Interpretation vs. decision-making: Bavarian Highest Regional Court rules on power of state courts and its limits to interpret and clarify operative part of arbitral awards in recognition proceedings
In a decision on an application for declaration of enforceability of a domestic arbitral award on agreed terms, the Bavarian Highest Regional Court (BayObLG) recently addressed the power of state courts and their limits to interpret and clarify the operative part of arbitral awards. The ruling also clarified the requirements for formal service of an application for declaration of enforceability on the respondent and on the admissibility of penalty interest.
Facts of the case
In an arbitration concerning remuneration claims for corporate finance services, the Claimant sought payment from the Respondent, a Lebanese resident and managing director of a German company, for having arranged the financing of a corporate acquisition. During the arbitral proceedings, the parties reached a settlement and applied for an arbitral award on agreed terms pursuant to § 1053(2) ZPO on 4 July 2023. On 19 July 2023, the arbitral tribunal rendered the arbitral award on agreed terms, the operative part of which reads in Sections I and II as follows:
I. The Respondent is obliged to pay to the Claimant the amount of EUR 276,000. This is a net amount; to the extent that the payment is subject to VAT, the Respondent shall additionally pay the statutory VAT. The amount is due two weeks after the date of the invoice, but no later than 1 August 2023. The invoice to the Respondent shall be sent electronically to the Respondent's representative.
II. The amount mentioned in Section I. shall be paid to the account of the Claimant IBAN DE (...), BIC (...), at (...) and shall bear interest from the due date at 9 percentage points above the basic rate of interest per annum. In consideration of the discount on the claim and the interest of the Claimant in a prompt receipt of payment, the amount mentioned in Section I. shall bear interest at 25% per annum from 1 October 2023, insofar as no payment has been made by then.
On 1 August 2023, the Claimant applied for a declaration of enforceability of the arbitral award for a payment obligation in the amount of EUR 328,440 (EUR 276,000 net plus statutory VAT of 19%), plus interest on that amount at the rate of 9 percentage points above the basic rate of interest per annum from 18 July 2023 (two weeks after the date of the invoice, alternatively from 1 August 2023) and interest in the total amount of 25% per annum from 1 October 2023.
Following a notice by the BayObLG, the Claimant amended the request for relief, asking for interest only from 1 August 2023 and adding the subsidiary request to declare the award enforceable in respect of the net amount of EUR 276,000 plus interest, should the BayObLG conclude that the order to pay statutory VAT was unenforceable.
The application and all other documents in the enforcement proceedings were served on the Respondent by posting them in the letterbox at the company’s German premises where the Respondent served as managing director. The letterbox was used since it was not possible to hand over the document to the Respondent in person. The GmbH objected to the service of the documents.
The Respondent did not make any submissions during the proceedings. On 22 January 2024, the BayObLG rendered its decision without hearing the Respondent.
BayObLG’s decision
In its decision, the BayObLG analysed in detail to what extent the award could be declared enforceable regarding the payment obligation. The court clarified that the awarded penalty did not amount to a violation of public policy. The court held that the application had been validly served on the Respondent and his right to be heard in the enforcement proceedings had been respected.
Determination of the enforceable part of the Award
Under German law, before an arbitral award can be enforced, it needs to be declared enforceable by the competent court. The decision declaring the arbitral award enforceable constitutes an enforceable title. An enforceable title must clearly determine the content and extent of the enforceable obligation so as to allow the enforcement body to execute it without referring to external sources. In case of arbitral awards, the enforceable title is the declaration of enforceability by the court, which must meet those strict requirements, and not the award itself.
It is the responsibility of the state court to determine the content of the operative part of an arbitral award within the limits of interpretation. It would be contrary to the German ordre public to issue an enforceable title, which for lack of precision cannot be executed. However, a state court must not substitute its own decision for that of the arbitral tribunal or modify the content of the arbitral award. Instead, the state court can only clarify the content of the decision. Thus, if the content of an arbitral award remains uncertain and cannot be clarified by interpretation of the state court, the declaration of enforceability must be refused.
Applying these principles, the BayObLG had to determine whether the operative part of the Award provided for the payment obligation for which the Claimant sought to be declared enforceable under the primary request for relief (i.e. whether the Award ordered the Respondent to pay not only the net amount of EUR 276,000, but also the VAT in the amount of 19%).
Wording of the Award
As a first step, the BayObLG analysed the objective wording of the relevant operative part of the Award, noting that the obligation to pay VAT on the settlement amount of EUR 276,000 was subject to the applicability of VAT. Hence, unless the Award provides elsewhere that VAT applies, the applicability of VAT still needs to be determined separately. In this regard, the court further noted that the Award was silent on the applicability of VAT.
Interpretation of the Award
As a second step, the BayObLG examined whether the Award could be interpreted as to oblige the Respondent to pay VAT on the settlement amount. To this end, the BayObLG took into consideration that the Respondent allegedly had received an invoice from the Claimant on the day of the settlement, in which the amount of VAT of 19% was applied to the settlement amount. However, in the court's view, this does not imply that the parties were sure that VAT was due. Instead, the wording of the Award, in the court's view, reflects the parties’ uncertainty about the applicability of VAT.
By the same token, the BayObLG held that the applicability of VAT to the original payment claim under the remuneration agreement did not automatically extend to the payment claim regarding the settlement amount.
The BayObLG concluded that the Award did not provide for an unambiguous obligation of the Respondent to pay VAT and that such an obligation could not be derived by way of interpretation. Consequently, the BayObLG limited the declaration of enforceability to the Respondent's obligation “to pay to the Claimant the amount of EUR 276,000, plus interests at the rate of 9 percentage points above the basic interest rate per annum from 1 August 2023 and interests in the total amount of 25% per annum from 1 October 2023.”
No grounds to set aside the Award
Since the Respondent did not raise grounds for setting aside the Award pursuant to §§ 1060(2), 1059(2) ZPO nor were any such grounds apparent, the Award could be declared enforceable without hearing the Respondent pursuant to § 1063(2) ZPO.
The court clarified that granting penalty interests in an arbitral award on agreed terms was not contrary to ordre public even when ordered without any time limit, in particular where the reasons for the penalty interests are set out in the arbitral award and the debtor is warned, as it was the case with Section II. of the Award.
Respondent’s right to be heard
Finally, the BayObLG held that the Respondent’s right to be heard had been respected in the proceedings of the declaration for enforceability of the Award. § 1063(1), sentence 2 ZPO provides that the Respondent must be heard before the court decides on the application for declaration of enforceability. This presupposes that the application for declaration of enforceability had been validly served on the Respondent. The BayObLG clarified that documents may be served on a natural person residing abroad at the business premises of the GmbH of which he is the managing director (Geschäftsführer) pursuant to §§ 180, 178(1) no. 2 ZPO since there is a legitimate expectation that the documents will be forwarded to the addressee.
Conclusion
The declaration of enforceability is the point of reference for the competent authorities in enforcement proceedings. In the declaration of enforceability, a state court can clarify the operative part of the arbitral award but must not change the content of the decision. In the case of an arbitral award on agreed terms, state courts may take into account the parties’ intentions on which a settlement is based in order to interpret the obligations set out in the award. However, the interpretation must be consistent with the wording of the award and must not refer to documents and circumstances that are not part of the arbitral award. When formulating an arbitral award on agreed terms, arbitrators and parties should bear in mind the requirements of potential enforcement proceedings.
The full text of the decision of the BayObLG in the German original can be accessed here: Bürgerservice - BayObLG, Beschluss v. 22.01.2024 – 101 Sch 172/23 e (gesetze-bayern.de)
For more information on this ruling and arbitration proceedings in Germany, contact your CMS client partner or these CMS experts:
