THE AUTHORS: <\/strong> In a recent decision, the German Federal Court of Justice (Bundesgerichtshof \u2013 BGH) addressed the level of scrutiny German state courts may apply when reviewing arbitral awards for potential violations of public policy. As a general rule, German courts are confined to a rather superficial review as the potential violation of ordre public<\/em> has to be \u201cobvious\u201d or \u201cmanifest\u201d and may, most importantly, not conduct a de novo-review of the award\u2019s merits. For cases with antitrust implications, however, the BGH now clarified that the courts seized are not restricted by this rule. Rather, they may conduct a full review of the arbitral award in fact and law to the extent they concern antitrust law (BGH, decision of 27 September 2022 \u2013 KZB 75\/21<\/a>). In the following article, Clyde & Co<\/strong><\/a>\u2019s <\/strong>Georg Scherpf<\/strong><\/a>, Antonios Politis and Benedikt Kaneko <\/strong>provide context on the understanding of the term public policy in Germany<\/a>, explain the view on the level of scrutiny to be applied when reviewing arbitral awards and highlight the key takeaways from the BGH\u2019s decision<\/p>\n\n\n\n A recognized advantage of arbitration is the possibility to enforce arbitral awards in almost any jurisdiction. This nearly universal enforcement is based on the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards<\/a>, which is currently signed by 171 parties, including Germany. Under the Convention, the grounds for refusal to enforce and recognize an arbitral award are very limited<\/a>. Domestic courts can refuse the enforcement and recognition of an arbitral award inter alia<\/em> under Article V(2)(b) New York Convention<\/a>, if the recognition or enforcement would be contrary to public policy of that country. The UNCITRAL Model Law<\/a>, on which Germany\u2019s arbitration law is primarily based, has incorporated Article V(2)(b) of the New York Convention in its Articles 34(2)(b)(ii), 36(1)(b)(ii).<\/p>\n\n\n\n Germany<\/a> has adopted these provisions in its arbitration law, which provides domestic courts with the authority to set aside arbitral awards stemming from arbitrations seated in Germany and refuse the recognition and enforcement of domestic and foreign arbitral awards, if \u2013 among some limited other grounds \u2013 the recognition or enforcement of the arbitral award would lead to a result that is contrary to public policy (Sections 1059 (2) No. 2b, 1060 (2) German Code of Civil Procedure \u2013 Zivilprozessordnung<\/em> for domestic awards and Section 1061 German Code of Civil Procedure referring to Article V(2)(b) of the New York Convention for foreign awards). Given that neither the Convention nor the Model Law further define the term, it is left to the state courts to interpret its meaning, which opens it up to diverging interpretations across jurisdictions.<\/p>\n\n\n\n This short article focuses on how German courts understand, interpret and apply the concept of public policy in arbitration-related proceedings and, in particular, what level of scrutiny a German court may apply when examining an arbitral award:<\/strong> If a violation of public policy is suspected, would a German court have to reopen the entire case and possibly even proceed to the taking of evidence stage, or is the review just necessary for \u201cobvious\u201d or manifest violations of public policy? Generally, German courts were strictly limited to reviewing obvious and manifest violations, although there was some debate among several German Higher Regional Courts (Oberlandesgerichte) <\/em>in the context of antitrust law to broaden the review. A recent and much discussed decision by the German Federal Court of Justice (Bundesgerichtshof <\/em>\u2013 BGH) has for now ended this judicial debate (BGH, decision of 27 September 2022 \u2013 KZB 75\/21<\/a>).<\/p>\n\n\n\n According to the established definition recently confirmed by the BGH (Decision of 16 December 2021 \u2013 I ZB 31\/21), a violation of public policy occurs if the arbitral award (or its declaration of enforceability) is manifestly incompatible with essential principles of German law, i.e.<\/em> if it \u201cviolates a norm that regulates the foundations of state or economic life, or if it is in intolerable conflict with German perceptions of justice<\/em>\u201d. Naturally, a violation of mere dispositive law is not included, as deviation from such is a matter of party autonomy. However, not all violations of mandatory law constitute a violation of German public policy either. Rather, the norm in conflict must be an expression of a value decision by the legislator that is fundamental to the legal system. This, however, will only apply in the most exceptional cases (see BGH, decision of 28 January 2014 \u2013 III ZR 40\/13 and decision of 8 May 2014 \u2013 III ZR 371\/12).<\/p>\n\n\n\n In terms of examples, such \u201cexceptional\u201d cases are usually divided into substantive and procedural violations of German public policy:<\/p>\n\n\n\n – Substantive violations cover cases in which the contents of the arbitral award are incompatible with the fundamental concepts of the German legal system (see,<\/em> Higher Regional Court of Munich, decision of 30 July 2012 \u2013 34 Sch 18\/10 and Higher Regional Court of Saarbrucken, decision of 30 May 2011 \u20134 Sch 03\/10).<\/p>\n\n\n\n Such a violation has been found if the arbitral tribunal orders a party to undertake an illegal action (see,<\/em> Higher Regional Court of Munich, decision of 30 July 2012 \u2013 34 Sch 18\/10) or to a conduct that would violate antitrust law (see,<\/em> Higher Regional Court of Dusseldorf, decision of 21 July 2004 \u2013 Sch(Kart)1\/02).<\/p>\n\n\n\n Furthermore, a substantive violation of German public policy is thinkable where a party is ordered to pay gambling debts or punitive damages.<\/p>\n\n\n\n – Procedural violations of public policy have been found if the decision was rendered on the basis of a procedure that deviates from the fundamental principles of German procedural law to such an extent that it cannot be regarded as having been rendered in an orderly procedure governed by the rule of law (see,<\/em> BGH, decision of 15 May 1986 \u2013 III ZR 192\/84), even when taking into account that an arbitral proceeding potentially differs significantly from State court proceedings. Procedural violations are often violations of the principle of the right to be heard (Article 103 (1) German Constitution \u2013 Grundgesetz<\/em>), which is also considered a cornerstone of arbitral proceedings. Other fundamental principles of a procedure that, if not met, can lead to a violation of public policy include the independence and impartiality of the arbitrators<\/a>, the equality of the parties and the right to a fair trial.<\/p>\n\n\n\n Importantly, the above-mentioned standards for procedural law also apply to foreign-seated arbitrations and resulting awards to be enforced in Germany<\/a>. In this context, however, the BGH<\/em> distinguishes between an ordre public interne<\/u><\/em>applicable in proceedings concerning domestic awards and an ordre public international<\/u><\/em> for foreign awards. In the interest of international trade, it is well-established court practice in Germany to apply the latter standard when considering whether the enforcement of a foreign award would be against public policy (see, e.g.,<\/em> BGH, decision of 2 March 2017 \u2013 I ZB 42\/16 and decision of 6 October 2016 \u2013 I ZB 13\/15). One should not be confused by this distinction: the ordre public international<\/em> in this context still refers to a public policy assessment from the vantage point of German law. At most, the ordre public international<\/em> is considered to be a slightly less stringent standard of review than the ordre public interne <\/em>(BGH, decision of 2 March 2017 \u2013 I ZB 42\/16, para. 21). In any case, this will only lead to marginally different results under the two standards, if at all.<\/p>\n\n\n\n The most important practical consideration when applying the above definition is what level of scrutiny state courts may apply when examining an award for possible violations of public policy. Internationally, this question is answered in very different ways (see, e.g.,<\/em> the newest developments in France<\/a>). In Germany, the general rule is that courts will not review the merits of an arbitral award and, in particular, will not conduct a de-novo<\/em> review of the merits. This so-called prohibition of a r\u00e9vision au fond<\/em> prohibits courts from replacing an arbitral tribunal\u2019s assessment of the evidence with its own assessment of the evidence. To prevent a review through the backdoor for factual correctness of the award by way of an extensive scrutiny and review for a public policy violation, the BGH<\/em> generally requires the violation of ordre public<\/em> to be obvious or manifest (see,<\/em> BGH, decision of 28 January 2014 \u2013 III ZB 40\/13). This was understood to generally limit a court\u2019s level of scrutiny.<\/p>\n\n\n\n However, there was some debate between several Higher Regional Courts on whether this general prohibition of a r\u00e9vision au fond<\/em> must have a universal application or whether, in relation to particularly significant areas of law, a more in-depth examination should be possible. The debate specifically concerned the area of antitrust law as a result of the public interest in a proper functioning competition. Here, the views ranged from a very far-reaching review of the arbitral award for violations of antitrust law, including not only the legal findings but also the judicial determination of the facts (see, e.g.,<\/em> Higher Regional Court of Celle, decision of 14 October 2016 \u2013 13 Sch 1\/15 Ls. 2, at para. 89 and Higher Regional Court of D\u00fcsseldorf, decision of 21 July 2014 \u2013 VI-Sch (Kart) 1\/02, Sch (Kart) 1\/02, paras. 24 et seq<\/em>.), to a review of only the grossest and most obvious violations of public policy (see, e.g.,<\/em> Higher Regional Court of Thuringia, decision of 8 August 2007 \u2013 4 Sch 03\/06). Most recently, the Higher Regional Court of Frankfurt held that only a very limited review of an arbitral tribunal\u2019s application of antitrust law was to take place, since a separate antitrust review competence of the state court would be incompatible with the nature of arbitration as a private form of dispute resolution, because the decision of the parties to transfer the power to decide disputes to a tribunal would be undermined (Higher Regional Court of Frankfurt, decision of 22 April 2021 \u201326 Sch 12\/20, para. 79).<\/p>\n\n\n\n In its recent ruling from 27 September 2022 (KZB 75\/21)<\/a>, the BGH overturned the Higher Regional Court of Frankfurt\u2019s ruling on the scope of review and thereby put an end to this debate. The BGH held that at least for certain \u201ccore<\/em>\u201d antitrust law provisions (such as Sections 19, 20, and 21 German Competition Act \u2013 \u201cGesetz gegen Wettbewerbsbeschr\u00e4nkungen<\/em>\u201d, including prohibitions with respect to the abuse of market power positions and other restrictive behavior) that form part of Germany\u2019s ordre public<\/em>, the courts are not limited in their review and may scrutinize an arbitral award for a violation of these provisions in fact and in law. Recognition and enforcement of an arbitral award that incorrectly applies elementary foundations of the legal order and the fundamental norms of antitrust law would lead to a result that would be \u201cobviously<\/em>\u201d incompatible with essential principles of German law. No legal system could accept that violations of its most fundamental standards are confirmed by its own courts, regardless of whether or not these violations are manifest or obvious (see,<\/em> para. 15 of the BGH\u2019s recent ruling). Therefore, insofar as the application of such elementary rules of the legal system is at issue, the prohibition of r\u00e9vision au fond<\/em> does not apply, leading to a full review of the award in fact and law (\u201cuneingeschr\u00e4nkte Kontrolle in tats\u00e4chlicher und rechtlicher Hinsicht<\/em>\u201d). In the BGH\u2019s view, this is particularly true for antitrust law, because the rules in question would not only serve the interest of the parties to the arbitration, but the preservation of the public interest in functioning competition (para. 16). Because an obvious (in the sense of \u201creadily detectable\u201d) violation of antitrust law may only be considered in rare circumstances, courts would often be precluded from conducting an appropriate review taking into account the complexity of antitrust cases (para. 17). Without a full review, this public interest would not be adequately protected.<\/p>\n\n\n\n As a result, as far as the question of a violation of core provisions of antitrust law (such as the prohibition of cartels or abusive practices) is concerned, the state judge may therefore not simply resort to a mere review of plausibility or of readily detectable violations but must conduct a full review in fact and law. Ultimately, one could even argue that this decision institutes a de facto<\/em> right to appeal arbitral awards if and to the extent they concern the application of antitrust law.<\/p>\n\n\n\n Certainly, the BGH\u2019s decision will have significant consequences for arbitral awards in cases with antitrust implications. However, this limitation of the prohibited r\u00e9vision au fond<\/em> should be seen as confined to the core provisions of antitrust law. Overall, for most potential public policy violations \u2013 and in particular all of those that only concern the parties to the dispute (e.g.,<\/em> potential procedural public policy violations) \u2013 the scope of German courts\u2019 review will continue to be narrowly limited.<\/p>\n\n\n\n It remains to be seen to what extent this limited suspension will result in a new trend and whether possible violations of other areas of law will soon be subject to full review by German courts, too. Looking ahead, the question will be which norms are to be seen as elementary, the violation of which would automatically be accompanied by an \u201cobvious<\/em>\u201d incompatibility with the German legal system. However, since the BGH is generally regarded as \u201carbitration-friendly\u201d and will not want to diminish the special advantages of arbitration proceedings (e.g.,<\/em> finality of arbitral decisions), it is likely that the BGH will tread carefully here.<\/p>\n\n\n\n Georg Scherpf<\/strong><\/a>\u00a0is a partner at\u00a0Luther, Complex Disputes<\/a><\/strong>. He advises both private and state parties on complex arbitrations and cross-border litigations. His commercial arbitration work covers a broad range of legal issues and sectors including international trade (CISG<\/a>), corporate disputes (joint venture and post M&A) and energy (particularly on- and offshore wind and construction disputes). \u201cHe garners praise for his first-rate arbitration practice advising clients on large-scale construction and energy disputes.\u201d (Who\u2019s Who Legal 2024). His public international law experience includes advising clients in relation to bilateral investment treaties (BITs) and multilateral investment treaties including the\u00a0Energy Charter Treaty (ECT)<\/a>. He has acted for investors in several complex treaty cases (ICSID<\/a>,\u00a0UNCITRAL<\/a>\u00a0and ad hoc) relating to infrastructure and energy investments in\u00a0Spain<\/a>,\u00a0Ukraine,\u00a0Czech Republic<\/a>, Mexico,\u00a0Albania<\/a>, and\u00a0Germany<\/a>.<\/p>\n\n\n\n Antonios Politis<\/strong> is an Associate in Clyde & Co<\/strong><\/a>\u2019s Global Arbitration Group in Hamburg, Germany. He advises and represents both private and State parties in domestic and international arbitration proceedings as well as in complex cross-border disputes before German courts. He is admitted to practice law in Germany (Rechtsanwalt) and in New York (Attorney at Law).<\/p>\n\n\n\n
Georg Scherpf<\/a><\/strong>, Partner at Luther, Complex Disputes<\/a><\/strong>
Antonios Politis<\/strong>, Associate in Clyde & Co<\/a><\/strong>
Benedikt Kaneko<\/strong>, Research Assistant with Clyde & Co<\/a><\/strong><\/p>\n\n\n\n
\n\n\n\nIntroduction<\/strong><\/h2>\n\n\n\n
The Interpretation of Public Policy in German Arbitration Law<\/strong><\/h2>\n\n\n\n
Level of Review and Scrutiny by German Courts<\/strong><\/h2>\n\n\n\n
Conclusion and Outlook<\/strong><\/h2>\n\n\n\n
\n\n\n\nABOUT THE AUTHORS<\/strong><\/h5>\n\n\n\n