The German arbitration law is laid down in sections 1025 to 1066 of the German Code of Civil Procedure (ZPO).1 Germany adopted the 1985 UNCITRAL Model Law on International Commercial Arbitration (the UNCITRAL Model Law) with some minor modifications. Three of these shall be highlighted here.
First, the ZPO provides for a relaxed written form requirement for the conclusion of arbitration agreements. A letter, which summarises an oral agreement between the parties including an arbitration agreement and which was transmitted from one party to the other party and against which no objection was raised in good time by the other party, is a valid arbitration agreement, if all parties involved are merchants, companies or commercial partnerships.2
Second, the ZPO has different sets of rules for the recognition and enforcement of domestic and foreign arbitral awards. Domestic arbitral awards are enforced in accordance with section 1060 ZPO (specifying separate grounds for refusal in section 1059(2) ZPO). Regarding the recognition and enforcement of foreign arbitral awards, section 1061 ZPO explicitly and exhaustively refers to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention). The German Arbitration Law is therefore readily accessible to the international arbitration practitioner familiar with the Model Law and the New York Convention.
Third, the German Arbitration Law allows parties to seek a declaratory judgment on the validity of the arbitration agreement prior to the constitution of the arbitral tribunal (section 1032(2) ZPO). While this provides an opportunity to clarify issues relating to the competence of the tribunal at an early stage, it does not deprive the party of the right to immediately start arbitration proceedings, which may be initiated also while proceedings under section 1032(2) ZPO are under way (section 1032(3) ZPO).
Against this backdrop, and coupled with a number of high-profile cases in recent years, decisions of the German Higher Regional Courts and the German Federal Court of Justice (FCJ) on German arbitration law are increasingly reported in the Digest of Case Law on the Model Law,3 frequently reviewed outside Germany by scholars, and more recently even referred to by foreign courts when applying and interpreting national law in pari materia.4
The past year has seen a set of noteworthy decisions in Germany relating to both commercial and investment arbitration cases.
Arbitrations in sports-related disputes, especially the particularities of the Court of Arbitration for Sport (CAS), have continued to be the subject of German court decisions, with the FCJ now having decided the case of the speed skater Claudia Pechstein. Despite this decision, the debate relating to the structural inequalities in sports-related arbitration agreements continues. The highly discussed decision of the Higher Regional Court of Frankfurt (the Frankfurt Court) in Achmea (formerly known as Eureko) v Slovak Republic, in which the court had to address the validity of arbitration clauses in intra-EU bilateral investment treaties (intra-EU BITs), has now made its way to the FCJ, which recently made a preliminary reference to the European Court of Justice (ECJ).
On the whole, the decisions in the past year have once again underscored the arbitration and enforcement-friendly approach taken by German courts and their awareness of the particularities of the arbitral process.
Federal Court of Justice decides in the Pechstein case
Federal Court of Justice, 7 June 2016, KZR 6/15
In June 2016, the FCJ issued its judgment5 regarding Claudia Pechstein’s claim for damages against the International Skating Union (ISU) for a doping ban she considered unlawful. As previously reported,6 the courts of first and second instance – the Regional Court of Munich and the Higher Regional Court of Munich – had admitted her lawsuit despite a prior final CAS award. Both courts considered Pechstein’s arbitration agreement with the ISU to be invalid. In the courts’ view, that agreement, which was included as a standard clause in a registration form Ms Pechstein had to sign to compete in the 2009 championships in Hamar (Norway), had not been entered into voluntarily. Consequently, the courts did not consider themselves barred from exercising jurisdiction over the case.
While the Regional Court accepted the res judicata effect of the binding CAS award, it assumed that the CAS award did not render Ms Pechstein’s claim for damages inadmissible. Since her claim was based on the alleged illegality of the doping suspension, the claim, however, failed on the merits because the Regional Court saw itself barred from reviewing that issue. The Higher Regional Court of Munich ruled that the standard arbitration clause which the athletes had to accept constituted an abuse of a dominant market position within the meaning of the German antitrust law. Therefore, the Higher Regional Court held that Ms Pechstein was not barred from bringing its claim in state courts. However, the Higher Regional Court did not move on to the merits straight away but allowed for an appeal of its admissibility decision to the FCJ.
The FCJ now overturned the Higher Regional Court’s judgment. It agreed with the Higher Regional Court that the ISU indeed had a dominant market position. Yet, it could not see an abuse of that position in requiring athletes to enter into standard arbitration agreements.
To confirm the validity of the arbitration agreement between Ms Pechstein and the ISU, the FCJ first established that the CAS was a ‘true’ arbitral tribunal within the meaning of sections 1025(2) and 1032(1) ZPO. To arrive at this conclusion, the FCJ distinguished the CAS from internal arbitral bodies of sports associations (Vereinsgerichte or Verbandsgerichte), which would not possess the necessary independence and neutrality. The Higher Regional Court of Munich, however, had considered the closed list from which CAS arbitrators must be chosen as unbalanced to the detriment of athletes. The list is drawn up by the International Council of Arbitration for Sport (ICAS), where international sports federations, the International Olympic Committee and the Association of the National Olympic Committees have a dominant position. The FCJ, however, concluded that this would not lead to insufficient guarantees for the protection of the rights of the athletes. First, the FCJ had no doubt that the list contained a sufficient number of arbitrators independent from the ISU from which the parties could choose their arbitrators. Secondly, the FCJ held that the ISU itself had no dominant position in the ICAS as it was only one of many international sport federations represented in the ICAS. The closed list of arbitrators, hence, did not constitute an institutionalisation of a preponderance of a particular sports federation.
The FCJ further reasoned that the sports federations on the one hand and the athletes on the other hand could not be considered as two blocks with fundamentally opposed interests, leading to a joint dominant position of the federations and Olympic committees against the athletes. Rather, the sports federations as well as the International and National Olympic Committees may have competing interests in specific cases in addition to the uniform one to fight doping. The fight against doping, however, was also in the interest of the athletes.
Turning to the specifics of the abuse of a dominant market position, the FCJ took into account on the one hand the sports federations’ interests in having a functioning worldwide uniform system for dispute resolution and on the other hand the athletes’ interests in receiving a fair trial before an impartial and independent tribunal. It concluded that these interests were actually not contradictory. Stressing the importance of a uniform international resolution of doping disputes, the FCJ held that this task could not be left to domestic courts without seriously impairing the objective sought. The FCJ concluded that, in the present form,7 the CAS rules provide for a still tolerable procedure for the appointment of arbitrators.
Looking then into Ms Pechstein’s fundamental rights under the German Constitution, the FCJ held that, in the case of a contractual relationship such as Ms Pechstein’s arbitration agreement with the ISU, a voluntary acceptance of that relationship would generally be assumed. Ms Pechstein had not been threatened or forced to sign the agreement and there was no indication of fraud either. Yet, Ms Pechstein’s decision to agree to the rules for the speed skating competition in Hamar in 2009 (which included the standard arbitration agreement in question) was without alternative, as she – in the exercise of her profession as a skater – was dependent on the participation in such competitions. However, according to the FCJ, this was counter-balanced by the sports federations’ right to self-administration, which is also protected under German constitutional law. The FCJ, therefore, denied an abuse of the ISU’s dominant market position.
Having decided that article 6(1) ECHR, article 102 of the Treaty on the Functioning of the European Union (TFEU) as well as Swiss law would not require a different outcome, the FCJ ultimately declared Ms Pechstein’s claim inadmissible.
Ms Pechstein has already announced that she is now going to take the case to the German Constitutional Court, which, however, can only review the matter with regard to violations of constitutional law but not regarding all the potential procedural issues she might want to raise.
One such issue may be what triggered a minor outcry in the German media after the release of the judgment: the FCJ took its decisions based on the assumption that, in the event the parties to a CAS dispute could not agree on a presiding arbitrator to be appointed, the President of the CAS Appeals Division would make this appointment. Yet, according to the CAS’ Procedural Rule R54, the latter is always the case for appeals against a federation’s or association’s decision (eg, in doping matters). As the President of the CAS Appeals Division is appointed with a simple majority of the members of the ICAS and from among its members,8 critics argue that this procedure is one manifestation of the structural imbalance of the CAS system.9
In any case, what the Pechstein saga has revealed so far is that the CAS arbitral system is far from being perfect. This message has hopefully also reached the responsible officials in Lausanne and will trigger further improvements of the sports arbitration process – to the benefit of both the athletes and the sports federations.10
Federal Court of Justice asks ECJ to rule on intra-EU BITs
Federal Court of Justice, 3 March 2016, I ZB 2/15
In the 2016 edition of the The European, Middle Eastern and African Arbitration Review, we reported on the setting aside proceedings of the final award in the investment dispute between the Dutch Achmea B.V. (formerly known as Eureko) and the Slovak Republic.11 The Slovak Republic challenged the award rendered by an UNCITRAL ad hoc tribunal (the Tribunal) arguing that the Tribunal lacked jurisdiction because the arbitration clause was contained in an intra-EU bilateral investment treaty (BIT) and thus invalid (section 1059(2)(1)(a) ZPO) due to its incompatibility with EU law, in particular articles 344, 267 and 18 TFEU. The Higher Regional Court of Frankfurt (the Frankfurt Court) dismissed all EU law related objections. An appeal was subsequently lodged with the FCJ. With its decision of 3 March 2016, the FCJ now requested a preliminary ruling from the ECJ on the compatibility of investor-state arbitration clauses in intra-EU BITs with EU law. We will briefly again summarise the procedural history and the reasoning of the Court before addressing the decision of the FCJ requesting a preliminary ruling.
The FCJ had already been seized with the matter in 2014 when the Slovak Republic appealed the Frankfurt Court’s mid-2012 decision to uphold the partial award on jurisdiction. This appeal was, however, rendered moot by the Tribunal’s final award.12 In its 2014 decision concerning the final award, the Frankfurt Court rejected the Slovak Republic’s EU law arguments for a number of reasons.
The Slovak Republic’s first argument was that the arbitration clause in the BIT violates article 344 TFEU, which obliges EU member states ‘not to submit a dispute concerning the interpretation or application of the Treaties [ie, TEU and TFEU] to any method of settlement other than those provided for therein.’ The Frankfurt Court flatly rejected this argument, pointing out that the treaties lacked a mechanism to settle disputes between member states and individuals. Furthermore, it pointed out that the ECJ, in its Opinion 1/09 of 8 March 2011, concluded that any violation of article 19(1) TEU, even taking into account the preliminary ruling procedure of article 267 TFEU, would not amount to a violation of article 344 TFEU.
With regard to the Tribunal’s inability to request a preliminary ruling from the ECJ pursuant to article 267 TFEU, the Frankfurt Court considered the situation comparable to the one of tribunals in commercial arbitrations. Invoking the ECJ’s jurisprudence on commercial arbitrations, it reaffirmed that, although arbitral tribunals cannot ask the ECJ for a preliminary ruling, arbitration clauses do not violate article 267 TFEU.
The Frankfurt Court also rejected the Slovak Republic’s argument that intra-EU BITs violate article 18 TFEU because they would discriminate against investors from other EU member states. It argued that since the arbitration agreement does not violate the above provisions of EU law, nothing would militate against extending the arbitration clause also to investors from other EU member states (instead of abrogating the otherwise valid arbitration agreement).
Finally, the Frankfurt Court went on to also dismiss the Slovak Republic’s public policy arguments. It discarded the arguments based on article 267 TFEU for the same reasons as above. There was also no conflict with substantive provisions of EU law in this regard, in particular no violation of the freedom of capital movements, since the Tribunal had dismissed Achmea’s claim for violation of the BIT’s free transfer of payments provision.
The Frankfurt Court considered all questions related to EU law to be already sufficiently answered in the jurisprudence of the ECJ and therefore, relying on the acte clair doctrine, refrained from requesting a preliminary ruling by the ECJ. The decision of the Frankfurt Court was appealed before the FCJ. In its decision of 3 March 2016,13 the FCJ disagreed and requested a preliminary ruling from the ECJ concerning the compatibility of intra-EU arbitration clauses with articles 344, 267 and 18 TFEU (in that specific order).
The ruling will hopefully bring some welcome clarity to the intensely disputed and debated relationship between intra-EU BITs and EU law. The European Commission currently makes every effort to eliminate intra-EU investment arbitration. Already in June 2015, it initiated infringement proceedings against five EU member states (Austria, the Netherlands, Romania, Slovakia and Sweden) and requested them to terminate their intra-EU BITs. Should the Commission succeed, this would deprive EU nationals investing in another EU member state from the possibility of having recourse to a neutral forum for the settlement of their disputes with that state.
In contrast to the European Commission, the German FCJ seems to favour the reasoning of the Frankfurt Court. In particular, the FCJ seems unconvinced that article 344 TFEU prohibits a dispute resolution mechanism between an investor and the host state considering that EU law does not address this situation. The FCJ also contended that article 267 TFEU does not stand in conflict with intra-EU investment arbitration since the decisions can be refused enforcement if they violate public policy, which also includes breaches of fundamental provisions of EU law. The FCJ pointed out that the ECJ had accepted this limited form of review in arbitrations between private parties and that it does not see any reasons that would justify a different approach in investor-state arbitrations.
Arbitral tribunals’ obligation to transmit documents to the other party
Federal Court of Justice, 28 January 2016, I ZB 37/15
The applicant in the proceedings had signed a cooperation agreement with the respondent for the development of a golf course as well as a separate agreement referring all related future disputes to arbitration. Some years later a dispute arose between them as to the obligations arising under the cooperation agreement. The respondent later terminated the cooperation agreement and the applicant initiated arbitration proceedings. Following two separate oral hearings, a partial award was rendered declaring the termination to be invalid and awarding damages to the applicant who subsequently sought to enforce the partial award.
The respondent objected to the enforcement and applied for the annulment of the award pursuant to section 1059(2) No. 1 (b) ZPO, which provides, inter alia, that an award can be annulled if a party was ‘unable to assert the means of challenge or defence available to him’. The respondent submitted that the tribunal had failed to transmit to him certain documents in accordance with section 1047(3) ZPO that the applicant had introduced into the proceedings. The respondent also contended that this failure infringed the respondent’s right to be heard and thus violated public policy (section 1059(2) No. 2 b) ZPO). The Higher Regional Court Frankfurt (the Frankfurt Court) rejected the application for annulment and declared the award to be enforceable.14 The respondent filed an appeal to the FCJ.
The FCJ rejected the appeal holding that section 1047(3) ZPO does not impose an obligation on the arbitral tribunal to transmit documents to the other party, if the other party already has knowledge of these documents. In fact, arbitral tribunals are generally not obliged to transmit or serve documents on the other party, but are simply required to ensure that the other party has knowledge of such documents. Section 1047(3) ZPO provides that: ‘Any written pleadings, documents, and other communications supplied by one party shall be brought to the other party’s knowledge […].’ Moreover, the legislative intent of section 1047(3) ZPO – to specify the right to be heard – does not require the tribunal to transmit documents that both parties have knowledge of.15 The FCJ also looked at German court practice, which does not require a party to send exhibits to the other party which the other party already has in its possession in original or certified copy (see section 133(1) ZPO).
The FCJ noted that the Frankfurt Court had found that the documents introduced by the applicant were a collection of contractual documents already exchanged between the parties during the negotiation and execution of the cooperation agreement. At no point during the proceedings did the respondent assert that he had no knowledge of the documents in question or that the documents submitted actually deviated from originals or certified copies that he had in his possession. Consequently, the FCJ correctly rejected an interpretation of section 1047(3) ZPO that would have allowed an annulment for mere formal reasons (ie, failure to transmit documents) but which did not have a material impact on the parties’ right to be heard considering that the respondent was able to review and comment on documents already in its possession.
However, the FCJ indicated that if an arbitral tribunal has reasons to believe that documents submitted deviate from the documents that the other party already has in its possession (or from the originals), it could be under an obligation to actually transmit the documents to the other party.
Considering that section 1047 ZPO is a verbatim adoption of article 24 of the UNCITRAL Model Law, this decision may also be of particular interest to practitioners in other jurisdictions with similar provisions.
The FCJ did not specify how arbitral tribunals are expected to become aware of deviations between documents submitted and documents already in the possession of one of the parties. In practice, however, a cautious tribunal will always ask each party to transmit to the other party or parties all documents also presented to the tribunal.
Distinguishing between arbitration and expert determination clauses
Higher Regional Court of Munich, 23 December 2015, 34 SchH 10/15
Upon the applicant’s request for the appointment of a sole arbitrator,16 the Higher Regional Court of Munich (the Munich Court) had to decide whether an identical clause in two construction contracts provided for arbitration or expert determination. The clause stipulated that any dispute shall be ‘decided by a publicly appointed and sworn expert with binding effect between the parties’. The clause specified that an expert (which was already identified by name in the general terms and conditions of the respondent) should only decide matters relating to construction defects, change orders, accounting and other matters related to the construction. Moreover, the clause provided for Landshut, Germany, to be the place of jurisdiction.
The applicant argued that the clause constituted an agreement to arbitrate because the expert was supposed to render a decision with ‘binding effect’. Furthermore, the fact that a place of jurisdiction was designated in the clause indicated that this ought to be understood as the arbitral seat for the dispute. The applicant also argued that questions relating to construction defects, change orders, accounting and contract execution necessarily involved legal considerations.
The Munich Court held that the clause did not constitute an agreement to arbitrate within the meaning of section 1029 ZPO but rather provides for expert determination. When assessing whether the parties agreed on expert determination or on arbitration it was not relevant, in the Munich Court’s view, how the parties designated the body that was called to decide the dispute but rather what decisional power the parties attributed to such body.
In this case, the Munich Court concluded that the parties had tasked the expert only with the determination of selected factual issues such as the existence and extent of construction defects. They had not entrusted the expert to decide on the legal consequences that derived from this factual determination. The parties therefore had not intended the expert to decide conclusively on the rights and obligations under the construction contracts and render an award that would be readily enforceable. The questions that the expert was tasked to decide are ordinarily decided by experts during arbitration proceedings. The fact that the parties had intended the decision to be binding between the parties does not make it an agreement to arbitrate. The findings of an expert determination are ordinarily binding upon the parties and on the court that has to subsequently decide on the legal issues. The court can only review the determination if there were grave and evident flaws or the expert was evidently biased (see section 319 German Civil Code, BGB). The fact that the parties had also designated a place of jurisdiction indicated that they intended to ultimately resolve their disputes in a state court.
The Munich Court also mentioned that, in case of doubt whether the parties had agreed on an expert determination or on arbitration, the less intrusive interpretation (ie, expert determination) shall prevail. In this case, however, the Munich Court did not have any doubts and rejected the applicant’s request for the appointment of a sole arbitrator for lack of a valid arbitration clause within the meaning of section 1029 ZPO.
Filing set-off claims in enforcement proceedings
Higher Regional Court of Munich, 19 May 2015, 34 Sch 24/14
The Munich Court also had to decide on a set-off claim in proceedings for a declaration of enforceability of an arbitral award. The underlying dispute between two German attorneys concerning claims arising from their civil partnership was decided by arbitration in accordance with the arbitration clause contained in the partnership deed. The applicant partially succeeded in the arbitration and sought a declaration of enforceability before the Munich Court. In these proceedings the respondent filed a set-off claim. The Munich Court held that it was barred from deciding the set-off claim because this fell within the scope of the arbitration clause.
German procedural law allows respondents, under certain conditions, to raise set-off claims during enforcement proceedings (section 767 ZPO). According to section 767(2) ZPO, the grounds for such claims must have come into existence after the close of the hearing.17 In recent years, there has been some debate as to whether the higher regional courts have jurisdiction to decide set-off claims in accordance with section 767 ZPO when dealing with applications for declarations of enforceability or whether such claims fall within the jurisdiction of the local courts.18 In a decision from 2007, the FCJ confirmed that higher regional courts also have jurisdiction to decide set-off claims in these situations,19 provided they do not fall within the scope of a valid arbitration clause or are otherwise precluded.
This decision should remind parties pursuing enforcement of arbitral awards in Germany that section 767 ZPO offers a possibility for a respondent to interject the enforcement of awards if the respondent has a set-off claim that is not covered by the arbitration clause.
- An English translation is available at www.disarb.org.
- Cf. section 1031(2) ZPO, which makes certain exceptions to the written form requirement of the UNCITRAL Model Law.
- UNCITRAL 2012 Digest of Case Law on the Model Law on International Commercial Arbitration, available at www.uncitral.org/pdf/english/clout/MAL-digest-2012-e.pdf.
- See Astro Nusantara International BV and others v PT Ayunda Prima Mitra and others  SGHC 212.
- For the German text of the judgment see SchiedsVZ 2016, 218 et seq.
- See Happ/Scherpf/Rauschning, ‘Germany’, The European, Middle Eastern and African Arbitration Review 2016.
- The FCJ took note of the major changes the CAS system had undergone in the 1990s, in particular following criticism by the Swiss Federal Tribunal in the Gundel case.
- See Statutes of the Bodies Working for the Settlement of Sports-Related Disputes, Rules S6(2) and S8(1).
- See also ‘BGH entschied auf falscher Tatsachengrundlage‘, Legal Tribune Online, 30 June 2016, available at www.lto.de/recht/hintergruende/h/bgh-urteil-pechstein-cas-falsche-tatsachengrundlage/ (last visited 17 August 2016).
- In the same vein also Wilske/Markert/Bräuninger, ‘Entwicklungen in der internationalen Schiedsgerichtsbarkeit im Jahr 2015 und Ausblick auf 2016‘, SchiedsVZ 2016, 127, 144.
- Happ/Scherpf/Rauschning, ‘Germany’, The European, Middle Eastern and African Arbitration Review 2016, summarising the decision of the Higher Regional Court of Frankfurt, 18 December 2014, 26 Sch 3/13.
- Since the partial award had been superseded by the final award, the FCJ dismissed the appeal for lack of continued legitimate interest in the proceedings (Federal Court of Justice, Decision of 30 April 2014, III ZB 37/12). In a more recent decision, the FCJ clarified that the necessary legitimate interest continues to exist if the tribunal renders only a partial award on the merits. In this case, the state court’s ruling on the tribunal’s competence remains relevant since the arbitration is still pending (Decision of 18 June 2014, III ZB 89/13).
- Federal Court of Justice, 3 March 2016, I ZB 2/15.
- Higher Regional Court of Frankfurt, 25 March 2015, 26 Sch 7/12 and Sch 1/13.
- See explanatory notes to section 1024 ZPO, BT-Drucks. 13/5274, p. 49.
- Section 1034(2) ZPO allows a party to request the appointment of an arbitrator by the court if the arbitration clause disadvantages the other party in the composition of the Tribunal. This, however, requires a valid arbitration clause within the meaning of section 1029 ZPO.
- Section 767 ZPO: (1) Debtors are to assert objections that concern the claim itself as established by the judgment by filing a corresponding action with the court of first instance hearing the case. (2) Such objections by way of an action may admissibly be asserted only insofar as the grounds on which they are based arose only after the close of the hearing that was the last opportunity, pursuant to the stipulations of the present Code, for objections to be asserted, and thus can no longer be asserted by entering a protest. (3) In the action that he is to file, the debtor must assert all objections that he was able to assert at the time at which he filed the action.
- See Borris & Schmidt, ‘Vollstreckbarkeit von Schiedssprüchen und materiellrechtliche Einwendungen des Schiedsbeklagten’, in SchiedsVZ 2004, 273.
- Federal Court of Justice, 8 November 2007, III ZB 95/06.
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