Second Chances in Arbitration – The German Federal Court of Justice Clarifies Conditions for Remittal to the Arbitral Tribunal

With its decision of 18 December 2025 (I ZB 42/25), the Federal Court of Justice (“Bundesgerichtshof” or “BGH”) has delivered a rare clarification on the scope and limits of judicial remittal to the arbitral tribunal under §1059(4) of the German Code of Civil Procedure (“ZPO”) following the setting aside of a domestic arbitral award.

§1059(4) ZPO provides that: 

"[w]here an application for setting aside the arbitral award has been filed, the court may, where appropriate and so requested by a party, set aside the arbitral award and remand the matter to the arbitral tribunal.” 

The key question is under which circumstances remittal is considered appropriate. The BGH decision clarifies that not every violation of the right to be heard (Article 103(1) of the German constitution (the “Basic Law”)) automatically precludes remittal. Rather, remittal is excluded only in cases of serious procedural defects, notably in cases of obvious and grave violations that undermine confidence in the tribunal’s impartiality or its willingness to engage in an open and genuine reconsideration of the case.

This blog post examines the recent decision of the BGH, explains its implications for the practice of remittal under §1059(4) ZPO, and outlines practical guidance and strategic considerations for counsel.

Background

The dispute in question arose out of a life‑sciences M&A transaction in which the buyer acquired a biotech company for a fixed price plus three milestone‑based earn‑outs tied to the start of specified clinical trials. The SPA, governed by German law, provided for arbitration seated in Munich.

The sellers alleged that the buyer had breached its contractual duty to use best efforts, thereby preventing the occurrence of a milestone event. The arbitral tribunal found that the buyer had wrongfully prevented the occurrence of a milestone event during the earn-out period, in breach of the principle of good faith within the meaning of §162(1) of the German Civil Code (“Bürgerliches Gesetzbuch” or “BGB”). On that basis, the tribunal ordered the buyer to pay one milestone-based earn-out, reduced by the contractually agreed earn-out deduction, plus interest.

The buyer applied to the Bavarian Higher Regional Court to set aside the award, arguing, inter alia, that the tribunal had violated its right to be heard (Article 103 of the Basic Law, §1042(1)(2) ZPO), thereby giving rise to a ground for set-aside pursuant to §1059(2) No. 2(b) ZPO. The sellers sought dismissal of the application, alternatively a remittal to the tribunal under §1059(4) ZPO, and a declaration of enforceability.

In its decision of 2 April 2025, the Bavarian Higher Regional Court set aside the award insofar as it ordered payment and costs, and referred the matter back to the tribunal pursuant to §1059(4) ZPO. The Bavarian Higher Regional Court took the view that the award violated the buyer’s right to be heard, both with regard to the finding of a breach of duty by the buyer and with regard to the finding of causation between that breach and the failure of a milestone event. Moreover, the Court found that the tribunal’s reasoning on causation did not meet the minimum standards required for the reasoning of an award and that the tribunal failed to apply the appropriate burden of proof standard.

Both parties lodged appeals on points of law (“Rechtsbeschwerden”) with the BGH.

Analysis

At the core of the BGH’s decision lies the question of whether any violation of Article 103(1) of the Basic Law automatically renders a case “unsuitable” for remittal to the tribunal. The BGH answered this with a clear no.

According to the BGH, a case is only unsuitable for remittal if the ground for setting aside reveals a defect in the arbitral proceedings that cannot be remedied by renewed proceedings before the tribunal. In all other cases, remittal remains, in principle, available, even where the award has already been set aside. The BGH held that this includes, in particular, violations of the right to be heard, procedural defects, partial and severable excesses of jurisdiction, and violations of the ordre public.

The BGH thus rejected a restrictive interpretation of §1059(4) ZPO, finding that the statutory wording only requires that remittal is suitable and was requested by one of the parties, and that it provides no basis for excluding remittal alongside certain grounds for setting aside. Had the legislator intended to bar remittal in cases of violations of the ordre public or other serious defects, it could have done so expressly, as debates on Article 34(4) of the UNCITRAL Model Law indicated. The BGH held that the decisive criterion is whether the tribunal is able to cure the respective defect.

While adopting a generally permissive approach to remittal, the BGH nevertheless drew certain boundaries. The BGH held that remittal under §1059(4) ZPO is excluded where there are serious procedural defects, and in particular, where there is an obvious and grave violation of the right to be heard. This is the case, for example, if the circumstances would allow a party, in reopened proceedings, to successfully challenge an arbitrator under §1036(2) ZPO or apply for termination of the arbitrator’s mandate under §1038(1) ZPO. Where grounds exist for terminating an ongoing mandate, these necessarily also preclude an extension of that mandate through remittal under §1059(4) ZPO. The same conclusion applies when the circumstances would require the replacement of an arbitrator, since that would limit reasons of procedural economy pursued by §1059(4) ZPO, and the tribunal would have to be reconstituted in any event. In short, remittal is impermissible where the defect affects the integrity of the tribunal itself, rather than merely the correctness of the award.

Applying these principles, the BGH upheld the Higher Regional Court’s decision to remit the case. It found that the Higher Regional Court had acted within its discretion in concluding that remittal was appropriate, despite the existence of several deficiencies in the proceedings leading up to the award.

The BGH agreed with the Higher Regional Court that the buyer did not face an obvious and grave violation of its right to be heard. The BGH also confirmed that the Higher Regional Court had acted within its discretion in attributing the tribunal’s shortcomings in the reasoning of the award to a loss of oversight in a highly complex and voluminous case rather than a deliberate disregard of submissions, which also explained the inconsistencies in applying the burden and standard of proof. The BGH saw no basis to assume that the tribunal would be unwilling or unable to reassess the disputed issues with an open mind. A broader exclusion of remittal for every violation of the right to be heard would, in the BGH’s view, unduly restrict the purpose of §1059(4) ZPO as a means of procedural economy.

Commentary and Key Takeaways for Counsel (On Both Sides)

The decision in BGH I ZB 42/25 significantly strengthens §1059(4) ZPO as a mechanism of procedural efficiency and provides clear governing factors for remittal. Counsel on either side of the proceedings may use this to their advantage.

Remittal Is Not “Exceptional,” So Parties Must Plead It Strategically

The BGH decision makes clear that remittal is a procedural tool that is not exceptional. That matters for lawyers because it changes the default expectation in post-award litigation: setting aside may now more often lead to a return to the same tribunal, rather than the dispute ending in court or restarting before a newly constituted tribunal. In practical terms, parties should treat remittal as a remedy to be argued with the same intensity as the set-aside ground itself, and, if appropriate, should consider including it in the alternative prayer for relief.

The Focus Expands From “There Was a Due Process Violation” to “Is It Curable, or Does It Taint the Tribunal?”

The BGH’s key clarification is that not every violation of the right to be heard (Article 103(1) Basic Law) blocks remittal under §1059(4) ZPO; remittal is barred only for serious procedural errors, especially “obvious and grave” violations of the right to be heard. For counsel, once one party has requested a remittal, the practical “pleading burden” changes accordingly: it is not enough to show a due process defect; counsel must also frame why that defect is (or is not) curable by the same tribunal.

(Procedural) Difficulties May Follow Once the Tribunal Is Reconstituted

From a practical perspective, remittal may open a new procedural battleground. While remittal is intended to promote procedural economy, that objective can be undermined once the tribunal is reconstituted. In practice, reconstitution often triggers a new set of procedural and strategic complications. First, a reconstituted tribunal is particularly vulnerable to fresh challenges for lack of independence or impartiality under §1036 ZPO. Parties who were unsuccessful in the arbitration may seize the opportunity to challenge re-appointed arbitrators. Even where such challenges ultimately fail, they can significantly delay the proceedings and shift the focus away from the substantive issues. Second, once the tribunal is re-constituted, disputes frequently arise over the scope of the remittal itself. Parties may disagree on whether the tribunal is confined to curing specific defects identified by the court, or whether it is free to reopen broader aspects of the case. This creates a real risk of procedural fragmentation. Instead of a focused continuation, the arbitration may drift into a quasi-de novo proceeding, undermining the efficiency gains that §1059(4) ZPO is meant to achieve.