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Higher Regional Court of Cologne enforces award despite pending set aside proceedings in South Korea
Practical Law UK Legal Update Case Report 9-522-8809 (Approx. 4 pages)
Higher Regional Court of Cologne enforces award despite pending set aside proceedings in South Korea
by Stephan Wilske (Partner) and Stephan T. Meyer (Associated Partner), Gleiss Lutz
| Published on 06 Dec 2012 • Germany |
In a decision dated 6 July 2012, but only recently published, the Higher Regional Court of Cologne refused to adjourn enforcement proceedings in respect of an award when set aside proceedings were still pending before the Supreme Court of South Korea. The court also considered denying enforcement (but sensibly refused to do so) on the ground of an alleged breach of a party agreement by the arbitral tribunal.
Background
Section 1061(1) of the German Code of Civil Procedure (Zivilprozessordnung) (ZPO) provides:
"The recognition and enforcement of foreign arbitration awards is governed by the Convention of 10 June 1958 on the recognition and enforcement of foreign arbitral awards (published in […]). […]."
Article VI of the New York Convention provides:
"If an application for the setting aside or suspension of the award has been made to a competent authority [of the country in which, or under the law of which, that award was made], the authority before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security."
Facts
The respondent, a German company, had loaned a vertical furnace to the claimant, a South Korean company, under a co-operation and licence agreement entered into by the parties in 2000.
In about 2004, the respondent breached the agreement by producing a clone of the loaned furnace. Although the agreement provided for the settlement of disputes by arbitration in South Korea, the respondent brought evidentiary proceedings in Germany and obtained a preliminary injunction against the claimant. According to Germany's "loser pays" costs approach, the claimant bore the cost of these court proceedings.
The claimant responded by commencing arbitration against the respondent in South Korea, seeking reimbursement of the legal costs it had incurred in Germany. The respondent counterclaimed, seeking damages for breach of the co-operation and licence agreement. In June 2010, the arbitral tribunal dismissed the claimant's claim and awarded the respondent damages of US$500,000. The award was challenged by the claimant in South Korea. However, both the Seoul Central District Court and the Appellate Court of Seoul refused to set aside the award.
In April 2012, the claimant appealed to the Supreme Court of South Korea. Before the Supreme Court of South Korea had decided on the appeal, the respondent requested the Higher Regional Court of Cologne to enforce the award. The claimant objected to enforcement, arguing (among other things) that:
- The award could not be enforced in Germany while the set-aside proceedings were pending in South Korea.
- The arbitral tribunal had disregarded a party agreement by obtaining an external legal opinion, although the parties had allegedly agreed that the expert's opinion would be limited to explaining technical details.
Decision
The Higher Regional Court of Cologne declared the award enforceable (when the court issued its decision, the appeal in South Korea had not yet been decided).
The court dismissed the claimant's first objection, stating that, although permitted by Article VI of the New York Convention, the South Korean set aside proceedings were not a sufficient reason to adjourn the enforcement proceedings. According to the court's review, this was because there were no grounds to refuse enforcement of the award. The court added that, if the award was set aside in South Korea, the claimant could still make a request to revoke the enforceability of the award.
With regard to the claimant's second objection, the court failed to find a party agreement which the arbitral tribunal was alleged to have breached. The court referred to the minutes of the arbitral hearings held in South Korea and quoted both the claimant's and the respondent's statements regarding the position and status of the external expert. It found that these statements were not made with reference to each other and that they did not show a party agreement that limited the expert to only give evidence on technical details.
Comment
The succinct approach adopted by the court to the question of adjournment pursuant to Article VI of the New York Convention is not surprising. German commentators go so far as to require the party requesting adjournment to show that the foreign set aside proceedings are likely to be successful. This rather strict position taken in Germany sharply contrasts with US case law. In 1987, a New York Federal District Court held that adjournment could be refused only if the action filed in the foreign country to set aside the award was "transparently frivolous" (Spier v Calzaturificio Tecnica SpA, 663 F. Supp. 871, 875). This decision has been relied on by other US courts as recently as 2011.
The court's handling of the alleged party agreement shows judicial common sense. If a breach by the arbitral tribunal of a party agreement can destroy the entire award, then great caution should be applied where an explicit agreement is lacking and only an implied agreement is alleged, as in this case.
This issue brings to mind the recent case of Flex-n-Gate v GEA, Docket no. 26 Sch 13/10. The Higher Regional Court of Frankfurt set aside an award in favour of GEA because it found that the arbitral tribunal had disregarded certain party agreements that had been addressed in a procedural order, and in terms of reference transmitted to an expert witness. In that case, the terms of reference had not resulted from corresponding statements of both parties. Instead, one party had merely failed to oppose revisions suggested by the other party.
The decision of the Frankfurt court has been the subject of intense discussion in the German arbitration community. In particular, practitioners are concerned that alleging breaches of party agreements, thereby founding a reason to set aside pursuant to Article V(1)(e) of the New York Convention, might become a new preferred avenue of attack for parties unhappy with the outcome of an arbitration. Such anxiety was not relieved when the Federal Court of Justice, Germany's highest civil court, refused to hear GEA's appeal against the decision of the Frankfurt court.
However, in this situation the decision of the Higher Regional Court of Cologne could prove a valuable precedent against overreaching attempts to jeopardise arbitral awards by relying on alleged breaches of party agreements.