Update: Arbitrator’s Nightmare: When Procedural Orders Backfire – Flex-n-Gate v. GEA

In November 2012 I posted on the Gea v. Flex-n-Gate decision of the Frankfurt Court of Appeals (Oberlandesgericht) that treated procedural orders as Agreements between the parties and that had been upheld by the Federal Supreme Court (Bundesgerichtshof). The piece was cross-posted at the Kluwer Arbitration Blog, were it sparked some debate. In the most recent issue of the German Arbitration Journal (Zeitschrift für Schiedsverfahren) Gerhard Wagner and Maximilian Bülau discuss the case in detail.

Their English language article, “Procedural Orders by Arbitral Tribunals: In the Stays of Party Agreements?”* provides a great analysis of the case and its legal context. Wagner/Bülau ask the question “What’s wrong with the Frankfurt decision?” and discuss measures that the arbitral tribunal can take to avoid the “Frankfurt Surprise”. Here are my key take-aways in a nutshell:

Wagner/Bülau are of the opinion that the Frankfurt court correctly construed the procedural orders before is as an agreement between the parties, but that the court’s broad wording created a lot of potential for misinterpretation as a precedent:

“Based on these facts, it is difficult to see how the conclusion that the rules that were set down within the Procedural Order and the Terms of Reference were anything other than what they purported to be: an agreement of the parties. For this reason, the Frankfurt decision does not deserve criticism but support.

If the Court were to be criticized, however, it would be for not clearly distinguishing the case from all the other cases in which the arbitrators get the parties involved when drafting a procedural order. As has been stated above, it is commonplace that an arbitral tribunal behaves in much the same way as the tribunal in the case before the court in Frankfurt did, and, after commencement of the arbitration, convenes the parties to a procedural hearing in order to discuss the rules for the proceedings with the parties. It is also far from unusual that a tribunal circulates the draft of a procedural order and shows itself to be open for comments and requests by the parties, and that it modifies the draft to accommodate the parties’ wishes. If the decision of the Frankfurt Court of Appeal is interpreted broadly, most procedural orders issued in the way just outlined would have to be classified as procedural agreements within the meaning of Section 1059 (2) (No. 1) (lit. d) ZPO. As a result, the bulk of rules set down in procedural orders would be elevated to the level of party agreements and thus be removed from the discretionary authority of the arbitrators.”

Wagner/Bülau reach this conclusion after a careful discussion of the concept “procedural agreement” within the meaning of Sec. 1059 para 2 no 1 d) German Code of Civil Procedure (ZPO), which provides that an arbitration award may be reversed only if “the formation of the arbitral tribunal or the arbitration proceedings did not correspond to a provision of this Book [i.e., ZPO] or to an admissible agreement between the parties, and that it is to be assumed that this has had an effect on the arbitration award.”

According to Wagner/Bülau, “[t]he key to avoiding falling into the “Frankfurt trap”, i.e. to have procedural orders reclassified as party agreements by a court of law sitting in challenge procedures, is to make it clear to the parties that:

  • the tribunal intends to reserve its discretion to issue or alter the procedural order, irrespective of the consent of either party; and that
  • the tribunal expects any agreement between the parties which purports to restrain the tribunal’s discretion to be explicit and in writing.” 

* Gerhard Wagner and Maximilian Bülau, Procedural Orders by Arbitral Tribunals: In the Stays of Party Agreements? SchiedsVZ 2013, 6

Here is the abstract: “Procedural orders allow an arbitral tribunal to supplement the rather abstract and sparse procedural provisions supplied by the applicable law of arbitration and institutional frameworks by additional rules that are tailor-made for the dispute at hand. As such they are an indispensable tool of efficient dispute resolution. Even though arbitrators retain the authority to issue procedural orders unilaterally, tribunals frequently seek the consent of the parties when considering a procedural order, as this enables them to harness private information about the dispute and to conduct the proceedings on a basis acceptable for all sides. A recent ruling by the Frankfurt Court of Appeals, however, suggests that such consensus-seeking might transform a procedural order into a binding procedural agreement between the parties that can only be modified or abrogated if both parties agree. This article illustrates the adverse implications of the Frankfurt decision, namely the danger of an inappropriate “petrification” of the arbitral proceedings, and the respective potential for abuse by the parties. At the same time, the article explores ways to avoid these consequences without giving up the advantages of framing the procedure in accordance with the parties’ joint preferences.”

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