05 June 2003

Robert Berengeno

By Dr. Robert Berengeno, Rechtsanwalt[1]

Carrying out national and international economic relations is unthinkable without arbitration tribunals.[2]

I. When and why should arbitration proceedings be agreed to?

The Advantages of Arbitration[3]:

Parties may place the responsibility for making the decision on a person whom they both trust.

  • The arbitrator can be chosen from specialist areas of expertise; for example, specialist legal scholars, business men, technicians, etc.
  • The proceedings are not public. Thus, confidential matters remain confidential regardless of the contentious proceedings.
  • The proceedings are faster. One doesn’t have to wait until the conclusion of normal court proceedings. Furthermore, as a rule, the arbitrator decides faster than the over-burdened normal courts.
  • Costs can be saved as the arbitration proceedings are often cheaper than normal court proceedings.[4]

Finally, there are obvious advantages in the international arena, due to the fact that in many nations the conduct of regular proceedings can be exhausting.

II. A short overview of Arbitration Proceedings.

On January 1, 1998 the German law on arbitration proceedings (Schiedverfahrensrecht) came in force. German Procedural Law (ZPO) has consequently allowed the exercise of this private arbitration jurisdiction[5] in place of official jurisdiction, that is, alongside the normal courts.

Arbitration proceedings are not a part of the proscribed civil process. Instead, they allow for the free election of a private person as the organ of judicial authority. By doing so the normal administration of justice is excluded.[6] Moreover, the constitutionality of arbitration proceedings is incontrovertible.[7]

Connected to its general provisions, the German Procedural Law (ZPO) contains definitions of all the various stages of arbitration proceedings, including the initial agreement on entering into arbitration, the formation of the arbitration tribunal and its jurisdiction, the carrying-out of the proceedings until remittal and defences, and in particular, the enforcement of the arbitrators decision.[8]

1) General Definitions as per the ZPO

Sections 1025 – 1028 of the ZPO control the application of Book 10. Its provisions apply when the venue for the arbitration proceeding are within Germany. Section 1043, Para. 1 of the ZPO provides that the parties must themselves determine the location for the proceedings. However, as is apparent from the rule of section 1043, Para. 2 this venue need not be where the arbitration tribunal actually sits.

Practice Tip: By agreeing upon Germany as the place of venue, one can insure the applicability of German law to the arbitration proceedings.[9]

2) The Arbitration Agreement[10]

a) Forms of the Arbitration Agreement.

This agreement can be concluded in a separate agreement (i.e., arbitration agreement) or within a contractual clause (i.e., arbitration clause[11]), (cf. section 1029 Para. 2 ZPO). Simply stated, either form of the agreement places the responsibility for determining of the matter in full or in part upon the arbitrator. The arbitrator need not decide the entire case and will often enter a binding judgment on a particular part of the claim, such as the quantum of the claim.[12]

Summary: Arbitration tribunals in the sense of Book 10 of the ZPO are private courts that base themselves upon, and decide within the scope of, the private legal agreement. The tribunals are therefore controlled by the relevant provisions of the ZPO instead of those provisions which control a normal court or tribunal.[13]

b) The effect of the Arbitration Agreement

When a claim is raised before a normal court or tribunal, if an arbitration agreement is presented, the court must reject the claim, as long as the defendant has presented the agreement before the beginning of the oral hearing. However, this is not the case, when the normal court/tribunal determines that the arbitrationl agreement is void, inoperative, or unenforceable (compare section 1032 ZPO). In spite of this, the right to present the arbitration agreement before the Regional Court is indefeasible.

Practice Tip: The Court will not address issues related to the arbitration agreement sui sponte.[14] However, the Court provides the parties with the right to object to normal court proceedings, and it suffices to merely bring the agreement to the attention of the Court.

3) The Creation of the Arbitration Tribunal

Sections 1034 – 1039 of the ZPO control in detail the formation of the arbitration tribunal. It provides for the appointment, rejection and termination of the tribunal commission due to inability or impossibility of the fulfilment of its duties, and the replacement of the arbitrator.[15] Basically it provides the following:

  • With a view to fair proceedings, the provisions provide that the impartiality (i.e., neutrality) and independence (i.e., freedom of direction) of the arbitrator be insured. Consequently, a participant cannot act as the arbitrator. For example, a board member of a legal organisation or a company cannot arbitrate a dispute between that organization and the company.[16]
  • In order to insure impartiality, a participant who believes himself to be disadvantaged by the members of the arbitration tribunal may raise a claim before a normal court/tribunal in this regard, to deviate from the named or agreed upon arbitrator, and name one on its own.

4. The jurisdiction of the Arbitration Tribunal

The fourth part of Book 10 of the ZPO contains two sections, i.e. 1040 and 1041 ZPO, which provide important rules on the jurisdiction of the Arbitration Tribunal.

In accordance with section 1040, Para. 1, the arbitration tribunal possesses the competence to determine the legality and most importantly the efficacy of the arbitration agreement.[17] The very decision of the arbitration tribunal regarding its own legality or the efficacy of the arbitration agreement is, nevertheless, only temporary.

Practice Advice: Within a month of service of a written notice of the arbitration tribunal’s decision on the case, any party may make claim before a normal court for review of that decision. However, if the plaintiff has serious doubts regarding the efficacy of the arbitration agreement, it is best to immediately raise a claim before a normal court.

Section 1041 of the ZPO further provides means for obtaining injunctive relief. Unless there is an express provision in the agreement to the contrary, upon the application by one of the parties, the arbitration court may order provisional measures upon a party, which it views as necessary in relation to the matter in dispute.

5. Proceedings before the Arbitration Tribunal

a) General rules

The Proceedings are controlled by sections 1042 to 1050 of the ZPO. The starting point builds a general and inalienable right of the parties to equal treatment and the right to be heard in accordance with sections 1042, Para. 1 of the ZPO. Moreover, the sections regulate the commencement of arbitration proceedings (section1044), the language of the proceedings (section 1045), the contents of the claim and answer (section 1046), the termination of the oral negotiations (section 1047), rules on the default of a party and on expert opinion testimony (§§ 1048, 1049) and the state court’s approval of the arbitration proceedings (section 1050).

b) Hierarchy of the controlling law

Section 1042, Para. 3 and 4 of the ZPO also provides a picture of the structural hierarchy of compulsory and optional legal rules, agreements of the parties, as well as standards for the arbitrator’s decision-making.[18] The following provides a hierarchy of the controlling sources:

  • First, of fundamental importance are laws relating to public order and other non-dispositive provisions such as the guarantee of the right to be heard and the fundament right of equal treatment under the law.
  • Second, procedural rules as provided for by the parties within the arbitration agreement.
  • Third, optional procedural rules contained in §§ 1025 to section 1066 of the ZPO, (i.e., “Book 10”) which may be adopted by the parties
  • Finally, so far as the parties have not agreed, and Book 10 does not contain any default procedures, the holes will be filled at the discretion of the arbitral court, (section 1042, Para. 4 ZPO).

6. The End of the Proceedings: The Arbitration Decision.

The decision has a legal nature and content similar to that of a state judgment. It provides a final statement of decision and thereby concludes the arbitration proceedings.[19]

Other methods of concluding the proceedings are the withdrawal of a claim and the arbitration settlement.

7. Remedies (section 1059 ZPO): Motion for Termination Action for Declaratory Judgement:

Section 1059 ZPO governs the allowed state legal recourse following an arbitration decision. By this section a party has the following possibilities to overturn the decision:

  • In accordance with section 1059 ZPO, a motion for suspension can only be raised to the Appellate Court (i.e., the locally competent Regional Court, “Oberlandesgericht”).
  • Section 1059, Para. 2 of the ZPO provides the grounds for suspension as follows: procedural defect, inefficacy of the arbitration agreement, injury of the rights to be heard and equal treatment before the court, decisions that disagree with what has been claimed, incoherent procedural rules or disagreement with the election of the arbitrator within the provisions in Book 10 of the ZPO or disallowed agreements of the parties (e.g. cohesion, etc, see section 1059 para.2, no 1 ZPO). Next to this, the next most common ground for suspension are those specified in section 1059 para. 2, no. 2 ZPO (i.e., a lack of objectivity according to German Law) and a violation of public order.
  • The deadline for bringing claims is three months after the entrance of the arbitration agreement, as long as the parties have not otherwise agreed (section 1059, Para. 3 ZPO).
  • As long as the requirements of section 1054 ZPO are not fulfilled, a claim for a declaration of the non-existence of an arbitration agreement is allowed. [20]

8. The Costs of the Arbitration Decision

The arbitration process costs money. In contrast to using state courts, the advantage of arbitration is that the parties themselves can agree before arbitration upon how the costs are to be borne. That is, the costs can be limited and apportioned in accordance with the will of the parties, independent of the outcome of the arbitration.

Where the parties have not agreed on the distribution of costs, the arbitration tribunal may decide this issue. However, in such circumstances the arbitrator is not bound by the ZPO, unless it is prescribed in the Arbitral Agreement that section 91 of the ZPO applies. Also, independent of the running of the proceedings, this decision can be made “according to the (arbitrator’s) best judgment having observed the conditions of the individual case.”

9. Notwithstanding an Arbitration Settlement or Decision: Proceedings before the normal Court of Justice

The ZPO also provides for situations when normal courts are authorised to intervene in arbitration proceedings. In the interests of speed and simplicity the Regional High Court will act in the first instance. The parties cannot object to this court´s decisions.

However, the use of this Court is limited by section 1065 to certain exceptional circumstances. This Court may be called upon by either party in order to address the lack of jurisdiction of the arbitration tribunal or to address the unenforceability of the arbitration decision.

10. The Enforcement for the Arbitration Decision and the Arbitration Settlement

The arbitration decision is not, in contrast to a normal decision, a document enforceable by the court. However, the Court can make the arbitration decision a court enforceable decision, (1060-1064 ZPO). The court will deny a claim for a declaration of enforceability when one of the above mentioned reasons for the suspension of the arbitration decision is presented (e.g., lack of jurisdiction, unenforceability, etc.).

IV. Checklist

  • Wills and Testamentary Dispositions: the above mentioned rules from Book 10 of the ZPO (compare section1066) control arbitration tribunal´s proceedings in matters of wills and testamentary decisions.
  • Labour Law. in contrast, the special provisions of §§ 101-110 of the German Labour Court Act control arbitration of labour disputes. Section 2 Para. 1, 2 and section 4 of the Labour Court Act are indefeasible and cannot be contracted out of by the parties. It is to this extent that Book 10 of the ZPO finds no application in these cases, (compare section 1010, Para. 3 of the Labour Court Act).
  • Arbitration Court Regulations: the various arbitration tribunal regulations are provided for by the following institutions: the German Institute for Arbitration Jurisdiction (DIS), The International Handelskammer (ICC), UNICITRAL, American Arbitration Association, London Court of International Arbitration (LCIA-Rules) and the World Intellectual Property Organization (WIPO).
  • An Example of an Arbitration Clause is given by the DIS:

“All disputes arising under this contract (indication of the contract) or within its area of validity, will be decided in accordance with the arbitration regulations of the German Institute for Arbitration Jurisdiction (DIS) in lieu of court legal redress.”

  • The following additions to the DIS-Arbitration clauses are worthy of mentioning. They address the areas concerning:

- The number of arbitrators
- The location of the arbitration proceeding
- The language to be used in the arbitration proceeding

  • Clerks and Judges: often parties forget that judges and clerks need official authorisation to be lifted to their positions within the arbitration proceedings (com. Section 65, Para. 1 BBG, section 40 DriG). If this authorisation is lacking, then any arbitration statement (i.e., decision or settlement) is ineffectual as a violation of section 134 BGB.

[1] The author is a Rechtsanwalt at Bird & Bird, Düsseldorf.
[2] Cf. Henn, Schiedverfahrenrecht (Arbitration Proceedings Law), 3. Ed. 200, S.IX.
[3] Cf. the detailed discussion of Schwab/Walter, Arbitration Jurisdiction, 6. Ed. 2000, S. 4.
[4] Cf. Schwab/Walter (Fn.3); Often mentioned is the possibility of solving disputes over the internet – Online Dispute Resolution (ODR).
[5] Cf. BGH v. 15.5.1986 – III ZR 192/84, NJW 1986, 3027 0 MDR 1986, 917.
[6] Cf. Albers in Baumbach/Lauterbach/Albers/Hartmann, 60 Ed. 2002, Main Feature § 1025 ZPO Note 6, With all provisions ist fundamentally the partivate autonomy of the parties to control, cf. z.B. §§ 1043 para. 1, 1045 para. 1 ZPO just as Berger, Das neue Deutsche Schiedsverfahrenrecht (The New German Arbitration Law), DZWir, 1998, 46.
[7] Cf., Scwab/Walter (Fn.3), Henn (Fn. 2), Rz. 1.
[8] Cf. see Berger, DZWir, 1998, 46.
[9] Cf. further see Berger, DZWir, 1998, 46.
[10] It is important to differentiate between the arbitration agreement and the agreement regarding the arbitrator’s expert opinion. The latter addresses the statement of the facts and elements of a decision that can be assigned to a third party.
[11] The future invalidity of the contract itself does not then influence the validity of the arbitration clause.
[12] Cf. Albers (Fn.6), § 1029 ZPO Rz. 13 m.w.N zur Rspr.
[13] Cf. in contrast Schwab/Walter (Fn.3), S. 1, Henn (Fn. 2), Rz. 1.
[14] BGH RR 1996, 1150 m.w.N.., BAG v. 30.9.1987 – 4 AZR 233/87, MDR 1988, S. 259.
[15] Cf. Geimer in Zöller, 23. Ed. 2002, § 1034 ZPO Rz. 2 ff.; Albers (Fn. 6), § 1029 ZPO Rz. 5.
[16] Cf. Albers (Fn. 6), § 1029 ZPO Rz. 5.
[17] Cf. Berger, DZWir, 1998, 50 m.w.N.
[18] Cf. Berger, DZWir, 1998, 51.
[19] Cf. in contrast Henn (Fn. 2), Pg. 146. Correspondingly. the the state court can (§§ 300-307, 331a ZPO) provide for differing types of arbitration decisions with the most important being the partial-, reserved-, and interim arbitrational decisions
[20] In contrast the claims for a statement of the Validity of the Arbitration Decision due to a lack of need for legal protection is not allowed due to section 1060 of the ZPO, cf. Albers (Fn. 6), section 1059 Rz. 1.