When is the hearing closed? – The Bavarian Highest Regional Court rules on the preclusion of objections against the execution of an arbitral award under Sec. 767(2) ZPO

In a decision of 24 July 2024, the Bavarian Highest Regional Court (BayObLG) rejected an objection against the execution of an arbitral award because the applicant could have raised the objection in previous proceedings on the declaration of the arbitral award’s enforceability. Referring to an obiter dictum of the German Federal Supreme Court (BGH), the BayOblG held that the relevant threshold derives from the provision governing objections against the execution of state court judgments.

I. Facts of the Case

The proceedings before the BayOblG concerned the execution of an arbitral award rendered in Germany, in which the arbitral tribunal had ordered the respondent in the arbitration proceedings (Respondent) to (i) transfer a leasehold (Erbbaurecht), (ii) hand over a swimming pool complex (Real Estate) operated by a third party (Operating Company); and (iii) make certain payments to the claimant, a German municipality (Claimant).

After the release of the arbitral award, the Claimant applied for the declaration of enforceability of the arbitral award before the BayOblG, which is a prerequisite under German law for obtaining an enforceable title. While those proceedings were pending, an interim insolvency administrator for the Respondent's estate (Administrator) was appointed, resulting in an interruption of the proceedings pursuant to Sec. 240 of the German Code of Civil Procedure (ZPO).

The Claimant then applied for a resumption of the proceedings to which the Administrator objected, arguing that the insolvency proceedings took precedence over the enforcement proceedings. By contrast, the Administrator did not raise any substantive objections. The BayOblG rejected the Administrator's formal position and partially declared the arbitral award enforceable in so far as the transfer of the leasehold and the handover of the Real Estate to the Claimant was concerned. The court reasoned that those claims gave rise to rights of segregation (Aussonderungsrechte) under Sections 47 and 86 (1) No. 1 of the German Insolvency Code (InsO), allowing the Claimant to enforce its claims outside the insolvency procedure.

In order to fulfill the Respondent's obligations under the arbitral award to the extent it had been declared enforceable, the Administrator transferred to the Claimant under a notarial deed the leasehold, the Respondent's indirect possession of the Real Estate and the Respondent's claims against the Operating Company for handover of the Real Estate. In order to obtain immediate access to the Real Estate, the Claimant informed the Administrator through the competent enforcement authorities that it would execute the arbitral award and evict the Administrator from the property.

The Administrator objected to the execution of the award, referring to the fact that the Operating Company was exercising possession over the Real Estate in accordance with a binding lease agreement. The Administrator took the position that he had fulfilled all of Respondent's obligations under the arbitral award or, alternatively, that fulfillment of such obligations was legally impossible for him.

On that basis the Administrator filed an action raising an objection against the execution of the arbitral award pursuant to Sections 767, 795 and 794(1) ZPO.

II. The BayObLG's decision

1. Jurisdiction

The BayObLG first confirmed that the action raising objections against the execution of a judgment under Sec. 767 ZPO (Vollstreckungsabwehrklage) can also be raised against the execution of an arbitral award. Pursuant to Sec. 767(1) ZPO, debtors are to assert objections that concern the claim itself as established by the judgment by filing a corresponding action with the court of first instance hearing the case.

The BayObLG further stated that the scope of the relevant arbitration agreement determines whether state courts or the arbitral tribunal is competent to decide on the objections raised.

Absent any objection by the Claimant against the jurisdiction of the state courts, the BayObLG continued to determine which court was competent to hear the case. Following the BGH's position that the court having decided on the enforceability of the arbitral award is to be considered court of first instance within the meaning of Sec. 767(1) ZPO, the BayObLG assumed jurisdiction to decide on the action.

2. Preclusion

Pursuant to Sec. 767(1) ZPO, objections may be asserted only insofar as the grounds on which they are based arose after the close of the hearing that was the last opportunity, pursuant to the stipulations of the ZPO, for objections to be asserted and thus can no longer be asserted by entering a protest.

According to the settled case-law of the BGH, a party can raise in proceedings concerning the declaration of enforceability of an arbitral award not only the statutory grounds for the setting aside of the arbitral award under Sec. 1059(2) ZPO but also substantive objections if the underlying grounds have arisen after the rendering of the arbitral award.  

On that basis, the BayOblG held that the Administrator was precluded from objecting to the execution of the arbitral award if he could have raised his substantive objections in the proceedings concerning the declaration of enforceability, which he did not do.

III. Conclusion

The takeaways of the thoroughly reasoned decision are as follows:

First, substantive objections that have arisen after the rendering of the arbitral award can be asserted by an action raising objections against the execution pursuant to Sec. 767 ZPO.

Second, whether state court or the arbitral tribunal are competent to hear such action depends on the scope of the relevant arbitration agreement.  

Third, among the state courts the court that has decided on the enforceability of the arbitral award is also competent to hear the action raising objections against the execution of the arbitral award.

Fourth, in addition to the grounds for setting aside of an arbitral award under Sec. 1059(2) ZPO, substantive grounds against the declaration of enforceability can be raised in the proceedings concerning the declaration of enforceability of the arbitral award.

Fifth, where substantive objections against the arbitral award exist, they must be raised in the proceedings concerning the declaration of enforceability. Otherwise, they become precluded pursuant to Sec. 767(2) ZPO and cannot be relied upon during the execution phase.

The decision of the BayOblG can be accessed in the German language at: https://www.gesetze-bayern.de/Content/Document/Y-300-Z-BECKRS-B-2024-N-22544

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