Arbitral tribunal decides on questions of foreign law without appointing a tribunal expert – is this a violation of the right to be heard?

Higher Regional Court of Frankfurt a.M., Decision of 28 November 2019 – 26 Sch 17/18

In its decision of 28 November 2019, the Higher Regional Court of Frankfurt a.M. (“OLG Frankfurt” or “Court”) dealt with the question whether an arbitral tribunal composed of non-US qualified arbitrators violated the claimant’s right to be heard and/or acted arbitrarily by rejecting the claimant’s application for the appointment of a tribunal expert on certain questions of US law after the party-appointed legal experts had rendered deviating legal opinions.

The OLG Frankfurt held that the tribunal’s decision to render an award without obtaining an additional (decisive) opinion from a tribunal-appointed expert did not constitute a ground for setting aside the award for violating the procedural ordre public. German law does not necessarily require an arbitral tribunal (or a domestic court) to appoint its own expert to investigate questions of foreign law. This applies in particular if, as in this case, the tribunal has provided a plausible explanation for how it was able to reach its decision based on the evidentiary record and its own assessment of the opinions expressed by the party-appointed experts.

Facts of the case

The claimant in the arbitration and applicant before the OLG Frankfurt is a German company, which entered into a share and purchase agreement (SPA) with an entity fully owned by the respondent in 2013. Pursuant to the SPA, the claimant purchased all the shares in a number of companies, including an entity located in Massachusetts (US), which specialises in the finishing of furniture surfaces. In producing the furniture finishing, the US entity uses liquid resin containing certain toxic substances, which are discharged into the air during the production process. For the discharge of these substances, the US entity had obtained an environmental permit dating from 2006. In the SPA, the entity selling the shares to the claimant warranted, inter alia, that as of the closing date of the transaction, the production process of the US entity complied with the relevant permits and authorisations as well as the applicable laws and environmental regulations.

In 2015, the claimant initiated an arbitration against the respondent raising claims based on alleged violations of the environmental warranties contained in the SPA. In particular, the claimant claimed compensation for costs it had incurred after an inspection by the environmental authority had determined in early 2015 that the production process exceeded the applicable emission limits. As a result, the environmental authority had imposed a fine upon the US entity and further required it to install a machine to treat the outgoing air, which had caused the claimant to incur additional capital and operating expenses.

Among the issues in dispute between the parties in the arbitration was the question whether certain emission rates and emission factors referred to in the environmental permit from 2006 constituted mandatory elements of the permit or non-mandatory guidelines. In support of their respective positions on the interpretation of US environmental regulations and the authorities’ practice in applying them, the parties each produced legal opinions, which reached deviating conclusions. In addition, the parties were also in dispute over several technical issues on which both sides had also produced expert reports expressing deviating opinions. At the end of the oral hearing where all legal and technical experts had been heard, the claimant requested that the tribunal appoint two additional experts: one to render a decisive opinion on the debated questions of US law and the other to render a decisive opinion on the technical issues.

In a procedural order following the hearing, the tribunal initially indicated that it would appoint a tribunal expert to address the questions of US law and asked for an increase in the arbitrators’ fees to cover the additional work required. In response, the claimant opposed the arbitrators’ request for a fee increase and maintained its opinion that two tribunal experts were required to render a decisive opinion on the deviating conclusions reached by the party-appointed experts. In a further procedural order, the tribunal rejected the claimant’s application and decided that the appointment of a tribunal expert was not required for it to render its decision on the legal and technical issues in dispute.

In its award, the tribunal provided detailed reasons why it had ultimately decided not to appoint a tribunal expert. The tribunal then dismissed the claimant’s claim, basing its decision on two separate grounds: it found that there was no violation of the environmental warranties stipulated in the SPA; and it held that, in any event, even if there had been a violation, the claimant had failed to establish causation between a warranty violation as of the closing date and the damages it was claiming.

The claimant filed an application with the OLG Frankfurt to set aside the award, arguing that the tribunal had violated the claimant’s right to be heard as well as the prohibition of arbitrariness by rejecting the claimant’s request that a tribunal expert be appointed on the questions of US law and another one on the technical issues, even though the arbitrators did not have the necessary expertise to judge these questions themselves.

Decision of the OLG Frankfurt

The OLG Frankfurt dismissed the claimant’s set-aside application for lack of a ground to set aside the award.

No violation of the right to be heard

The Court first affirmed that a violation of the claimant’s right to be heard would constitute a violation of the German procedural ordre public. It further held that the assessment of whether a violation of the right to be heard had occurred was subject to the same standard that applies to German courts.

Specifically with regard to questions of foreign law, the Court held that the tribunal did not have to obey stricter requirements than a German court pursuant to Section 293 of the German Code of Civil Procedure (ZPO). Pursuant to this provision, a court is required to investigate the relevant questions of the applicable law, but it is within the court’s discretion to decide how to approach this investigation. In particular, the court is not bound to the evidentiary offers made by the parties and it is not necessarily required to obtain a legal opinion on foreign law as part of its investigation.

On that basis, the OLG Frankfurt decided that the tribunal’s decision to render its award based on the evidentiary record before it, in particular the opinions provided by the party-appointed experts, did not constitute a violation of the claimant’s right to be heard. The tribunal had expressly considered the arguments submitted by both parties and the opinions expressed by their experts and there was no indication that the tribunal had failed to take notice of, or to take into account, any specific submissions or arguments made by the claimant.

The Court also noted that the tribunal had also based its dismissal of the claim on a second ground: a lack of causation between the alleged violation of the environmental warranty and the costs incurred by the claimant. The claimant had expanded the US entity’s production after the closing date and the tribunal thus considered that the exceedance of the emission limits determined in 2015 could also have been caused by this expansion.

In this context, the Court emphasised that the tribunal had not based its dismissal of the claim on a non liquet regarding certain unresolved questions of law (which would have been contrary to its obligation to investigate questions of foreign law). The tribunal had rather left certain questions open, noting that it did not have to reach a conclusive opinion on these because the claim had to be dismissed for lack of causation in any event.

The Court then turned to the tribunal’s decision not to appoint a tribunal expert regarding certain technical issues, which also involved a dispute between the parties as to the legal relevance of the practices followed by the US environmental authority in determining whether emission limits were being exceeded. In this context, the Court first emphasised that to ignore a party’s motion to take evidence can amount to a violation of the ordre public if the fact to be established is relevant to the tribunal’s decision. At the same time, the question whether a fact is relevant to the outcome of the case is to be assessed and decided by the tribunal and cannot be second-guessed by the Court. This follows from the prohibition of a révision au fond.

Again, the Court held that the tribunal had not based its decision on a non liquet resulting from two deviating expert opinions, but had instead explained why it considered the opinion rendered by the claimant’s expert to be inconclusive. In addition, the tribunal had determined that the authority’s practices in assessing whether emission limits were being exceeded were the relevant benchmark in its assessment of the claimant’s damages claim and, on that basis, primarily relied on an official statement of the competent authority setting out these practices. The Court considered that an assessment of the authority’s practices based on its own official statement did not require specific technical or legal expertise that would have precluded the tribunal from reaching a conclusion without obtaining such additional expertise.

No violation of the prohibition of arbitrariness

Finally, the OLG Frankfurt considered the claimant’s argument that the tribunal’s award violated the prohibition of arbitrariness. While confirming that a violation of the constitutional prohibition of arbitrariness set out in Art. 3 para. 1 of the German Basic Constitutional Law (GG) can constitute a violation of the procedural ordre public and thus amount to a ground for setting aside the award, the Court affirmed that an error in applying the law does not render an award arbitrary. Arbitrariness requires that an obviously applicable legal provision has been ignored or that a legal provision was misinterpreted in a blatant manner. In particular, the Court emphasised that the prohibition of arbitrariness must not result in a review of whether the tribunal correctly applied the law (due to the prohibition of the révision au fond). The Court’s review must be limited to cases indicating an abuse of the tribunal’s jurisdictional power.

The Court held that there was no indication for arbitrariness on the tribunal’s part. In particular, the fact that the tribunal initially indicated that it would appoint a tribunal expert to render a decisive opinion on questions of US law, but ultimately decided to refrain from doing so after the claimant had rejected the arbitrators’ request for an increase of their fees, does not render its conduct arbitrary. The Court again emphasised that the tribunal has discretion in determining its approach to investigating the applicable foreign law, and also considered it legitimate for the tribunal to take into account aspects of procedural efficiency and cost efficiency in making this determination.

The Court further referred to the explanation provided by the tribunal in the award for its decision not to appoint tribunal experts. In this explanation, the tribunal had confirmed that it considered itself sufficiently briefed by the party expert opinions for rendering its decision and had also noted that cost aspects played only a subordinate role. The Court further reasoned that the tribunal had provided detailed assessments of the views expressed by the parties’ respective experts and had explained that it could leave open certain questions of US law because they were not relevant to its decision. The Court therefore concluded that the tribunal’s decision not to follow the views expressed by the claimant’s experts did not amount to arbitrary conduct.

Conclusion

The decision rendered by the OLG Frankfurt confirms the importance of a party’s right to be heard, but also illustrates how challenging it is to succeed in establishing a violation. In particular, a court called upon to determine whether a violation of the right to be heard has occurred must bear in mind the prohibition of the révision au fond. The Court has clarified that, just like a German court, an arbitral tribunal is obliged to investigate relevant questions of foreign law, but has discretion in determining the approach to this investigation. The Court further confirmed that when a tribunal is faced with deviating expert opinions, be it on questions of law or on technical issues, it is not necessarily required to appoint a tribunal expert to render a decisive opinion.

If, as in the case here, the tribunal provides a plausible explanation as to why it was able to reach a conclusion on the relevant issues without obtaining a decisive opinion, the tribunal’s decision to reject an application for the appointment of a tribunal expert does not amount to a violation of the right to be heard. Given that arbitral tribunals are often faced with deviating conclusions reached by party-appointed experts, the decision of the OLG Frankfurt provides comfort in that a tribunal may continue to apply its own judgment to determine whether or not it requires additional evidence (causing the parties to incur additional costs) in order to resolve the dispute before it.

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