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Arbitration

Disputes arising from business transactions in Germany can be referred to any German court. But neither the choice of venue by the opposing party nor the length and cost of the appeals process are always foreseeable.

One of the imponderables is that judges, though having a thorough understanding of the law, may often lack technical expertise. Since the proceedings in the ordinary courts are open to the public, trade secrets that are disclosed in court can, in the worst case, become accessible to the competition, while the media publicize alleged product and safety defects.

In case of cross-border transactions, the risks often escalate. As a rule, the legal expertise of German judges is focused on the points of German law. Another consideration is the fact that the enforcement of a German court ruling outside of Germany is often only possible – if at all – with great difficulty. For a number of reasons, German companies tend to shy away from international litigation. Even in a country under the rule of law, such as the USA, high attorney's fees, exorbitant damages and unaccustomed rules of evidence and discovery make litigation seem risky.

In many cases, it is therefore advisable to agree on arbitration proceedings as an alternative to seeking recourse to the ordinary courts. The procedural steps of an arbitration proceeding are similar to those of a proceeding in the public court system. The parties exchange pleadings, and as a rule there is also an oral hearing where evidence may be taken. The proceeding culminates in a binding arbitral award, which has the same effect on the parties as a court ruling.

The arbitrators have greater flexibility and discretion in shaping the proceedings than a judge in the public court system. The parties themselves also have a greater influence on the proceedings. They participate in the selection of the arbitrators and are able to choose the place of arbitration and the language of the arbitral proceedings by mutual agreement.

Types of arbitral tribunals

It is necessary to distinguish between two types of arbitral tribunals:

  • The so-called institutional arbitral tribunals are associated with an institution, often a Chamber of Industry and Commerce (IHK) or an industry association. The German Institution of Arbitration (DIS) and the German Maritime Arbitration Association (GMAA) are also widely known. The institutions provide rules for the proceedings and in most cases also fee regulations. In addition, they assist the parties at the initiation and throughout the entire arbitration proceeding.
  • An "ad hoc" arbitration proceeding, on the other hand, is conducted without institutional support. The parties and their attorneys together with the arbitrators conduct the proceeding under their own direction.

Rules for arbitration proceedings

If the parties to an arbitration proceeding agree on German law, Sections 1025 – 1066 of the German Code of Civil Procedure (Zivilprozessordnung; ZPO) apply. But many of these regulations may be waived, changed or amended by mutual consent. That may be accomplished either by the rules of arbitration of the relevant institution, before the arbitral tribunal seized of the matter, or by agreement between the parties.

Arbitration proceedings produce speedy results

Arbitral tribunals proceed under a schedule approved by the parties. Their decisions are final without the opportunity for appeals on questions of fact or law. Arbitral awards can only be set aside in the public court system in the case of grave formal defects or a violation of the basic tenets of law ("ordre public").

But even if arbitration proceedings are often more flexible and speedy than trials before a court, complex cases take time. The parties are, indeed, always entitled to a fair hearing and have the right to be represented by an attorney.

Arbitration proceedings are confidential

Strict confidentiality is agreed in most cases if this is not already stipulated in the rules of arbitration. Unlike in court proceedings open to the public, details that are confidential or potentially damaging to a party’s reputation, as well as the arbitral award itself, cannot become public knowledge.

Many companies consider this the most important benefit of the arbitration, which is rooted in commercial traditions. Confidentiality also makes it easier to preserve existing business relationships, especially because arbitration proceedings often end in an amicable settlement.

Arbitral tribunals establish – internationally – enforceable titles

While the rulings of German courts are often not enforceable outside of the EU and the European Free Trade Association (for example in China and Russia), arbitral awards are declared to be enforceable by local courts in the more than 140 signatory states of the "New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards".

Costs of arbitration proceedings

Many arbitral institutions offer calculators to determine the cost of a proceeding and of an arbitrator on their websites. The regulations governing costs vary. Generally it can be said, that German arbitral institutions are cost effective and that the fees of German lawyers are relatively low.

Choice of arbitral tribunal

Having a choice among arbitral institutions, arbitrators, and places of arbitration is a significant advantage in comparison with the public court system and therefore deserves the greatest care. The reputation of institutions, technical specialization and costs are important criteria.

Cost considerations are often a factor in recommending a single arbitrator – unless the amount in controversy is particularly high or the matter is especially complex. In that case it is recommended to select a panel of several – as a rule three – arbitrators.

It is important to stipulate the qualifications of the arbitrators precisely in advance in order to arrive at an arbitral award that is fair and acceptable for all parties concerned. It may therefore be advisable to select an arbitrator who is a member of a specific profession or is employed in a specific industry, or who can contribute the language and inter-cultural skills that are necessary in international matters in particular.

Alternatives to arbitration

The principal out-of-court alternatives to arbitration are to commission an expert opinion or to enter into mediation:

  • If the dispute between the parties is only concerned with establishing actual facts, the commissioning of an expert opinion recommends itself as a solution. In this way, the parties obtain a binding clarification of the matter in dispute, which may generally also not be contested later before a court.
  • In mediation, the parties themselves – unlike in arbitration proceedings – work on a solution to their conflict on their own responsibility. In doing so, they are assisted by a mediator, who acts as a neutral third party. But the power to decide rests solely with the concerned parties. In contrast to the arbitrator, the mediator thus has no enforcement or decision-making powers.

Services of IHKs and AHKs

The Chambers of Industry and Commerce (IHKs) in Germany and the world-wide network of German Bi-National Chambers of Commerce Abroad (AHKs) offer advice and assistance on the topic of arbitration in many forms.

If desired, they will help the parties find qualified attorneys and arbitrators, or they will recommend a suitable arbitration institution. Some IHKs and AHKs conduct arbitration proceedings themselves. The Chambers are also able to name appropriate mediators or specialists who can prepare an expert opinion.

Model arbitration clauses

An arbitral tribunal can only act with legal effect if the parties have agreed to refer disputes to it. This should already be done at the contract signing, since it is difficult to agree on an arbitration institution or on an "ad hoc" proceeding once a dispute has arisen.

To do so, the parties must incorporate appropriate arbitration clauses into their contracts. But such clauses may be impaired by defects – for instance they may not specify sufficiently clearly to which arbitral tribunal disputes shall be referred.

It is therefore urgently recommended, to use the model clauses from a recognized arbitration institution. The following are listed as examples:

  • Model clause of the the Frankfurt am Main Chamber of Industry and Commerce (www.frankfurt-main.ihk.de)
    "All disputes arising in connection with the contract [... description of the contract ... ] or its validity shall be finally settled in accordance with the Arbitration Rules of the Chamber of Industry and Commerce Frankfurt am Main (IHK Frankfurt am Main) without recourse to the ordinary courts of law."

  • Model clause of the the Court of Arbitration of the Hamburg Chamber of Commerce (www.hk24.de)
    Any dispute arising in connection with the present contract […exact description of the Contract…] or with respect to its validity shall be finally settled by the Court of Arbitration of the Hamburg Chamber of Commerce, to the exclusion of the ordinary courts of law. The substantive law of ––– shall be applicable to such dispute."
  • Model clause of the Munich Chamber of Industry and Commerce (www.muenchen.ihk.de)
    "All disputes arising from the contract (… exact description of contract …) including its validity shall be finally settled according to the Arbitration Rules of the Chamber of Industry and Commerce of Munich and Upper Bavaria (IHK München) without recourse to the ordinary courts of law."

  • Model clause of the German Institution of Arbitration (www.dis-arb.de)
    "All disputes arising in connection with this contract or its validity shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration (DIS) without recourse to the ordinary courts of law."

  • Model clause of the German Maritime Arbitration Association (www.gmaa.de)
    "All disputes arising out of or in connection with this Contract or its validity shall be finally settled by arbitration in accordance with the Arbitration Rules of the German Maritime Arbitration Association (GMAA) current at the time when the arbitration proceedings are commenced."

Specifically to cross-border contracts the following aspects should be added:

  • The place of arbitration is ...
  • The number of arbitrators is ...
  • The language of the arbitral proceedings is ...
  • The applicable substantive law is ...

Other model clauses

Aside from the clauses listed above, many institutions offer model clauses that address particular legal issues. First to be named here are the members of the world-wide network of German Bi-National Chambers of Commerce Abroad (Deutsche Auslandshandelskammern), with 140 locations in 92 countries, which administer arbitration proceedings in many locations throughout the world.

For disputes involving company law, ownership of residential apartments or probate matters, reference is also made specifically to the model clauses of the Schlichtungs- und Schiedsgerichtshof Deutscher Notare (Mediation and Arbitral Panel of German Civil Law Notaries) at www.dnotv.de.

Contact

Prof. Dr. Stephan Wernicke
Prof. Dr. Stephan Wernicke
T +49 30 20308 - 2700
F +49 30 20308 - 2777
Dr. Christian Groß, Rechtsanwalt (Syndikusrechtsanwalt)
Dr. Christian Groß, Rechtsanwalt (Syndikusrechtsanwalt)
T +49 30 20308 - 2723
F +49 30 20308 - 2777