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News

Arbitration- Germany

Contributed by Ashurst

In a recently published(1) decision(2) the Higher Regional Court of Berlin refused the recognition and enforcement of an International Chamber of Commerce (ICC) arbitral award issued in Shanghai, on the grounds that the arbitration agreement was invalid according to the final and binding decision of a Chinese court. Even though no international treaty exists and it is uncertain whether China will mutually recognize German court decisions, the Higher Regional Court of Berlin held that such reciprocation is expected.

 

Facts

In the proceedings before the Higher Regional Court of Berlin, the claimant sought the recognition and a declaration of enforceability of an ICC arbitral award which had been issued on March 30 2004 in Shanghai, pursuant to Section 1061(1) of the German Code of Civil Procedure and in connection with Articles II(1) to V(1) of the New York Convention.

 

The arbitration had been initiated by the claimant regarding certain payment claims in connection with a contract for the construction of a production plant in China. The contract contained in its annex an arbitration clause which read: "Arbitration 15.3 ICC Rules, Shanghai shall apply." This clause referred to a standard arbitration clause,(3) according to which any disputes were to be finally resolved by a sole arbitrator pursuant to the rules specified.

 

Since the respondent had challenged the validity of the arbitration clause, the claimant had sought a declaratory judgment regarding the validity of the arbitration agreement before the People's Court of Wuxi. This court, however, dismissed the action by a final and binding order of September 2 2004, on the basis that the arbitration agreement was invalid pursuant to Chinese law because it did not clearly provide for a specific arbitral institution or tribunal.

 

Further, the claimant initiated proceedings for the recognition and a declaration of enforceability before the People's Court of Wuxi in August 2004, after the arbitral award had been issued. However, no decision was rendered in these Chinese proceedings prior to the decision of the Higher Regional Court of Berlin.

 

In the German proceedings the respondent applied for dismissal of the claimant's application on the basis of the judgment by the People's Court of Wuxi regarding the invalidity of the arbitral agreement.

 

The claimant argued that:

 

" the arbitral tribunal itself had considered the arbitration clause as valid and had confirmed its jurisdiction;

 

" the arbitration clause was sufficiently specific regarding the arbitral institution since it referred to the ICC rules according to which the International Court of Arbitration of the International Chamber of Commerce was to be the competent arbitral institution, which was confirmed by precedent of the Chinese Supreme Court;

 

" the decision of the People's Court of Wuxi had breached the Chinese procedural rules, because the court should have rendered an appealable judgment rather then a final and binding order; and

 

" the recognition of this decision of the People's Court of Wuxi by the German courts was excluded pursuant to Section 328(1)(5) of the German Code of Civil Procedure, because the principle of mutual reciprocity did not apply as no instance of recognition of a German judgment in China was on record.

 

Decision

The Higher Regional Court of Berlin refused recognition and enforcement of the arbitral award because the arbitration agreement was invalid according to the final and binding decision of the People's Court of Wuxi. The Higher Regional Court of Berlin held that this order must be recognized by the German courts since it must be assumed that China will mutually recognize German court decisions.

 

In the absence of any international treaty on the mutual recognition of court decisions between China and Germany, the court considered the actual practice of the courts as decisive. Although it was not clear whether and to what extent the Chinese courts will recognize German court decisions, the court held that, for the principle of mutual recognition to apply, one country must always take the first step and that the legislature did not want to exclude this possibility with Section 328(1)(5) of the German Code of Civil Procedure. Rather, it was to be expected that the Chinese courts would in fact reciprocate and begin to recognize German court decisions

 

In addition, the Higher Regional Court of Berlin held that the arbitration agreement must be considered invalid regardless of the Chinese decision. The court reasoned that the arbitration clause was not sufficiently specific pursuant to the decisive Chinese law, which - unlike German arbitration law - requires that the arbitral tribunal must be specified in the arbitration agreement. In this case the authority which was to nominate the sole arbitrator was not mentioned in the arbitration clause itself, but rather could be determined only indirectly due to the reference to the ICC Arbitration Rules in the annex to the contract.

 

Finally, the Higher Regional Court of Berlin rejected the claimant's motion to stay the German proceedings until the People's Court of Wuxi had issued a judgment in the enforcement proceedings, because Article VI of the New York Convention does not provide for such a stay.

 

Comment

The decision of the Higher Regional Court of Berlin is significant because it is the first time a German court has confirmed the mutual recognition of court decisions between Germany and China.(4) It remains to be seen whether the Chinese courts will follow suit and whether other German courts will continue to assume mutual recognition in the future.

 

International Law Office