This is an Insight article, written by a selected partner as part of GAR's co-published content. Read more on Insight
Despite the fact that Germany has only just under 83 million inhabitants, the size of German exports ranks among the highest worldwide. Due to Germany’s great focus on exports, the country is closely intertwined with the world economy. As a consequence of the size of German exports and the multitude of economic international relationships of German companies, trade disputes with a connection to Germany are not uncommon, be it because of German jurisdiction, German material law applying or that at least one German party is involved.
There are good reasons for choosing Germany as a forum for international disputes. The German Arbitration Law provides a structured basis for arbitration side by side with the rules of the German Arbitration Institute (DIS). In addition, the recognition of foreign arbitral awards has been facilitated since Germany adopted the New York Convention. The German courts, which under the guidance of the German Federal Court of Justice are developing an increasingly harmonised case law, contribute to the fact that it as a forum for arbitration can be a desirable alternative to other locations, especially since Germany is very internationally oriented and centrally located. Thus, Germany is becoming increasingly important in the context of international arbitration.
The following brief overview gives an insight into the German Arbitration Law and shows the adoption of the new DIS Rules one year after their publication. In its final section, the article touches on a recent Achmea court decision and how it relates to arbitration in Germany.
German arbitral jurisdiction
The German Arbitration Act, which is based on the UNICITRAL Model Law, is regulated in the German Code of Civil Procedure (section 1025ff ZPO). It applies when the place of arbitration is in Germany.
Where the parties have the possibility of having legal relations, they may conduct arbitration proceedings. Pursuant to section 1030 I ZPO, any pecuniary claim may therefore be the subject of an arbitration agreement. Excluded from arbitration are disputes regarding the existence of a rental contract (section 1030 II ZPO) and non-proprietary claims that could not be subject to a settlement. Also, German law provides some exclusions from arbitration; for example if securities trading is concerned (section 37h of the Securities Trading Act).
The central starting point of arbitration proceedings is that the parties have effectively agreed to resolve conflicts not before a state court but before an arbitral tribunal. Such an arbitration agreement in accordance with section 1029, paragraph II of the German Civil Code can be entered into in the form of an independent agreement (arbitration agreement) or in the form of a clause in a contract (arbitration clause).
It is compulsory that the arbitration agreement of the parties is effective. Only in this way can the jurisdiction of the arbitral tribunal be established. The latter can then decide on the existence and validity of the arbitration agreement itself, as in section 1040 I ZPO (competence-competence). It should be noted that an invalid contract may also contain an effective arbitration agreement (cf. section 1042 I 2 ZPO). This gives the arbitral tribunal the opportunity to decide on the legal consequences of the invalid contract.
Once the question of the jurisdiction of the tribunal has been clarified, it must be decided according to which rules the arbitration proceedings are to be conducted. The parties may elect to agree on the rules that should apply for the ad hoc arbitration on an individual basis or to fall back on already existing rules of procedure, whereas developing procedural rules individually requires a high degree of experience and involves a great deal of effort. Established rules are provided, among others, by the DIS or, for instance, by the International Chamber of Commerce. It should be emphasised that the ‘group of companies’ doctrine is not established in Germany so that an arbitration agreement has no binding effect for a non-signatory. Nonetheless, a once-agreed-on arbitration clause clings to the claim and cannot be dislodged unilaterally.
In contrast to proceedings in state courts, the parties in arbitration proceedings are able to determine the number and the person of the arbitrators themselves. If the number of arbitrators has not been determined, the number of arbitrators shall be three according to section 1034 I ZPO. The parties are free to decide on the procedure for appointing arbitrators. For a tribunal consisting of three arbitrators, each party usually appoints one arbitrator and these two appoint the chairman. If an appointment leads to difficulties, the competent higher regional court shall decide on the appointment at the request of one of the parties. The German Arbitration Law does not require specific qualifications for arbitrators. Arbitrators may be legal professionals but also, for instance, persons who have technical expertise in the subject matter in dispute. However, it is essential that the arbitrators are impartial and independent. An arbitrator can be challenged if circumstances exist and give rise to justifiable doubts regarding these qualities.
The DIS Rules 2018 and how they have been received
As already mentioned above, the parties can rely on administrated rules of an arbitration organisation within the framework of German arbitration. On 1 March 2018, the new arbitration rules of the DIS (DIS Rules 2018) came into force and it was the first reform in 20 years that replaced the DIS 1998 Arbitration Rules. The new rules have already been discussed in several essays, so this article gives a slight indication on how practice has accepted the amendments. It is fair to say that the new rules are broadly accepted by users as a modern tool for conducting arbitration efficiently.
The past year has shown that the new DIS rules contain some innovations that make arbitration faster and even more efficient. According to section 12.2 of the DIS Rules 2018, the respondent must appoint his or her arbitrator within 21 days, whereas previously this had to take place within 30 days. The time limit for responding to the claim is 45 days after service of the claim on the respondent (section 7). In the old version, the rules did not regulate the time limit for the statement of defence at all. Instead, the time limit for the statement of defence was determined by the arbitral tribunal. However, the tribunal had to be constituted first. Even if the arbitral tribunal was constituted without delay, the deadline for the statement of defence was therefore often far longer than 45 days. This acceleration will not only save time but also costs.
Language and place of arbitration
The parties are largely free to determine the arbitration procedure themselves or they can agree on existing arbitration rules. Some of the main reasons for choosing an arbitration procedure are the flexibility of the procedure, the enforceability of arbitral awards, the confidentiality of the procedure and the possibility to choose qualified arbitrators. In contrast to a state court proceeding, the parties involved in the arbitration proceedings are free to choose their own language and place. This allows a better adaptation to the circumstances of the individual case.
The parties should already choose the place of arbitration deliberately. This determines which state courts could possibly intervene in the arbitral proceedings and decide on the effectiveness of the arbitral award. For this purpose, Germany is an ideal location for arbitration. Judges in Germany are typically very well qualified and often bilingual. This ensures that even if a state court needs to be involved in arbitration, for instance if an arbitral award was challenged, the judges are able to deal competently with the subject matter of the dispute.
Confidentiality of arbitration proceedings
Another aspect that makes arbitration more attractive is the confidentiality that prevails in these proceedings. While oral hearings and pronouncement of judgments in state courts are generally public, arbitration proceedings are generally not public. This ensures that the essential cornerstones of the process remain private and that reputation and company secrets are protected from the eyes of the public. In this context, a significant protection of confidentiality is afforded by section 44 I of the DIS Rules 2018. Accordingly, the parties and their attorneys, the arbitrators, employees of the DIS and other persons involved in the arbitration proceedings at the DIS shall maintain secrecy about the arbitration proceedings towards everyone.
Enforceability of arbitral decisions
Arbitral awards can be enforced in the same way as state judgments and the possibility of their enforcement is also regarded as a great advantage of arbitration.
With the New York Convention, the contracting states have undertaken to recognise an arbitral award made in another contracting state and to enforce it in their own country. As Germany has signed the New York Convention, enforceability of international arbitral awards is ensured in Germany.
Costs of arbitration proceedings
Costs are always an important issue to take into consideration when it comes to arbitration. The costs of arbitral proceedings in Germany vary, since they depend on the respective fee regime. Usually the governing rules contain provisions regarding the costs (eg, section 34 of the DIS Rules: arbitrators receive a fixed fee – based on the amount in dispute – and reimbursement of expenses). The DIS receives an administrative fee as well as value-added tax. The DIS offers a calculator on its website to determine the cost of a proceeding and an arbitrator. If the parties did not agree on a provision concerning the costs, the tribunal allocates the costs of the arbitration through an award (section 1057 ZPO). The arbitration agreement can include a provision of security so that an advance on the costs has to be paid-in. Generally, the losing party bears the costs of the arbitration proceedings and reimburses the winning party for their costs. Legal fees may be based on hourly rates or on the statutory fees established in accordance with the amount in dispute. The costs for the assistance of a court depend on the value of the subject matter.
The Achmea ruling
The long awaited Achmea judgment of the Court of Justice of the EU (CJEU), which was rendered in March 2018 and in which the CJEU had the opportunity to decide specifically on the compatibility of the investor-state dispute settlement (ISDS) provision (Slowakische Republik v Achmea BV, CJEU Grand Chamber 6.3.2018, Case C-284/16), which is contained in practically all bilateral investment treaties (BITs) concluded worldwide, had its initial hearing in German courts.
The Achmea decision concerned a provision of the BIT between Czechoslovakia (hereon the Slovak Republic as its legal successor) and the Netherlands, concluded in 1991. Article 8 of the BIT provided that disputes between one party and an investor of the other party would be submitted to arbitration.
The main facts of the case were the following: Slovakia opened its health insurance market to private investors in 2004. The Dutch company Achmea made significant investments in this market.
Following a change of government in 2006, Slovakia partially reversed the liberalisation of the health insurance market and enacted the following three laws:
- the law of 12 December 2006 prohibiting the use of insurance brokers;
- the law of 25 October 2007 prohibiting the distribution of profits from the health insurance business; and
- the law of 28 April 2009 prohibiting the sale of insurance portfolios.
With its decision of 26 January 2011, the Slovak Constitutional Court ruled that the legal prohibition of profit distributions was unconstitutional. With the new legal regulation of the health insurance system, which came into force on 1 August 2011, Slovakia again permitted profit distributions.
As a result, Achmea suffered significant losses. Achmea asserted that it had suffered losses in the double-digit millions owing to the applicant’s statutory regulatory measures. In October 2008, the company initiated arbitration proceedings, claiming damages for violation of its rights under the BIT. In the arbitration proceedings, Frankfurt, Germany, was determined as the place of arbitration in agreement with the parties.
The arbitration tribunal upheld Achmea’s claim and ordered Slovakia to pay damages amounting to €22 million. As a result, the Slovak Republic challenged the award before the Higher Regional Court in Frankfurt as the competent court in Germany on the grounds that it had infringed EU law. As the challenge was rejected, the Slovak Republic appealed this decision with the German Federal Court of Justice. Thereupon, the German Federal Court of Justice finally referred the question to the CJEU as to whether the arbitration clause in the BIT was compatible with EU law. The CJEU denied this and stated that the parties involved had no arbitration agreement, since intra-EU BITs run contrary to EU law. In the CJEU’s view, the well-established principle of German law, as laid out in section 1059, paragraph 2, No. 1 ZPO, applied to this case and the court set aside the final award, finding that investors have effective legal protection before domestic courts and cannot rely on arbitrations to solve intra-EU investment disputes. Otherwise, the principle of the autonomy of EU law would be violated.