Lessons from the Past: Avoiding the Frankfurt Surprise in the COVID-19 Era

Author: Bruno Acevedo*

INTRODUCTION

Since the onset of the COVID-19 pandemic, many ongoing arbitrations have had to adjust their proceedings to surmount the challenges imposed by the unprecedented global health crisis. Social distancing, travel bans, and lockdowns, among other measures, have strained the functioning of arbitral tribunals worldwide. International arbitration has proven to be relatively resilient to these limitations. Some of the tools that are being widely used to cope with the pandemic are videoconferences and remote hearings. However, in dealing with this unprecedented crisis, we should remember some lessons from the past.

One thing to keep in mind while setting out on or adjusting the arbitration proceedings in these unpredictable times is what some authors called the “Frankfurt Surprise”,[1] which serves as a cautionary tale on the enforceability issues that may arise when framing a procedural order as an agreement between the parties on procedural issues in the arbitration.

THE “FRANKFURT SURPRISE”

In February 2011, the Frankfurt Court of Appeals adjudged the Flex-n-Gate v. GEA case, setting aside an arbitral award on the grounds that it had violated the parties’ agreement regarding the proceedings of the arbitration.[2]

The facts to the arbitration that gave rise to the Frankfurt Surprise are as follow. GEA (claimant) agreed to sell a subsidiary company to Flex-N-Gate (respondent). After signing the SPA, but before the sale was closed, the deal went sour and GEA initiated arbitration proceedings against respondent for breach of contract.[3]

In the quantum phase of the arbitration, the tribunal consulted with the parties on how to carry on the proceedings.[4] After discussions, the arbitral tribunal gathered the parties’ agreements and circulated “Procedural Order No. 10”.[5] Section III of the procedural order read “[t]he arbitral tribunal furthermore documents the parties’ agreement as to the content of written submissions” and continued to state that any claim made by the parties would have to be accompanied by written witness statements and expert reports.[6]

The claimant did not abide by the rules set forth in the procedural order. It did not attach the relevant documents to the expert reports it submitted or disclosed all the documents on which it based its damages calculation.[7] Respondent raised this issue before the tribunal.[8] Nevertheless, the tribunal issued a final award ordering respondent to pay damages.[9]

Respondent challenged the award.[10] The Court of Appeals decided to set aside the award on the basis of section 1059 of the German Civil Procedure Code, which is an adoption of article 34 of the UNCITRAL Model Law on International Commercial Arbitration.[11] The relevant rule states that an arbitral award may be set aside if the party making the application furnishes proof that the arbitral procedure was not in accordance with the agreement of the parties.[12]

In this instance, the Court found that Procedural Order No. 10 was an agreement between the parties on the proceedings of the arbitration because: a) the wording of the procedural order expressly stated that the rules laid out were agreed upon by the parties and b) the history of the case showed that the parties had discussed extensively, through conference calls and correspondence, how to determine the quantum of the damages and the final agreement had been laid out in section III of the procedural order.[13] Furthermore, it found that the proceedings did not correspond to the rules set forth in the procedural order and that the violation impacted the award.[14] Therefore, the court annulled the award.

WHY IS IT RELEVANT NOW?

Several arbitral institutions have encouraged parties to use videoconference or audioconference hearings to try to mitigate the effects of the health measures implemented worldwide and avoid delays.[15]

As a general principle, the parties to an arbitration have the freedom to agree how the arbitration will be conducted.[16] Institutional rules allow arbitrators to issue the procedural orders that are appropriate to conduct the arbitration in an expeditious and cost-effective manner, after consulting with the parties.[17]Normally, most procedural matters are addressed at the start of the arbitration proceedings in case management conferences.[18] However, during the course of the arbitration, arbitral tribunals are often called to issue the procedural orders that the case management requires.[19] Confronted with the pandemic, arbitral tribunals may take an approach where they seek the parties’ consent to hold virtual hearings and their input on how to work them out. Making the decision to hold virtual hearings without the parties’ consent or over party objection may bring issues of enforceability of the award in the future, as noted in the “ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic”.[20]

Nevertheless, in privileging the parties’ consent in this situation, arbitral tribunals must be aware of how they frame the procedural orders in terms of the drafting process and the wording they choose. The decision to carry out virtual hearings may be a matter of lengthy discussion between the parties and the resulting procedural orders may also be written out in a lot of detail.

Even in this instance, tribunals should be wary of elevating these discussions to the category of procedural agreements between the parties that would be binding to the arbitral tribunal that may strip them from any discretion or authority they have by virtue of the lex arbitri, the institutional rules, or previous procedural agreements. It also may also prove especially useful to specify that the procedural order issued to this effect may later be subject to changes at the arbitrators’ discretion.

Maintaining the arbitrators’ discretion will ensure that if some unforeseeable event arises during the virtual hearings or if some rule becomes impractical and unnecessary, the arbitral tribunal may choose to modify the procedural order, even without the parties’ consent, without imperiling the enforceability of the award.

CONCLUSION

The Frankfurt Surprise serves as a reminder that the parties’ agreement over procedural matters may raise issues regarding the enforceability of the award if not followed strictly. As such, it important to keep in mind that procedural agreements between the parties cannot be modified unilaterally by the arbitral tribunal.

Due to the COVID-19 pandemic, the situation in many parts of the world remains uncertain, and virtual hearings remain a relatively new feature for some practitioners around the globe. In light of these facts, it is advisable that, while incorporating virtual hearings into ongoing arbitrations, arbitral tribunals do not frame consultation of the parties for procedural orders as legally binding agreements between the parties that could strip them of their discretion to conduct the proceedings as they think most appropriate in instances of emergency or impracticality.

[1] Gerard Wagner & Maximilian Bülau, Procedural Orders by Arbitral Tribunals: In the Stays of Party Agreements?, 1 SchiedsVZ 6, 15 (2013).

[2] Oberlandesgericht [OLG] Frankfurt a. M. [Higher Regional Court Frankfurt am Main], Feb. 17, 2011, 26 Sch 13/10, https://1.next.westlaw.com/Link/Document/Blob/I5b54f0f41ef511e38578f7ccc38dcbee.pdf?targetType=PLC-multimedia&originationContext=document&transitionType=DocumentImage&uniqueId=7831ceb1-bbc0-4e22-8b47-45c4e12b13b5&contextData=(sc.DocLink).

[3] Peter Bert, Arbitrator’s Nightmare: When Procedural Orders Backfire – Flex-n-Gate v. GEA, Kluwer Arb. Blog (Nov. 20, 2012), http://arbitrationblog.kluwerarbitration.com/2012/11/20/arbitrators-nightmare-when-procedural-orders-backfire-flex-n-gate-v-gea/.

[4] OLG Frankfurt a. M., 26 Sch 13/10, at 3.

[5] Id. at 3.

[6] Id.

[7] Id.

[8] Id. at 4.

[9] Id.

[10] Id. at 5.

[11] Id. at 9.

[12] U.N. Comm’n on Int’l Trade L., UNCITRAL Model Law on International Commercial Arbitration 1985, with Amendments as Adopted in 2006, art. 34 (2006) [hereinafter UNCITRAL Model Law].

[13] OLG Frankfurt a. M., 26 Sch 13/10, at 9-12

[14] Id. at 12 – 13

[15] Niuscha Bassiri, Conducting Remote Hearings: Issues of Planning, Preparation and Sample Procedural Orders, in International Arbitration and the COVID-19 Revolution 105, 106 (Maxi Scherer et al eds., 2020).

[16] UNCITRAL Model Law, supra note 12, art. 19; see generally, Gary B. Born, Chapter 2: Legal Framework for international Arbitration Agreements, in International Commercial Arbitration 251-59 (3rd ed. 2020) (ebook).

[17] For example, see ICC Rules of Arbitration 2017, art. 22 [hereinafter ICC Rules].

[18] See ICC Rules, art. 23 (2017); Chartered Institute of Arbitrators, Guideline 6 Managing Arbitrations and Procedural Orders – 2016, art. 2.2. (2016).

[19] For example, see Chartered Institute of Arbitrators, supra note 19, art. 3.1.

[20] ICC, ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic 14 (2020).

*Bruno Acevedo (Mexico) is a Human Rights Fellow (2020-2021) currently pursuing an LL.M. degree at Columbia University (’21). He has clerked at both the Mexican Supreme Court of Justice and at the Federal Electoral Court, and has over 5 years of experience in Mexico City’s leading law firms on commercial arbitration and dispute resolution.