Arbitration in Germany
March 2012 | TALKINGPOINT | LITIGATION & DISPUTE RESOLUTION
FW moderates a discussion looking at Germany as a seat of arbitration between Henning Bälz at Hengeler Mueller, Vanessa Pickenpack at Oppenhoff & Partner, and Michael Hammes at PricewaterhouseCoopers.
FW: What general trends in German arbitration have you witnessed over the last few years? Has there been a noticeable rise in the number of companies using this process to resolve their commercial disputes?
Hammes: The most recent statistics of the German Arbitration Institute (DIS) show that over the last decade arbitral proceedings administered by this institution have risen from 62 proceedings commenced in the year 2000 to 155 proceedings commenced in 2010. This shows a growth of 150 percent. Forty-three of the proceedings commenced in 2010, around 28 percent, involved foreign parties from 28 different countries. This demonstrates that arbitration in Germany has an important international angle. Although the DIS statistics do not cover ad hoc proceedings, and although there are other specialised arbitration institutions in Germany, the DIS statistics should provide a good overall picture of the usage of arbitration in Germany. It should also be noted that in 2010 the DIS introduced further ADR rules including adjudication, mediation and expert determination to its portfolio of dispute resolution procedures, thus offering companies a choice of administrated procedures to resolve their disputes.
Bälz: Arbitration is a common means of dispute resolution in Germany and has become more and more popular in recent years. The number of arbitration cases under the rules of the DIS more than doubled between 2005 and 2010. In addition to the steps in regard of further ADR rules, the DIS fostered this development by introducing supplementary rules for expedited proceedings in 2008 and supplementary rules for corporate law disputes in 2009. The increasing number of cases involving one or more parties from abroad does not come as a surprise given that Germany’s economy heavily relies on exports. Also, the Federal Republic of Germany has entered into numerous bilateral investment treaties (BITs) with other states which usually provide for arbitration clauses.
Pickenpack: In recent years, there has been a general trend towards alternative dispute resolution in Germany. Although parties particularly opt for arbitration proceedings, other resolution measures like mediation have become more popular and it is not unusual that arbitration is combined with mediation processes. Mainly for large, globally working companies arbitration is of significant importance, but the number of small and medium-sized companies opting for arbitration has considerably increased. In certain fields of law, such as M&A transactions, there are scarcely any agreements not providing for arbitration, and arbitration is increasingly superseding state court proceedings. This tendency is reflected by the latest annual statistics of the ICC, which show that in the last couple of years the majority of participants – either parties or arbitrators – in ICC proceedings were German.
FW: What key considerations determine whether parties in Germany opt for arbitration over other dispute resolution mechanisms, as a means to reach agreement?
Bälz: Confidentiality is a key consideration. Another advantage of arbitration is the opportunity to nominate a competent and experienced arbitrator who is familiar with the subject matter and the parties’ business. This aspect may be more relevant than in other countries, in particular, common law jurisdictions, as in Germany one may become a judge straight after finishing law school and a two year apprenticeship, so that the parties to a lawsuit may find themselves in front of a very young judge with little experience. Finally, time and money are also important criteria. Arbitration is not always the most economic option given that in state court proceedings both court fees and attorneys fees to be borne by the party losing the lawsuit are subject to a statutory cap. In the recent years, lawmakers have taken various steps to introduce mediation as another means of dispute resolution. Although increasingly asked for, mediation has not yet become as common as in other jurisdictions given that litigation in Germany is in various aspects less burdensome and costly than in other countries.
Pickenpack: Compared to state court proceedings, for most parties, the decisive factors are that the proceedings are confidential, that they can influence the arbitration, and they can make sure the dispute is handled by arbitrators, who are qualified experts in the respective branch and field of law. In addition, in most cases arbitration has a time saving effect. Arbitration is usually limited to one instance only and the parties usually accept the arbitral award as final and binding and thus only rarely raise objections against the award. Although mediation also offers confidential and flexible dispute resolution, these proceedings are disadvantageous in that they are time and cost consuming if no agreement can be reached. For many parties, this is an argument against mediation, at least as a sole means to reach an agreement.
Hammes: In 2005, a PwC study, ‘Commercial Dispute Resolution – A Comparative Analysis of Dispute Resolution Procedures’, summarised the responses of 158 German companies in respect of their preferences in resolving commercial disputes. It found that, arbitration is preferred over all other dispute resolution mechanisms except bilateral negotiation if a final and binding decision is sought that solves the dispute. Arbitration is preferred over litigation if confidentiality and autonomy in conducting the proceedings are considered key elements, and the business relationship with the opposing party has future prospects. Interestingly the responses do not ascribe a cost advantage to arbitration compared to litigation. The cost issue of arbitration was also detected in later studies with an international focus and has lead to ongoing discussions of how to better control costs in international arbitration proceedings.
FW: In your opinion, what overall advantages does Germany offer as a venue for arbitration proceedings as compared to other locations?
Pickenpack: If the parties choose a venue in Germany they automatically opt for the application of the German provisions on arbitral proceedings as set out in Section 1025 ff. of the Code of Civil Procedure (ZPO), insofar that these are binding and not subject to some other agreement between the parties. Section 1025 ff. ZPO is based on the UNCITRAL model law. Therefore, it not only has a high recognition value for international parties, but is also internationally accepted. Furthermore, these provisions can easily be read and their interpretation follows from the wording of the provisions. Also, a German venue is constituent for the jurisdiction of the German courts for annulment claims. The rather restrictive annulment practice in Germany results in high legal certainty for the parties. Besides these legal considerations there are mere practical arguments for a German venue. Germany provides a modern and efficient infrastructure and is easily accessible, in particular for participants from all over Europe.
Hammes: Germany has a competitive legal framework and infrastructure to host arbitrations. The 10th book of the German Civil Procedure Code has adopted the UNCITRAL Model Law, and Germany is a signatory of the New York Convention. The big international law firms all have arbitration specialists located in Germany, providing excellent legal support. In addition, there is also a growing number of smaller local law firms which specialise in arbitration and further means of dispute resolution. Besides the DIS, other administrating institutions are available including the German Maritime Arbitration Association and the Chinese European Arbitration Centre, both established in Hamburg. It is also worth mentioning that the DIS and the Chamber of Commerce and Industry in Frankfurt established, in 2005, the Frankfurt International Arbitration Centre which cooperates with the World Bank’s ICSID in Washington to host investment treaty arbitration under the arbitration rules of the ICSID convention.
Bälz: Germany has a long tradition as a place of arbitration. Based on the UNCITRAL Model Law, The rules of arbitration provided for under the Code on Civil Law Procedures meet international standards. Also, Germany has an efficient court system and there is a special competence of the Court of Appeals in the various Federal States where experienced judges deal with ancillary measures in connection with arbitration proceedings. If German law is applicable law, it might be of relevance that Germany’s civil and commercial law is considered to be one of the most developed in Europe and jurisprudence and legal literature is easily accessible.
FW: What are the potential pitfalls of arbitrating in Germany, considering issues such as the speed and efficiency of proceedings, and the predictability of outcomes?
Hammes: Given the competitive legal framework and infrastructure in Germany, and based on my view that German courts in general appear to be arbitration friendly, there is nothing I consider as a potential pitfall of arbitrating in Germany in respect of speed and efficiency, particularly in comparison to other countries. The speed and efficiency of arbitration proceedings depend primarily on the parties’ and the tribunals’ conduct of the proceedings. If there is cooperation and commitment of the parties and the tribunal to efficient and swift conduct of the proceedings, an award can be rendered within a few months after the proceedings are commenced – even in rather complex cases. However, if cooperation and commitment do not exist, then arbitration proceedings can take a few years simply to conclude on the question of liability.
Bälz: Potential pitfalls of arbitration in Germany are probably the same as in other jurisdictions. Legal disputes have become more and more complex and often include a vast amount of documents and data which need to be assessed. Consequently, the length of arbitral proceedings is a concern. In this context, it should be noted that neither the DIS Rules of Arbitration – with the exception of the rules on expedited matters – nor the rules of arbitration contained in the Code on Civil Law Procedures provide for a time limit as provided for in Article 30 of the ICC Arbitration Rules. Moreover, whether a pitfall or not, parties to arbitration in Germany should be aware that German procedural law does not know the concept of pre-trial discovery so that, in principle, each party must rely on the documents it can produce on its own.
Pickenpack: Particular pitfalls of arbitrating in Germany compared to other venues are hard to identify. Generally speaking, the speed and the efficiency of the proceedings are in most cases subject to the management of the case by the arbitral tribunal and also to the schedule of all participants in the proceedings. Just as in state court proceedings the outcome of arbitral proceedings are often hard to predict, in particular in complex and comprehensive cases. Compared to disputes handled by state courts the further difficulty is that arbitral awards are rarely published and, therefore, there is no consistent case-law that the parties can rely upon.
FW: How would you describe the commercial and technical expertise of arbitrators in Germany?
Bälz: Germany is one of the leading industrial countries in the world and has a long tradition as a place of commerce and trade. Correspondingly, there are a large number of lawyers and, in particular, arbitrators, with the expertise required to deal with legal issues arising in this context. Germany also hosts important institutions in the technical field, for example, the European Patent Office in Munich, which draw a community of legal and technical experts.
Pickenpack: The parties of arbitration proceedings in Germany can draw benefit from the fact that experts of most industries and fields of law can be found here. German engineers are internationally recognised for their expertise and the parties can easily identify an expert who has the technical know-how required in the particular case. Moreover, the German Chambers of Commerce provide support with the selection of suitable experts. The parties will also find qualified lawyers in Germany who, for example, specialise in international law or are familiar with commercial customs, supporting them either as counsel or acting as arbitrators. These preconditions make it easy for the parties to select arbitrators with the skills required in the particular case and, in addition, to appoint further experts to provide evidence in the proceedings.
Hammes: Germany has many good arbitrators of different backgrounds with excellent expertise, both commercial and technical. Arbitrators usually comprise arbitration specialists from international law firms or from specialised local law firms, sitting or retired judges and law professors. Commercial expertise is best represented by arbitrators which have gained considerable experience as counsel in commercial matters. Having former judges as arbitrators, either as chairman or sole arbitrator, usually puts the tribunal in a more active role resulting in stronger guidance of the parties and the employment of tribunal appointed experts with precise instructions, particularly in domestic arbitrations between German companies. Other professions – for example accountants or engineers – may also be appointed as arbitrators but only in rare cases. I have seen contracts in which the parties agreed on an accountant or an engineer as sole arbitrator in case the disputed items are mainly commercial or technical related.
FW: How does Germany measure up as an arbitration centre for resolving international disputes, compared to other major centres around the world?
Pickenpack: In recent years, Germany has become an increasingly popular location for arbitration proceedings. Germany is an important commercial centre for nations all over the world and provides for modern, liberal and internationally accepted procedural rules. In addition, several arbitration organisations, particularly the DIS, and also the German Chambers of Commerce have made sure that arbitration has become more popular in Germany and also, as a result, Germany has become a popular venue for arbitration.
Hammes: In line with its federal tradition, arbitration proceedings in Germany are not hosted in a particular city like Paris or London. The cities of Frankfurt and Hamburg may be the most favoured seats for arbitration in Germany, however Düsseldorf, Munich, Stuttgart, Berlin and other cities also appear as seats of international arbitration. Germany, most likely, will never have the same significance as a venue for international arbitration as France, due to its of hosting the ICC court of arbitration; as the UK, for language reasons; or as Switzerland, for reasons of neutrality. Due to the vast involvement of German businesses in world trade and investment, neutrality will, in many cases, turn against Germany as a seat for arbitration proceedings. However, Germany has excellent arbitration specialists both as counsel and arbitrators, and everything else that is needed to conduct arbitration proceedings in a fast and efficient manner.
Bälz: Germany has been lagging behind other arbitration centres for quite some time. London, Paris, Zurich and Stockholm are often seen as the most eminent venues of arbitration. The former two cities take profit from the fact that they are the political and economic centres of the UK and France. It is much more difficult to identify one particular city in Germany that fills out this role given the federal system, and various cities that are centres of particular industries. Switzerland and also Sweden take advantage from the fact that they are considered to be ‘neutral’ which makes it easier for parties from different countries to agree on as place of arbitration. However, German lawmakers reformed the arbitration law in 1997 which was a first step towards an internationally competitive arbitration environment. Since then, Germany is, more and more often, chosen as a seat in international arbitrations.
FW: What advice would you give to companies preparing for arbitration proceedings in Germany?
Hammes: In order to have an efficient and fast arbitration that results in a comprehensible, and therefore acceptable award, companies have to engage the appropriate external counsel to advise, guide and represent them through the whole case from the very beginning. Furthermore, companies have to find independent arbitrators who are willing to take decisions that support speed and efficiency but also provide for flexibility if the development of the case so requires. In order to control efficiency and cost effectiveness it is important that parties are always in close contact with external counsel and closely monitor the development of the case and keep themselves permanently involved.
Bälz: The answer to this question depends on the case at hand, however, a carefully drafted arbitration clause is a good start. It often turns out that arbitration clauses are drafted in the last minute of a transaction or not considered thoroughly for other reasons which may, for example, result in contradicting clauses in a set of documents. It is often a good idea to opt for institutional arbitration providing for sample clauses and other support during the initiation, conduct and termination of arbitration proceedings. Moreover, it is fair to say that in German arbitration proceedings, probably more than in other jurisdictions, the briefs submitted by the parties are of pivotal relevance whereas the role of oral pleadings is probably less significant than in common law jurisdictions. Finally, parties to arbitration in Germany should be aware that it is quite common for German arbitrators to discuss, or even actively seek, an amicable settlement between the parties.
Pickenpack: It is difficult to give particular advice with regard to Germany as as venue of the arbitration, however, some particularities of the German procedural law automatically apply at German arbitration venues, and foreign parties should be informed. Parties used to Anglo-American and Anglo-Saxon law will be surprised to hear that, at least if not explicitly agreed upon between the parties, German arbitration law does not provide for discovery. Furthermore, in contrast to many other laws the German provisions on arbitration proceedings provide that not only the state courts but also the arbitral tribunal itself is entitled to grant interim or preliminary measures. In international proceedings, German parties however should be informed that, unlike in evidence proceedings before German state courts, cross-examination is permitted and will probably made use of by the parties and their counsel.
Henning Bälz is a partner at Hengeler Mueller and a member of the firm’s dispute resolution group. He deals with both litigation and arbitration cases for national and international clients. Mr Bälz studied law in Tübingen, Berlin and Bayreuth, and worked as a law apprentice (Referendar) with the Court of Appeals in Berlin. He received his doctorate in law from the Freie Universität Berlin in 2001. Before joining Hengeler Mueller, Mr Bälz worked as a foreign associate at Simpson Thatcher & Bartlett in New York. He can be contacted on +49 30 2 03 74 131 or by email: firstname.lastname@example.org.
Vanessa Pickenpack is a junior partner at Oppenhoff & Partner in Cologne. She specialises in litigation and arbitration, in particular post-M&A litigation and corporate litigation and arbitration. She advises and represents national and international enterprises on issues of civil, mercantile and commercial law, inter alia purchase law, commercial agency and distribution law. Ms Pickenpack can be contacted on +49 221 2091 334 or by email: email@example.com.
Dr Michael Hammes is a director at PricewaterhouseCoopers’ Frankfurt office. Dr Hammes has extensive experience in dispute resolution and has acted as an advisor to clients and their law firms, as a party-appointed or tribunal-appointed expert in arbitration and court proceedings, and as an expert in resolution mechanisms such as expert determination or mediation/conciliation. Dr Hammes was also engaged by the World Bank's International Finance Corporation to support the promotion and research of Alternative Dispute Resolution in Eastern Europe. Dr Hammes can be contacted on +49 69 9585 5942 or by email firstname.lastname@example.org.
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