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German Courts Emphasize Supremacy of Parties’ Agreements on Arbitration Procedure

In a landmark decision on 17 February 2011, the Higher Regional Court of Frankfurt (OLG Frankfurt) has strengthened the supremacy of parties’ procedural agreements over the arbitral tribunal’s procedural discretion (26 Sch 13/10). The German Supreme Court upheld the court’s decision, rejecting Claimant’s appeal (III ZR 8/11). 
In the case before the OLG Frankfurt, a distinguished DIS Arbitral Tribunal had issued a procedural order, containing detailed directions for the taking of expert evidence. Those directions had been subject to extensive negotiations between the parties and the arbitrators, and were referred to as “agreement by the parties” in the procedural order. Later in the proceedings, Claimant failed to comply with those parameters. However, the Arbitral Tribunal admitted the respective expert report, on which it relied to award damages to the Claimant in its final award of € 210 million.  The Respondent challenged the award and the OLG Frankfurt set it aside in accordance with Section 1059(2)(1)(d) of the German Code of Civil Procedure (ZPO).

At first glance, the OLG Frankfurt’s decision seems quite straightforward. Following the example of Art. 19 (2) of the UNCITRAL Model law, Section 1042 (2) ZPO provides: “Failing such agreement [between the parties] the arbitral tribunal may, subject to mandatory provisions of this Book, conduct the arbitration in such a manner as it considers appropriate.” In other words, the parties’ agreement on procedural issues takes priority over the tribunal’s procedural discretion. This bedrock principle was the basis for the court’s decision, holding that the parties’ procedural agreement on the taking of evidence could not be overridden by the arbitrators’ decision. So what is new?

The crucial point is that the OLG Frankfurt decided that when procedural directives are drafted by the tribunal, circulated between the parties, revised in accordance with their comments, and then issued as a procedural order, this constitutes a procedural agreement which cannot be overridden by the tribunal.

Such procedure is by all means commonplace, and it would represent a serious restriction of the arbitrator’s flexibility if any of such consensual orders were to be considered as overriding procedural agreements. The decision will require German courts and legal practioners to develop usable guidelines in order to distinguish mere orders from procedural agreements. In the meantime, legal commentators have encouraged arbitrators to avoid the possibility of a procedural order being classified as a procedural agreement – a proposition which, if not applied with care, might well clash with the overall aim in arbitration to reach consensus between the parties to the extent possible.