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The European Arbitration Review 2018

Germany

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. Four 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 involved parties 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 also be initiated while proceedings under section 1032(2) ZPO are under way (section 1032(3) ZPO).

Fourth, for the setting aside of arbitral awards, the ZPO not only requires violations of the arbitration law or the parties’ agreed procedure, but also that such violation had a causal impact on the award (section 1059(2) no. 1 lit. d ZPO). With this causality requirement, the German arbitration law sets a higher threshold for the setting aside of arbitral awards than the UNCITRAL Model Law (article 34 (2) (iv) Model Law).

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. On the whole, the decisions have once again underscored the arbitration and enforcement-friendly approach taken by German courts and their awareness of the particularities of the arbitral process. Further, the German Institute of Arbitration e.V. (DIS) is currently in the process of revising and updating its 1998 Arbitration Rules. We will provide a short overview of the status of the reform process.

Federal Court of Justice decides on disclosure obligation

Federal Court of Justice, 2 May 2017, I ZB 1/16

In its decision of 2 May 2017, the FCJ confirmed that a party is precluded from raising violations of the right to be heard in enforcement proceedings if it had not previously raised them in the arbitral proceedings. More interestingly, however, it decided that any failure of an expert to disclose circumstances that give rise to justifiable doubts as to his/her independence are grounds for setting aside if the tribunal relied on the findings of the expert.

The underlying arbitration concerned a joint venture dispute relating to the manufacturing of trains for the German National Rail Service (Deutsche Bahn). Following the discovery of certain defects, the the claimant and the respondent (the construction consortium) had agreed to remedy those defects. In the subsequent DIS arbitration, the claimant sought damages claiming that the respondent’s design flaws had led to the defects. the respondent filed a counter claim, alleging that the defects were caused during the assembly process for which the claimant was responsible.

In the arbitral proceedings, the tribunal appointed an expert to determine the origin of the defects. Before his appointment was confirmed, the expert made a declaration of independence, in which he stated that he had no economic or other ties to either of the parties. In his first (August 2012) as well as in his supplemental opinion (December 2012) he reached the conclusion that the defects were caused by design flaws, for which the respondent was essentially responsible. In January 2013, the respondent challenged the expert for lack of impartiality based on various errors evident in his opinion. The tribunal rejected the challenge as inadmissible because it was submitted late. The oral hearing was held in March 2013. Shortly after the hearing, the respondent once again challenged the expert’s independence alleging substantial financial ties between the claimant and the expert’s employer, the T. GmbH. Moreover, the respondent based its challenge also on allegedly defamatory statements made by the expert during the hearing. The Tribunal rejected the challenge in May 2013. In September 2013, the Tribunal awarded damages to the claimant, relying on the key findings in the expert report.

the respondent filed for setting aside of the award before the Higher Regional Court of Karlsruhe5 (the Karlsruhe Court) on two grounds: first, that the tribunal violated its right to be heard because it did not explicitly address the defamatory statements made by the expert at the oral hearing when considering and ultimately rejecting the respondent’s second challenge. Second, that the expert had not disclosed that its direct superior previously worked for the claimant and that substantial financial ties existed between his employer (the T. GmbH) and the claimant. According to the respondent, this fell short of the experts’ disclosure obligation under the ZPO and impacted on the final award justifying a setting aside. the claimant asked the court to reject the application and declare the award enforceable. The Karlsruhe Court rejected the application and declared the award enforceable. the respondent appealed the decision before the FCJ.

In its decision, the FCJ first looked at alleged violation of the right to be heard as a ground for setting aside. According to section 1059(2) No. 2 lit. b ZPO, an award can be set aside if its enforcement would violate the ordre public. A violation of the right to be heard (section 1042(1) ZPO) constitutes a violation of the ordre public.6 However, the FCJ sided with the Karlsruhe Court in that the respondent was precluded from raising that objection pursuant to section 1027 ZPO which states that:

A party who knows that any provision of this Book from which the parties may derogate or any agreed requirement under the arbitral procedure has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance without undue delay or, if a time-limit is provided therefor, within such period of time, may not raise that objection later.

The FCJ pointed out that although the parties may not derogate from the mandatory right to be heard when agreeing on arbitration, they may agree that the arbitral tribunal decides objections concerning the right to be heard. If a party subsequently fails to raise a violation in due time and in accordance with the agreed procedure, it is subsequently precluded from raising such objection in a state court. This outcome does not infringe the right to be heard if the party had the opportunity to raise its objection during the arbitration and if it was not evidently pointless to raise the complaint before the tribunal. The FCJ considered both conditions satisfied as there was ample time between the tribunal’s decision on the second challenge and the issuance of the final award.

The FCJ then went on to look at the respondent’s second objection, namely, whether the tribunal-appointed expert’s lack of disclosure constitutes a ground for setting aside. According to German arbitration law, a tribunal-appointed expert has the same disclosure obligation as arbitrators (section 1049(3) ZPO). According to section 1059(2) No. 1 lit. (d) ZPO, an award can be set aside, if the arbitral proceedings have not been conducted in accordance with sections 1025-1066 ZPO or in line with the parties’ agreement. Moreover, this violation must have impacted the award. Pursuant to the previous case law of the FCJ, not every violation of the disclosure obligation would justify setting aside. Instead, when assessing such violation, the court had to balance the violation (lack of disclosure) against the public interest in the finality of the award. Hence, an award would only be set aside in case of particularly severe violations of the disclosure obligation. The Karlsruhe Court had rejected a violation based on this jurisprudence.

In a change of its jurisprudence, the FCJ now held that any failure to disclose circumstances that can raise doubts as to the expert’s impartiality or independence constitutes a violation of the ZPO within the meaning of the setting aside provision (section 1059(2) no. 1 lit. d ZPO). A particularly severe violation is therefore no longer required. The FCJ went on to discuss the causality requirement in the context of the disclosure obligations.

As described in the introduction, the ZPO, unlike the Model Law, requires for the setting aside of an award that the violation had a causal impact on the award. The FCJ held that this causal link is to be assumed if the award is based on the findings of the expert in question and if the circumstances later discovered would have raised justifiable doubts as to the impartiality and independence sufficient for a challenge.

The FCJ referred the case back to the Karlsruhe Court for it to determine whether the existing ties between the expert’s employer and the claimant would give rise to justifiable doubt as to his impartiality and independence sufficient to justify a challenge.

The FCJ abandoned its previous jurisprudence now giving greater weight to disclosure obligations. In essence, any lack of disclosure within the meaning of section 1036 ZPO amounts to a violation of the ZPO in the context of setting aside proceedings. The lack of disclose no longer has to be balanced with the finality of the award and legal certainty thus lowering the bar for setting aside applications. The decision once again underscores the importance of full disclosure and transparency. Even a minor failure to disclose can no longer be swept under the carpet by pointing at the finality of the award.

The fixing of the arbitrator’s fees by the arbitral tribunal

Federal Court of Justice, 2 March 2017, I ZB 42/16

In March 2017, the FCJ rendered a decision holding that the fixing of the arbitrator’s fees by the arbitral tribunal itself does not give reason to refuse enforcement of a partial award which contains a decision on the shifting of costs between the parties. The Court’s decision was based on the following facts and legal considerations.

In September 2005, the later applicant of the enforcement proceedings (hereinafter referred to as ‘K’) and the later respondent of the enforcement proceedings (hereinafter referred to as ‘H’) concluded a cooperation agreement. Based on the termination of the cooperation by H, K initiated arbitral proceedings claiming, inter alia, that the termination was unjustified and that H would be liable for damages.

The arbitral clause provided for ad hoc proceedings in accordance with the ZPO. In addition, it stipulated that the tribunal should decide on the costs and other expenses of the proceedings.

By procedural order, the arbitral tribunal determined that its fees shall be calculated on an hourly basis at a rate of 500 CHF (around 450 EUR). H raised objections against this decision and upheld these objections during the entire course of the arbitral proceedings. In 2015, the tribunal rendered a partial final award deciding, among others, that H’s termination of the cooperation agreement was valid but that K was nonetheless entitled to be compensated by H. Thus, K partially succeeded with its claim on the merits, whereas the decision on the final quantification of compensation was left to the final award. The tribunal also decided on the costs – as they were so far accrued – and the question of the cost shifting between the parties. Clause 3 of the award, inter alia, set forth the remuneration of the three arbitrators. Clause 4 dealt with the shifting of the arbitrator’s remuneration between the parties, stating that H has to reimburse K in a certain amount. As requested by K – and irrespective of H’s objections – the Higher Regional Court of Jena (the Jena Court) granted enforcement of Clause 4. H appealed to the FCJ, arguing that the fixing of its own fees by the arbitral tribunal would violate German public policy, as the arbitrators would act as judges in their own cause.

Previous case law held that it would be contrary to German law if arbitrators were allowed to render a decision by which they award their own fees against the parties.7

However, in the case at hand, the FCJ pointed out that the arbitrators did not award their own fees against the parties. The part of the award that was declared enforceable (Clause 4) only dealt with the fee shifting between the parties whereas the part of the award which dealt with the fixing of the arbitrators’ fees (Clause 3) was not declared enforceable by the Jena Court. Put differently: the cost decision contained in the partial final award and declared enforceable in Germany, is no valid title for the tribu-nal to enforce its own claim for remuneration against the parties.

Consequently, one must be aware that any dispute between the parties and the tribunal as regards the arbitrators’ fees cannot be pleaded in the course of the enforcement proceedings but must be brought before the general jurisdiction courts. In these proceedings the respective claimant has to plead that the remuneration chosen by the arbitrators has been unreasonable high. This puts the unsuccessful party in an unfortunate position. On the one hand it has to reimburse the other party for the arbitrator’s fees and on the other hand it has to start new proceedings against the tribunal in order to receive at least partial reimbursement for the amounts paid to the other party as a result of the cost shifting. This decision is not conducive to the principle of procedural economy.

Overtaking decisions: The challenge of challenging interim decisions on jurisdiction

Federal Court of Justice, 9 August 2016, I ZB 1/15

This decision of the FCJ deals with procedural questions with regard to the challenge of the arbitral tribunal’s competence in a dispute concerning insolvency proceedings.

The applicant to the court proceedings is insolvency administrator on the assets of the AG-company, the respondent is insolvency administrator on the assets of the A-company, which is the parent company of the AG-company. Both companies were parties to different agreements which provide, inter alia, that any dispute between the parties would be subject to arbitration, provided that no solution had been found by common consent. Furthermore the contracts stipulate that opening insolvency pro-ceedings on the assets of a ‘CI Partner’ – the A-company was a CI Partner under that agreement – was a reason for the termination of the agreement.

Insolvency proceedings on the assets of both companies were opened in 2005 and the parties were appointed as insolvency administrators.

In 2012, the respondent initiated arbitral proceedings against the applicant. The applicant challenged the jurisdiction of the tribunal. After the tribunal – in accordance with section 1040(3) ZPO – rendered an interim decision, confirming its jurisdiction, the applicant applied to the Higher Regional Court of Frankfurt (Frankfurt Court) for review. After the Frankfurt Court rejected the application, the applicant appealed to the FCJ. In the meantime, the arbitral tribunal issued a final award in the case. Notwith-standing this, the FCJ did not reject the applicant’s challenge of the tribunal’s competence as inadmissible and thereby deviated from its established case law.

In the past, the FCJ had held that a party challenging an interim award confirming the tribunal’s jurisdiction, loses its legitimate interest, a procedural condition for making such an application, when the tribunal issues a final award in the meantime. As a consequence of the Court’s former view, the request to set aside the interim award became inadmissible.8 This practice had created an unpleasant situation for the applicant: on the one hand, it had to apply for review of the interim award because otherwise it would be precluded from raising this objection in a later stage, eg, in setting aside or in enforcement proceedings.9 On the other hand, it resulted from the FCJ’s former case law that the challenge of the interim decision before the competent German court bore the risk that these court proceedings would become inadmissible if the tribunal issued a final award before a court decision could be rendered. As a consequence of this inadmissibility, the applicant was liable for the entire costs of the court proceedings and would have to commence new proceedings challenging the final award.

It is mainly for reasons of procedural economy, that the FCJ, in its latest decision, deviated from this practice. The Court emphasised that it would be in the interest of the parties and in the interest of procedural economy that the costs and efforts spent during the proceedings for judicial review of the interim decision would not be wasted due to the (overtaking) final decision of the tribunal. The Court further explained that the state court’s decision on the tribunal’s competence – provided that the state court sets aside the interim decision of the tribunal – constitutes a reason to set aside the final award pursuant to section 1059(1), (2) ZPO and thus can be pleaded in the respective setting aside or enforcement proceedings.

Further to this change in its jurisprudence with regard to the challenge of the tribunal’s competence, the FCJ also affirmed its view expressed in previous decisions that an insolvency administrator is bound by an arbitration agreement entered into by the insolvency debtor.10 In the case at hand, the Court held that nothing else would follow from the contractual provision according to which the opening of insolvency proceedings would be a reason to terminate the agreements. According to the Court, it has to be ascertained whether the parties intended the arbitration clause to become ineffective together with the other contractual provisions. The Court held that in general – and in the case at hand – this would not be the case as it would generally not reflect the intention of the parties.

Enforcement of an arbitral award in insolvency proceedings

Federal Court of Justice, 26 April 2017, I ZB 119/15

In this case the FCJ held that a request for determination of a claim to the insolvency schedule is inadmissible in proceedings for enforcement of an arbitral award.

The applicants were shareholders of a company which became insolvent. The respondent was insolvency administrator on the assets of said company. In 2014, before the company became insolvent, the applicants initiated enforcement proceedings aiming at enforcing an arbitral award against the company. The award, inter alia, ordered the company to pay to each of the applicants an amount of €111,888.37.

The insolvency proceedings over the assets of the company were opened in September 2015 and the respondent was appointed as insolvency administrator on the assets of the company. This also affected the enforcement proceedings, because pursuant to section 240 ZPO pending court proceeding – including enforcement proceedings – were suspended if (1) insolvency proceedings were opened and (2) the court proceedings were related to the insolvency estate. As a consequence of this suspension, the applicants requested the respondent to determine their claims to the insolvency schedule.11 This was denied by the respondent which is why the applicants were allowed to resume the enforcement proceedings.12

However, after resuming the proceedings, the applicants no longer requested enforcement of the award, they rather requested that their claims will be determined to the insolvency schedule. The Higher Regional Court of Cologne rejected these claims, arguing that they were inadmissible in enforcement proceedings. The Federal Court of Justice confirmed this decision of the Cologne Court. The Court held that it can only be assessed in enforcement proceedings whether the arbitral award derogates from one of the reasons listed in section 1059(2) ZPO, ie, one of the reasons to set aside the award. Specific questions with regard to insolvency and insolvency proceedings have nothing to do with section 1059 ZPO and thus were not and could not be assessed. Consequently, the Court held that it cannot be assessed in the enforcement proceedings, whether the claims subject to the arbitral award were claims of creditors in insolvency proceedings or – even if they were such claims – which position the claims would have in the insolvency schedule. Furthermore, the Court pointed out that the award was made subject to a reservation in order to prevent the company’s assets to become less than the amount of the share capital. Due to this reservation a request for determination of the claims to the insolvency schedule would also include the assessment of whether the reservation became operative or not. According to the Federal Court of Justice, this assessment could not be made in enforcement proceedings.

Consequently, one has to be aware that, under German law, the determination of a claim to the insolvency schedule cannot be reached in the course of enforcement proceedings. It is rather necessary to file respective claims in ordinary court proceedings pursuant to section 180(1) 1st sentence of the Insolvency Statute.

Arbitrability of Shareholder Disputes I, II and III

Federal Court of Justice, 6 April 2017 – I ZB 23/16 (Arbitrability III)

Federal Court of Justice, 6 April 2009 – II ZR 255/08 (Arbitrability II)

Federal Court of Justice, 29 March 1996 – II ZR 124/95 (Arbitrability I)

In July 2017, the FCJ once again decided on the arbitrability of shareholder disputes in a decision the court itself refers to as Arbitrability III. Below, we will recap the legal considerations of the preceding decisions I and II before briefly outlining the considerations of this latest decision.

More than 20 years ago, in 1996, the FCJ decided in Arbitrability I that challenges to shareholder resolutions of limited liability companies (GmbH) are not arbitrable because such a decision would affect all shareholders, even those that have not participated in the arbitral proceedings. Some shareholders would thus be denied their opportunity to be heard and their procedural rights could not be guaranteed in the arbitral process. According to the FCJ, only in state courts, where shareholders could intervene in such disputes with full procedural rights, would their rights be fully respected.

Thirteen years down the road, the FCJ decided in its well-known Arbitrability II (2009) that shareholder disputes are arbitrable after all, provided that they provide protections equivalent those that shareholders can obtain in state courts. More specifically, it must be ensured that shareholders are informed about the dispute at all relevant stages, that they have the right to intervene and have an equal say in the selection of arbitrators.

If an arbitration clause in in the articles of association ensured those procedural rights of all shareholders, shareholder disputes would be arbitrable. The decision itself concerned the challenge of a shareholder resolution of a limited company (GmbH).

Another eight years on the FCJ decided again on the arbitrability of shareholder disputes (Arbitrability III). In its decision it confirmed the requirements set out in its 2009 decision and held that these requirements are also applicable in respect to limited liability partnerships (GmbH & Co. KG). In the specific case, however, the arbitration clause contained in the articles of association fell short of the requirements stipulated by the FCJ in ‘Arbitrability II’, as they we drawn up back in 1968 and not updated since.

This illustrates the need to review and update older articles of association in order to ensure the continuing validity of arbitration clauses. The DIS provides Supplementary Rules for Corporate Law Disputes13 and respective Model Clauses14 which were drafted in response to the FCJ ‘Arbitrability II’ decision.

Reform of the DIS Rules

The rules of the DIS are currently under revision. The committee in charge of revising the rules is headed by the secretary general of the DIS, Dr Francesca Mazza. The committee consists of several renowned German arbitration practitioners which inter alia include also one of the co-authors of this article, Dr Richard Happ. A final draft version of the new rules is expected in late September 2017. The new rules are set to enter into force on 1 March 2018.

Notes

  1. An English translation is available at www.disarb.org.
  2. Cf. section 1031(2) ZPO which makes certain exceptions to the written form requirement of the UNCITRAL Model Law.
  3. 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.
  4. See Astro Nusantara International BV and others v PT Ayunda Prima Mitra and others [2012] SGHC 212.
  5. Higher Regional Court Karlsruhe, 18 December 2015, 10 Sch 12/13.
  6. The FCJ emphasised that a court may generally assume that the tribunal took into consideration the arguments and evidence presented by the parties. A tribunal is further not under an obligation to explicitly address each and every argument in theirs reasons. The party raising a violation of the right to be heard must present evidence that shows that arguments or evidence was not taken into consideration at all when reaching its conclusions. See Federal Court of Justice, 2 May 2017, I ZB 1/16, para. 18.
  7. See Federal Court of Justice, 28. March 2012, III ZB 63/10; also Higher Regional Court of Munich (Oberlandesgericht München), 23 February 2007, 34 Sch 31/06, with further references.
  8. Federal Court of Justice, 5 November 2015, I ZB 5/15, with further references.
  9. Cf. Geimer in Zöller, 31 edition, commentary to the ZPO, Section 1040, para. 12.
  10. See for previous decisions: Federal Court of Justice, 25 April 2013, IX ZR 49/12, with further references.
  11. According to section 87 of the Insolvency Statute the applicants were obliged to do so.
  12. This follows from section 179(1) in conjunction with section 180(2) and section 184(1), second sentence of the Insol-vency Statute.
  13. The DIS-Supplementary Rules for Corporate Law Disputes 09 (SRCoLD) can be found at: www.disarb.org/en/16/rules/dis-supplementary-rules-for-corporate-law-disputes-09-srcold-id15
  14. The DIS Model Clauses for Corporate Disputes can be found at: www.disarb.org/en/17/clause/dis-model-clause-for-corporate-law-disputes-09-id10