO. As the dispute was arbitrable under that provision because it involved a commercial matter which can be subject to a settlement agreement, a ground for refusal pursuant to Art. of the NY Convention did not exist. The court also denied a violation of German public policy pursuant to Art. V (2) (b) of the NY Convention. The plaintiff, a German individual, and the defendant, a New York corporation, concluded a commodities futures agreement which violated certain provisions of German stock exchange laws. The agreement provided that it was to

6 Cologne Higher Regional Court, 15 February 2000, 9 Sch 13/99, Exclusive distributor (Spain) v. Seller (Germany) Munich Higher Regional Court, 34 Sch 31/06, 23 February 2007, Company A (Austria) v. Company B (Austria), Company C (Austria) be governed by the law of New York and also contained an arbitration clause. The plaintiff nevertheless started state court proceedings in Germany. When discussing the issue of arbitrability, the court referred to Art. II (1) of the NY Convention and its condition that the dispute had to be "capable of settlement by arbitration". The court held that the issue was not arbitrable under German law and thus, the NY Convention was not applicable. The dispute concerned a Spanish distributor and a German seller. A dispute arose between the parties and was decided by an arbitral tribunal. Claimant sought to enforce the award in Germany. The court dismissed the defendant's objection to enforcement. Upon examination of the grounds for refusal listed in Art. V of the NY Convention, it stated that there was clearly no ground for refusal based on lack of arbitrability. Three Austrian corporations concluded a contract in which they agreed that company A would perform post-production services for TV movies against payment of a fee. When a dispute arose, the claimant commenced arbitral proceedings. After the award had been rendered, it sought enforcement of the award in Germany. Federal Labour Court, 13 November 2007, 9 AZR 135/07 II (3), The court held that there were no grounds for refusal. This was, inter alia, because the subject matter of the dispute the payment of a fee for performances was arbitrable pursuant to Art. of the NY Convention. The dispute arose between a US employer and a German employee. The employee sought a reduction of her contractual working hours and initiated court proceedings before a state court in Germany. The defendant objected to the court's jurisdiction due to an arbitration clause contained in the contract of employment. The court was of the opinion that the German courts were not barred

7 Munich Higher Regional Court, 17 December 2008 Seller v. Assignee (Germany) by Art. II (3) of the NY Convention to decide on the dispute. It held that pursuant to Art. of the NY Convention, German law was applicable to the question of arbitrability. As Sec. 101 para 2 of the German Labour Court Act prohibited individual arbitration agreements where collective agreements exist, the court ruled that there was no valid arbitration agreement. The seller and German company concluded a supply contract. When company did not pay for certain deliveries, a dispute arose between the parties. On 31 December 2006, company, seller and the present defendant (assignee) entered into a contract under which company assigned its existing obligations under the contract to assignee, with seller's permission. Claimant commenced arbitration, at the end of which the arbitral tribunal found mostly in favour of seller. The assignee did not participate in the arbitration. Federal Court of Justice, 8 June 2010, I ZR 349/08, First and Second German Investors v. Brokerage House Dusseldorf Higher Regional Court, 7 October 2010, I-6 U 116/09, 6 U 116/09, II (1), V (1) (a) V (1) (a) The court considered the dispute to be arbitrable with reference to Sec ZPO and thus found that there were no grounds for refusal pursuant to Art. of the NY Convention. A contract was concluded between a foreign brokerage house and a German consumer that contained an arbitration clause. The court discussed the applicability of Sec. 37h of the German Securities Trading Act (WpHG), which sets a limitation of subjective arbitrability regarding investment services. In that regard, only merchants or legal entities under public law may conclude arbitration agreements for future disputes related to investment services and futures contracts. It held that the NY Convention did not govern the topic of subjective arbitrability but rather referred to the parties' personal law in Art. V (1) (a). Thus, Sec. 37h WpHG was applicable. A dispute arose between the parties about the information obligations related to the trade of Forex and CFD contracts. The second

8 German Investor v. Danish Brokerage House and Managing Director of German Finance Service Provider respondent rejected the German court's jurisdiction due to an arbitration agreement. The German court denied the validity of the arbitration agreement due to the lack of subjective arbitrability of the claimant pursuant to Sec. 37h of the German Securities Trading Act (WpHG) (see also the aforementioned case). The claimant was not considered a merchant pursuant to that provision. Karlsruhe Higher Regional Court, 4 January 2012, 9 Sch 2/09, and BGH, 20 December 2012, III ZB 8/12, H v. F in liquidation II (1), In that context, the court held that the parties' personal law pursuant to Art. V (1) (a) of the New York Convention is relevant for the determination of subjective arbitrability. In the specific case the court determined German law as the personal law applicable to the claimant pursuant to Art. 7 of the Introductory Act to the German Civil Code (EGBGB). A dispute arose between H (claimant) and F in liquidation (defendant) which was referred to and decided by an arbitral tribunal in the US according to the rules of the International Chamber of Commerce (ICC). The defendant objected to the enforcement of the award arguing that the registration of an insolvency claim in the insolvency register based on an international arbitral award was inadmissible pursuant to Sect. 180 of the German Insolvency Act (InsO). The courts held that the defendant had misunderstood Sec. 180 InsO, as this provision only regulated the territorial competence of state courts. German courts had repeatedly ruled that parties may refer disputes concerning the rights of the insolvency creditor to arbitral proceedings. Consequently, the issue was held to be arbitrable and the arbitration agreement recognisable pursuant to Art. II (1) of the NY Convention. Therefore, there was no ground to refuse enforcement due to lack of arbitrability.

GERMANY (1) Maxi Scherer. Wilmer Cutler Pickering Hale and Dorr LLP

GERMANY (1) Maxi Scherer. Wilmer Cutler Pickering Hale and Dorr LLP GERMANY (1) Maxi Scherer Wilmer Cutler Pickering Hale and Dorr LLP Date 20 October 2014 DRAFT To International Bar Association (IBA) Subcommittee on Recognition and Enforcement of Arbitral Awards From