Recent Developments in International Arbitration

Germany has a well-developed legal framework for international arbitration, modelled on the UNCITRAL Model Law and codified in the German Code of Civil Procedure (ZPO). Apart from mandatory provisions, parties to an arbitration may contractually agree to apply any institutional or other rules for the conduct of their arbitration proceedings. The German Arbitration Institute (DIS), for example, provides its own DIS Arbitration Rules, which were substantially modified in 2018 and offer internationally developed standards. Arbitration proceedings in Germany are also frequently conducted under other arbitration rules, such as those of the International Chamber of Commerce (ICC), and internationally recognised guidelines such as those of the International Bar Association (IBA) or the Prague Rules (2018), which are often agreed.

Reform of the German Arbitration Law

In February 2024, as part of its efforts to further strengthen Germany as a location for commercial disputes, the Federal Ministry of Justice (FMJ) presented a draft bill for the modernisation of German arbitration law, which among other things takes into account the revision of the arbitration rules of many arbitral institutions, the advancing digitalisation of procedural law and the practical experience with Sections 1025 et seqq. ZPO. Following consultation with interested parties, the draft law essentially proposes the following main reforms:

Informal agreements

In commercial transactions, parties shall in future be able to conclude arbitration agreements informally. This would correspond to the legal situation in Germany until 1997, and at the same time would also implement Option II of Article 7 UNCITRAL Model Law since 2006. At present, the arbitration agreement must either be concluded in writing or be documentable in some other way. In particular, this is intended to remove doubts about electronically agreed arbitration agreements, which may be particularly relevant in the context of smart contracts. The regulation would also allow for oral arbitration agreements in commercial transactions. For the sake of legal certainty, the draft bill provides that a party may request the other party to confirm an informal arbitration agreement in text form.

Validity of arbitration agreements

In the future, in the event of a party’s application for a declaration of (in-)admissibility of the arbitral proceedings, the competent state court shall also be able to make a final decision on the existence or validity of the arbitration agreement together with its decision on the admissibility of the arbitral proceedings.

Jurisdiction of the arbitral tribunal

Under the current German arbitration law, if an arbitral tribunal considers that it has jurisdiction, its decision may be challenged before the state courts. However, negative decisions on jurisdiction cannot currently be challenged in court. In the future, not only positive but also negative decisions of the arbitral tribunal on its jurisdiction shall be subject to review by the competent state court at the place of arbitration. This serves the purpose of procedural economy in parallel court and arbitral proceedings.

Appointment of arbitrators in multi-party proceedings

Many institutional arbitration rules contain provisions on the appointment of arbitrators in multi-party situations. In the future, the German arbitration law shall contain a dispositive provision for the substitute appointment of arbitrators in multi-party arbitrations if the parties on one side cannot agree on an arbitrator, which is an important guideline in particular for ad hoc proceedings.

Remote hearings

In recent years, many oral hearings have been conducted as remote or hybrid hearings, and this de facto development shall now also be legally anchored in the German arbitration law. In the future, arbitral tribunals shall have the right to hold oral hearings by videoconference, unless otherwise agreed by the parties. The law shall also regulate the recording of such videoconferences.

This is not new per se if the parties have agreed on a remote or hybrid hearing or to the applicability of the IBA Rules of Evidence 2020 or arbitration rules that provide for this possibility, such as the DIS Arbitration Rules. The provision in the DIS Arbitration Rules that the proceedings will be conducted by the arbitral tribunal once it is constituted gives the arbitral tribunal the power to decide whether hearings will be held in person or virtually.

However, the legal position in the event of a disagreement between the parties as to the holding of a virtual conference has not yet been clarified. According to an ICCA study published in 2022, of 78 jurisdictions surveyed, there are only two in which the arbitral tribunal is expressly empowered to order a virtual hearing. The proposed regulation clarifies that the right to be heard is generally also satisfied in a remote hearing.

According to the draft bill, the parties must be informed in good time of the organisation of a remote hearing. This will ensure that if there are objective reasons against a remote hearing, the parties will be able to present them to the necessary extent.

Even after this welcome legal clarification, arbitral tribunals should continue to take into account the existing case law on remote hearings. In particular, they should ensure compliance with the mandatory rules of the right to be heard and procedural equality of arms, which are part of the German procedural ordre public and the violation of which may lead to the setting aside of the arbitral award. A violation of the fundamental right to be heard may occur if a party does not have equal access to the technology necessary for a proper hearing, or if technical difficulties prevent a party from hearing the opponent’s arguments or presenting its own. In particular, a poor internet connection or malfunctioning equipment may cause such a problem. Parties are advised to bring such issues to the attention of the arbitral tribunal during the hearing, otherwise they risk not being able to challenge the award on these grounds at a later stage.

Arbitral awards

In the future, arbitrators shall be able to issue arbitral awards electronically by signing them with a qualified electronic signature provided that no party objects.

With the consent of the parties, arbitral awards may also be published in whole or in part in anonymised or pseudonymised form in order to promote transparency and the further development of the law. A party shall be deemed to have given its consent if it does not object within one month of receipt of the request for consent from the arbitral tribunal, provided that the party has been advised of this consequence in advance. The parties are free to make other arrangements.

The draft bill also clarifies that an arbitrator may issue a dissenting opinion in the arbitral award, unless otherwise agreed by the parties. This is the FMJ’s response to a ruling by the Frankfurt Higher Regional Court in 2020, in which the court expressed doubts in an obiter dictum as to the admissibility of a publication of a dissenting opinion, which is alien to German civil procedural law.

Language in judicial assistance and setting aside/enforcement proceedings

The FMJ is also addressing the issue of language in several reform projects and is facilitating the conduct of arbitral proceedings under German arbitration law in English by permitting the necessary judicial assistance actions by German courts in English.

Arbitral awards and other documents from the arbitral proceedings may be submitted in English without translation in setting aside, enforcement and judicial assistance proceedings.

In the future, it shall also be possible to conduct the entire setting aside and enforcement proceedings in English. The legislator provides that the federal states may set up specialised commercial courts to hear major international commercial disputes, and the federal states may confer jurisdiction on the commercial courts for setting aside and enforcement proceedings. With the consent of the parties, proceedings before the commercial courts shall then be conducted entirely in English.

Enforcement of interim measures

The draft bill also clarifies that interim measures are enforceable in Germany even if the place of arbitration is in another country. Currently, it is at the discretion of the German court to grant the enforcement of such interim measures.

A number of points in the draft bill are likely to be debated in the further legislative process, so that it is to be expected that the bill will undergo further amendments before it is enacted, which we will report on in the next issue.

DIS Supplementary Rules for Third-Party Notices (DIS-TPNR)

In a 2018 survey conducted by Queen Mary University of London, 39% of the 1066 arbitration practitioners surveyed said that the issue of third-party involvement was one of the biggest disadvantages of arbitration. They said it was the third biggest disadvantage of arbitration in general, as commercial disputes often involve more than two parties in intertwined legal relationships.

Multi-party arbitration is, of course, possible. However, such proceedings require the consent of all parties to the dispute in the form of an arbitration agreement, which will rarely be obtained in interwoven multi-party disputes involving more than two parties. In this respect, the subsequent inclusion of other parties by way of joinder, which is provided for in many arbitration rules (eg, Article 19 DIS Arbitration Rules), only contributes to the effective participation of third parties to a limited extent, as the other party usually has no interest in involving a third party. The main reason for this is that the third party usually becomes a full party to the arbitration and can therefore assert claims against any party to the arbitration. Thus, if the respondent files a recourse claim against a third party, the third party may respond by filing a counterclaim against the respondent. The claimant normally has no interest in the associated delay of the arbitral proceedings and will therefore usually refuse to consent to the joinder of the third party. Two or more successive proceedings are therefore usually necessary to resolve multi-party disputes.

The DIS has addressed this issue and, through a practice group involving numerous practitioners, has developed Supplementary Rules for Third-Party Notices (DIS-TPNR). The DIS-TPNR will make it easier to bind third parties to the findings of an arbitral award. Parties may now agree on these supplementary rules in addition to the DIS Arbitration Rules. Based on the proven and successful model of the ZPO, these rules make it possible to issue a third-party notice, which is not otherwise provided for in German arbitration law. The ZPO allows a third-party notice where a party may have a right of recourse against a third party not involved in the legal dispute in the event of an unfavourable outcome of the legal dispute. This right of recourse usually also depends on the factual and legal findings in the original proceedings, and the third-party notice allows the court in the recourse proceedings to be bound by all factual and legal findings underlying the original decision. This avoids double litigation on the same issue and contradictory decisions.

As in state civil proceedings, the DIS-TPNR provide that the third party is not a party to the arbitration, but an intervener. The third party may therefore support one of the parties to the arbitration but may not assert its own claims against the parties. In addition, the DIS-TPNR ensure that the other party will not have to bear the costs of the third party and the arbitration fees if it is unsuccessful. By agreeing to the DIS-TPNR, the other party will therefore be more likely to agree to a possible third-party notice in the arbitration agreement.

At the same time, the DIS-TPNR ensure that the third party is involved in the constitution of the arbitral tribunal. In return, the third party is bound by the findings of the arbitral award. In addition, the third-party notice suspends the statute of limitations for any recourse claim against the third party.

For the first time, the DIS-TPNR provide a set of rules by which the admissibility of the third-party notice in any arbitration can be agreed with legal certainty when concluding the arbitration agreement. While the parties are otherwise forced to construct their own individual rules on the admissibility of third-party notices in extensive arbitration agreements, they can now refer to the DIS-TPNR. This applies not only if the subsequent proceedings are also DIS arbitrations, but also if they are arbitrations under other arbitration rules or state proceedings. In addition to the DIS-TPNR rules, the DIS also provides a comprehensive Practice Note on its website.

Court Decisions

The most important decisions of the national courts regarding arbitration come from the higher regional courts, as they are competent to enforce and set aside awards, and at the appeal stage, from the Federal Court of Justice (BGH). In line with the decisions of past years, the German courts continue to recognise an arbitration-friendly environment that accepts and even favours arbitral proceedings.

One dispute stood out in particular last year. In a dispute between a German entrepreneur who, as managing director and shareholder of a Russian limited liability company, cooperated with a German-based group in connection with its market entry in Russia, arbitral proceedings were initiated before the International Commercial Arbitration Court at the Moscow Chamber of Commerce and Industry against several individual companies of the group and several former managers of group companies. This dispute has raised numerous issues in several jurisdictions in the past few years. In connection with the enforcement of the arbitral award, the BGH (I ZB 33/22) had to deal with several procedural issues.

Scope of arbitration agreement

One issue concerned the scope of the arbitration agreement, and the BGH confirmed that, under German law, the subjective scope of an arbitration agreement is generally limited to the contracting parties and their legal successors and that there is no extension of the arbitration agreement based on a group-of-companies doctrine.

Relationship between foreign setting aside proceedings and German enforcement proceedings

In the same decision, the BGH also held that a dismissing decision in setting-aside proceedings of the courts in the state of origin of an arbitral award is not binding on German courts in enforcement proceedings.

Pre-emptive actions against recognition and enforcement proceedings of foreign arbitral awards

In addition, the BGH held that an application for a declaration of non-recognition of a foreign arbitral award is permissible until enforcement proceedings are initiated. In contrast to national arbitral awards, where there is a three-month time limit for filing such an application, this application is not subject to a time limit.

Security deposit for the costs of the proceedings

In an earlier decision in the same legal dispute, the BGH reversed its previous case law and held that the provisions of the ZPO on the obligation to provide security for the costs of the proceedings apply to enforcement proceedings of domestic or foreign arbitral awards. Accordingly, claimants who do not have their habitual residence in a member state of the European Union or in a signatory state to the Agreement on the European Economic Area must provide security for the costs of the proceedings at the request of the respondent. In this particular case, a statutory exception applied as the request concerned a counterclaim.

M&A Disputes Before DIS Arbitral Tribunals

Strict confidentiality is a key reason for concluding arbitration agreements. Therefore, DIS arbitral awards cannot be published without the consent of the parties. However, since most post-M&A disputes in Germany are conducted through arbitration, this means that most decisions in this important area are not available to the public. This makes it difficult for the parties and their counsel to predict the outcome of their dispute and also hampers the development of the law. A DIS working group recently evaluated more than 100 post-M&A arbitral awards and examined their potential for further developing the law. The evaluation of the arbitration awards has been published, contributing to greater transparency in this highly relevant area.

Investor-state Disputes

Germany is a signatory state of the EU Agreement for the Termination of Bilateral Investment Treaties between member states of the European Union. The Agreement is a consequence of the Achmea decision of the European Court of Justice (ECJ) of 6 March 2018 (C-284/16), which ruled that the investor-state arbitration clause in the Netherlands-Slovakia bilateral investment treaty was incompatible with EU law because it encroached on the exclusive jurisdiction of the ECJ to interpret EU law, thereby undermining the principle of autonomy of the EU. The Agreement entered into force on 29 August 2020. As it explicitly does not apply to proceedings under the ECT, stating that the member states will address this issue at a later stage, it remains to be seen how arbitral tribunals in pending and future arbitrations under intra-EU bilateral investment treaties will react to the Agreement.

In July 2023, the European Commission proposed a joint withdrawal of the EU and its member states from the ECT. Member states have followed this proposal to varying degrees. Germany – like France, Luxembourg and Poland – has already withdrawn from the ECT. Germany’s withdrawal took effect on 20 December 2023. However, all investments covered by the ECT at the time of withdrawal will continue to be protected for 20 years.

In the context of investment arbitration, European states are making increasing use of the mechanism of Section 1032(2) ZPO, which provides that, until the arbitral tribunal is constituted, an application may be made to a state court for a declaratory decision on the (in-)admissibility of arbitral proceedings. In 2021, the Netherlands applied to the Cologne Higher Regional Court for a declaration that the ECT-based ICSID proceedings brought by UNIPER and RWE, respectively, in which the two energy companies seek compensation for the early phase-out of coal-fired power generation, are inadmissible. The rules of the World Bank agreement signed by Germany and the Netherlands to create ICSID provide for an autonomous dispute resolution system insulated from the intervention of state courts. Nevertheless, the Cologne Higher Regional Court (19 SchH 14/21 and 19 SchH 15/21) declared the state proceedings to be admissible under Section 1032(2) ZPO, emphasising the principle of the primacy of EU law and its protection. Shortly before, the Berlin Higher Regional Court (12 SchH 6/21) had taken a different approach, finding that Germany’s international treaty obligations prevailed over EU law in intra-EU disputes.

These decisions were appealed to the BGH (I ZB 43/22, I ZB 74/22 and I ZB 75/22), which ruled in July 2023 that in intra-EU disputes between a Member State and an investor, an application under Section 1032(2) ZPO against ICSID proceedings initiated under Art. 26 ECT is admissible. The BGH held that the general blocking effect of ICSID arbitral proceedings against review by state courts does not apply to intra-EU investor-state arbitral proceedings due to the primacy of European Union law. Arbitral proceedings in ICSID arbitral proceedings must be reviewable by European state courts, and this review can be bindingly anticipated in proceedings pursuant to Section 1032(2) ZPO. Furthermore, according to the case law of the ECJ, the arbitration clause in Art. 26 ECT is invalid due to a violation of the Treaty on the Functioning of the European Union (TFEU) and the arbitral proceedings initiated on this basis are inadmissible.

The BGH has thus confirmed that the ECJ's Achmea jurisprudence also precludes ICSID arbitrations and that EU law takes precedence over member states’ obligations under the ICSID Convention. Disputes between member states or between a member state and an investor from a member state should not be removed from the jurisdiction of the ECJ in order to preserve the coherence and uniformity of Union law. This is consistent from an EU law perspective. In the decision, the BGH emphasised that this is a narrowly limited exception to the fundamental exclusivity of ICSID proceedings.

In a decision from October 2023 on the declaration of enforceability of an arbitral award issued in Geneva concerning the bilateral investment treaty between Germany and India, the BGH (I ZB 12/23) confirmed this narrow exception and held that the Achmea jurisprudence is not transferable to bilateral investment treaties between member states of the European Union and third countries (extra-EU BITs). Following the ECJ's Komstroy decision (C-741/19), the BGH held that arbitration clauses in extra-EU BITs are not contrary to EU law. The decision not only confirms the BGH's compliance with EU law, but also its pro-arbitration stance.

Conclusion

The continuously positive attitude of the German courts towards arbitration and the current reform efforts of the German legislator suggest a continued positive outlook for arbitration in Germany.