i Germany – a UNCITRAL Model Law country
Germany is an UNCITRAL Model Law country. In 1998, the UNCITRAL Model Law (Model Law) was incorporated into the German Code of Civil Procedure (CCP)2 with minimal changes. As far as the recognition and enforcement of foreign awards is concerned, the CCP simply refers to the New York Convention of 1958 (New York Convention), which has thereby become applicable as domestic law (Section 1061 of the CCP).
Even the revised Model Law of 2006, however, has a weak point, which the German CCP does not address either, in that it contains no statutory rules relating to multiparty arbitrations. This obvious gap needs to be filled either by existing institutional arbitration rules to which the parties have referred in their arbitration agreements,3 or by specific provisions in an agreement providing for an ad hoc arbitration. However, the amendment of the CCP, which is expected to take place in 2019, will most probably fill that gap with a statutory provision.
Arbitral tribunals sitting in Germany normally tend to run arbitrations in a proactive and very cost-conscious way, and they comply fully with the requirements of Article 2 of the IBA Rules of Evidence 2010.4 For these reasons, hearings are generally shorter than hearings in comparable arbitrations with their seats in New York or London.
ii No distinctions between international and domestic arbitration law
In contrast with the Model Law, its German equivalent does not distinguish between international and domestic arbitrations and applies to both. The courts are reminded by legal authors that their decisions on purely domestic arbitration cases must also fit in an identical or similar situation related to an international arbitration. This emphasises and reinforces the liberal attitude of German courts with regard to matters of arbitration. The German Bar Association, through an initiative of 2015, proposed to the German lawmaker to include in the CCP Article 2A (1) of the Model Law 2006, requesting the courts to consider the international origin of the provisions on arbitration in the CCP and to promote uniformity in their application by having regard to the court decisions of other nations that are leading in international arbitration.5 The Federal Ministry of Justice has established a working group to review the German arbitration law. It is expected that the working group shall finish its review by the end of 2019, and that Parliament may pass any necessary amendments in 2020.6
The most important amendment made in the CCP to the Model Law is its wide-ranging clause on arbitrability. Any claim involving an economic interest may be the subject of an arbitration agreement.7 This includes everything to which a monetary value may be attributed. Any commercial matter is therefore arbitrable, including disputes about industrial property rights such as patents, or disputes about the validity of a board resolution in a joint venture. The German Patent Office even operates its own arbitration centre dealing with disputes resulting from national and international industrial property rights.8
iii Broad interpretation of arbitration clause
The German Federal Court (BGH) has recognised the modernisation of the form requirement related to an arbitration agreement in Article 7 Model Law 2006. It has concluded therefrom that an arbitration clause underlying a foreign arbitral award, which is to be recognised and declared enforceable in Germany, is to be interpreted in a broad and recognition-friendly way.9 This also applies to counterclaims covered by the arbitration clause.
iv Restrictions on arbitrability in business–consumer relationships
Subjective arbitrability may be restricted in a business–consumer relationship. These restrictions are part of the public policy of the European Union.10 Its German equivalent is based on a functioning and very efficient domestic court system where disputes resulting from a business–consumer relationship are normally decided within a few months at very low costs to both parties due to statutory scales on the costs of court proceedings and lawyers' fees that are compulsory, unless the parties agree otherwise11 – and consumers almost never agree to higher fees. The statutory scales are based on the amount in dispute. In all German court proceedings, the losing party has to reimburse the winning party, including the court costs and the statutory fees for its lawyers.12 This is one of the reasons why there are almost no frivolous court claims initiated by consumers.
A German consumer sued his American broker in Germany for fraud. The German courts held the arbitration clause invoked by the broker to be invalid and refused to refer the consumer to arbitrate his claim in the United States.13 Such limitation of subjective arbitrability in disputes with consumers is in line with the New York Convention. Article V1(a) of the New York Convention specifically authorises states to regulate the capacity of a person to enter into an arbitration agreement.14 In a series of cases decided between 2010 and 2011, the BGH therefore held arbitration agreements related to financial services between US banks or US brokers and consumers from the EU to be invalid.15
These public policy restrictions may not be circumvented by a standard form contract selecting a foreign law combined with an arbitration clause according to which the arbitral tribunal has its seat outside of Germany. The BGH has held such standard form clauses to be invalid in a business (broker)–client (consumer) relationship where New York law had been stipulated and the seat of the arbitral tribunal was to be New York City.16
v Domestic and international public policy
Germany follows Switzerland and France in distinguishing issues of public policy between a domestic public policy applicable in purely domestic arbitrations17 and international public policy applicable in international arbitrations where the arbitral tribunal has its seat outside of Germany. The differences between the two are only minimal.18 Therefore, the distinction very seldom influences either the annulment proceedings of an award rendered in Germany19 or the enforcement proceedings of a foreign award.20
The BGH has confirmed its long line of jurisdiction that a violation of due process by the arbitral tribunal – in terms of German constitutional law, a violation of the right to be heard – that may have influenced the result reached by such tribunal constitutes a violation of domestic or international public policy, or both. Such domestic award is to be annulled even if it had been issued in an international arbitration.21 A foreign award may not be recognised in accordance with Article V, Section 2(b) of the New York Convention,22 should the arbitral tribunal have violated a party's right of due process. If the court itself has violated the due process requirement in the course of annulment or enforcement proceedings, its decision may be reviewed by the BGH regardless of whether the violation itself may have influenced the result of these proceedings.23 Arbitral tribunals in their awards and courts in enforcement or annulment proceedings are obliged to deal in their reasonings with the central parts of the pleadings of the parties. If this is not done, or is done by way of empty formulae alone, this constitutes a violation of due process.24 Substantiated pleadings on contributory negligence or a violation of duties by the other party must have been discussed by the tribunal in the award.25 However, the tribunal must not deal with those parts of legal pleadings or offered evidence that in its view are immaterial to the outcome of the case.26
In all other matters, German courts almost never annul a domestic award or refuse the recognition and enforcement of a foreign award because of an alleged violation of public policy. The underlying reason for this restrictive approach is the internationally recognised principle that inhibits the courts from checking the substantive reasoning of an award.27 Even if a German state court judge by applying compulsory German law would have come to a different result than the arbitral tribunal, there is no automatic violation of public policy. Such violation is only to be assumed in extreme exceptional cases.28 It requires the violation of 'the most basic principles of German law, in particular the violation of constitutional basic rights'.29 There are some very recent examples of what the BGH does not regard to be a violation of public policy when:
- a tribunal did not apply correctly a regulation that is based on a statutory norm;30
- an arbitral tribunal had omitted to forward documents submitted by one party to the other party, but the other party had complete knowledge of the submitted documents and did not claim that they were in any way altered or forged;31 or
- an arbitral tribunal had misapplied the statutory provisions of German civil law on time bars and prescriptions, or when a judge of a state court sitting as arbitrator had not obtained the required authority to do so from his or her supervisory authority.32
In a famous case involving the ice-skater Claudia Pechstein, the BGH held that an arbitration clause that provided for CAS arbitration in Lausanne, Switzerland did not violate any constitutional rights of the skater or rights arising under Article 6 of the European Human Rights Convention.33
The structure of German courts in matters of arbitration
The supervisory functions of courts
Arbitration matters are privileged within the German court system, which is normally run on a three-tier system of district courts, courts of appeal and the BGH. Almost all matters related to arbitration work on a two-tier system only, starting at the appellate court level with the very restricted possibility of appealing any decisions to the BGH on issues of law only.34 The appellate courts decide on:
- the appointment, challenge and removal of arbitrators;
- interim awards by arbitral tribunals related to their jurisdiction;
- decisions by arbitral tribunals related to interim measures and annulment proceedings of awards rendered in Germany; and
- enforcement proceedings of domestic and foreign arbitral awards.35
The major arbitration centres for international and domestic arbitrations are Hamburg, Düsseldorf, Cologne, Frankfurt, Stuttgart and Munich. It is therefore not surprising that practically all court decisions related to arbitration at the first instance stem from courts of appeal of those cities. If a foreign award is to be executed in Germany, it is to be declared enforceable by the court of appeal in whose district the assets lie and in which enforcement is sought. Should the location of the assets be unknown, alternative jurisdiction lies with the Court of Appeal at Berlin.36
However, if a claimant starts a substantive action before any state court of first instance that according to a timely objection by the respondent is subject to an arbitration agreement, such court must decide whether the arbitration agreement is valid.37 The objection does not require a specific content; the intent and expressed will of the party to have the matter transferred to arbitration is sufficient. The court has to establish the intended will of the objecting party, applying all available standard rules of interpretation.38 If the court finds the arbitration agreement to be valid and operable, it has to refer the parties to arbitration. Such court decisions are subject to the normal appeal proceedings that govern the respective court action, and may therefore climb within the three-tier system from the district court to the court of appeal, and from there, exceptionally, to the BGH.39
If the respondent has raised a timely objection to a valid arbitration agreement, leading the court to refer the parties to arbitration, the respondent is barred later on from objecting to arbitration during the arbitration proceedings based on the now-asserted invalidity of the arbitration agreement.40 The principle of fairness that governs any judicial process, be it before a court or an arbitral tribunal, requires that a party may either hold an arbitration agreement to be valid or invalid. Once the party has made its choice, it is bound by it.
The assisting functions of courts
Municipal courts are responsible for assisting arbitral tribunals, at their request, in the taking of evidence.41 A party to an arbitration may apply for such court assistance only with the prior approval of the arbitral tribunal. German courts will also render assistance in the taking of evidence to arbitral tribunals sitting outside Germany.42 Such court assistance may become necessary if a witness is unwilling to appear before an arbitral tribunal to give his or her testimony during the evidentiary hearing, or if evidence is required from a third party that is not a party to the arbitration agreement. The municipal court will then apply its own rules related to proceedings before the German courts of first instance to obtain the requested evidence from a witness or a third party.43
German courts in general assist foreign arbitral tribunals or foreign parties with the express permission of their arbitral tribunal whenever possible or feasible to protect the integrity of an arbitration agreement and the functioning of the arbitration procedure. An example of this pro-arbitration attitude is well demonstrated by the appointment of an arbitrator at the request of a Japanese party by the appellate court in Munich, where the arbitral tribunal had its seat in Japan and the German respondent had refused to appoint its own arbitrator.44 The Munich court appointed as arbitrator an attorney from Tokyo, who of course knew Japanese law and in addition was fluent in German.
vi Arbitration institutions
The major arbitration institution of German origin is the German Institution of Arbitration (DIS), which now has its seat in Bonn and maintains an office in Berlin.45 In 2018 it issued completely revised DIS Rules.46 It is internationally recognised as Germany's principal player in the field of institutional arbitration and advises the Federal Ministry of Justice on matters of arbitration law. The DIS is not only used by German companies; it is also used as a neutral institution provided for in contracts between parties from different countries (e.g., an Austrian and a Polish company). Approximately one-third of its international arbitrations are done in English.
The revised DIS Rules 2018 reflect the UNCITRAL Arbitration Rules and the Model Law. They are available in English as a standalone authentic version, drafted by English native speakers like Peter Wolrich, and are similar to other major international arbitration institutions' rules. They contain the necessary provisions to cover multicontract arbitration, multiparty arbitration and joinder.47 Contrary to ICC arbitration, however, the DIS does not scrutinise in detail the drafts of arbitral awards rendered under its rules. Therefore, its costs are considerably lower than those of the ICC. The fees of an arbitral tribunal operating under the DIS Rules are to be determined according to the schedule of fees related to the amount in dispute.48 Usually the losing party must pay the winning party reasonable costs necessary for the pursuit of its claim or defence;49 however, the arbitral tribunal has discretion to allocate some or even all of the costs according to the efficient conduct of the parties. The DIS also has discretion to reduce the fees of the arbitral tribunal in the case of an early settlement50 or if the rendering of the award is unduly delayed by the tribunal.51
The other major player in institutional arbitration taking place in Germany is the ICC Court of International Arbitration. According to its statistics, cities like Frankfurt and Munich are among the preferred venues for international arbitrations under the ICC Rules.
vii Effects of time and cost in international arbitration
The constant increase of time and costs in international arbitration during recent years, due to its 'Americanisation', has for quite some time been of major concern to its German users. The need for resistance is reflected in the revised DIS Rules, which now contain a provision on the efficient conduct of the proceedings52 and specific Dispute Management Rules53 that allow parties to discuss with neutral outside help which ADR method is most suitable for their case.
Large corporations like Siemens, which exclusively use arbitration clauses in their international and domestic agreements, now incorporate into their contracts three-tiered ADR clauses.54 The first tier consists of direct negotiations at the executive level within a given time period. If direct negotiations fail, other ADR methods like mediation will be the next step, and only if they too are unsuccessful will these corporations start an institutional arbitration – be it an ICC or DIS arbitration. More than 50 per cent of all disputes initiated under these multi-tier clauses terminate prior to reaching the arbitration stage. There has been, therefore, a significant increase in the use of other ADR methods to settle disputes, with a corresponding reduction in international arbitrations to which German users are a party.
In DIS arbitrations, it is the obligation of the tribunal to hold with the parties a case management conference at the earliest possible time and discuss, inter alia, the possibility of an amicable settlement at any appropriate moment of the proceedings.55 In consequence, German chairpersons tend to follow the practice in Austrian and Swiss arbitration of asking the parties, at the hearing after the exchange of briefs and documents, whether they wish the tribunal to assist them in their settlement efforts – a question, as experience shows, liked by the parties themselves and their in-house counsel. The tribunal will render such assistance only under the full agreement of all parties in the arbitration, thereby always seeking to ensure that its independence and impartiality are not impaired.56
II THE YEAR IN REVIEW
i Developments affecting international arbitration
Non-existing arbitration institutions
Arbitration clauses sometimes refer to arbitration institutions that have never existed or have ceased to exist. If an arbitral tribunal in such case nevertheless confirms its jurisdiction by interpreting a pathological clause pointing out that the parties wanted in any case to arbitrate and not to have their case decided by a state court, its award will be recognised and declared enforceable in Germany.57
Arbitration agreements related to inter-corporate law disputes
Many German corporations are joint ventures with one or more foreign partners or shareholders, regardless of whether they are registered in the commercial register as a GmbH, GmbH & Co KG or as a small stock corporation. A large number of such companies have arbitration clauses in their statutes or articles of association related to inter-corporate disputes. The BGH has held that disputes between partners or between a company and its partners are fully arbitrable because they are about economic interests.58 This jurisprudence applies likewise to joint ventures that have their seat outside Germany under the condition that the arbitration clause is not invalid according to the laws of the seat.59
The arbitrability of shareholders' resolutions
An important feature of German arbitration law relates to multiparty arbitration resulting from a conflict between different partners or shareholders within a company or corporation on the validity of a shareholders' resolution.60 The arbitration agreement in the company's statutes has to sufficiently reflect the multiparty situation existing in inter-company disputes in order to be valid and the award being binding on all shareholders of the company. It is obvious that a shareholders' resolution, the validity of which is contested by a shareholder, may be either declared valid or invalid. It may not be invalid in relation to the shareholder who had started the arbitration and remain in force for other shareholders who did not participate in the arbitration. Since an arbitration award is only binding between the parties to the arbitration,61 the BGH has held that the arbitration agreement must contain a specific clause extending the effects of an arbitral award in an inter-corporate dispute related to a shareholders' resolution to all partners or shareholders of the company, regardless of whether they had participated in the arbitration.
According to the court, four requirements must be fulfilled:62
- all partners or shareholders must agree to the arbitration clause. This excludes the possibility to incorporate an arbitration clause by majority vote only. An insufficient arbitration clause in the statutes may only be cured by a unanimous vote of all partners or shareholders;
- since an arbitral award on the validity of a shareholders' resolution will be binding on all partners or shareholders, every shareholder or partner must have the opportunity to participate in the arbitration from the very beginning, be it on the side of the claimant or of the respondent;
- every shareholder or partner must be able to join the arbitration at a later stage at any time before the arbitral tribunal renders its final award, and must therefore be kept fully informed during the course of the arbitration; and
- all partners or shareholders must be able to participate in the formation of the arbitral tribunal within the normal time period provided for in its establishment.
These requirements go beyond the usual multiparty situation that has been resolved by institutional arbitration rules as a consequence of the 1992 Siemens v. Dutco decision by the French Court of Cassation.63
The DIS Supplementary Rules for corporate disputes64
It is obvious that an arbitration agreement that complies with all requirements set by the BGH will be lengthy and rather complicated. If individually drafted by lawyers, there is always a realistic chance that the result would be another pathological and very often invalid arbitration clause. The DIS in 2009 therefore developed its DIS Supplementary Rules for Corporate Disputes, including a model clause. These new Rules, which are an international first, have been carefully scrutinised by, inter alia, academics and judges. German corporate law very often requires that the statutes of a corporation or company must be notarised to be valid. This requirement does not apply to the DIS Rules to which the statutes refer.65
Arbitration agreement – applicable law
The arbitration agreement follows the law to which it has been subjected by the parties. If no law has been chosen, the law at the place of arbitration applies. Therefore, if the seat of the tribunal has been in Germany, German law is applicable according to Article V 1.(a) New York Convention.66
Arbitration agreement – form requirements
The form requirements of an arbitration agreement under Article II of the New York Convention are rather strict and often give rise to unnecessary disputes with regard to the recognition and enforcement of a foreign award. In this respect, the most favourable treatment rule of Article VII of the New York Convention may be very helpful. The form requirements under Section 1031 CCP, which are the same as those under Article 7 of the Model Law as amended in 2006, are much more liberal than Article II of the New York Convention. The BGH has held that, due to Article VII of the New York Convention, a foreign award is enforceable in Germany if the underlying arbitration clause is in compliance with the requirements of Section 1031 CCP even if it does not comply with the requirement of Article II of the New York Convention or the requirements valid at the seat of the arbitration in the foreign country.67
Arbitration agreements with consumers
The full title of the Model Law until 2006 was the UNCITRAL Model Law on International Commercial Arbitration. Its emphasis is therefore on arbitration related to transactions in business-to-business relationships, and German arbitration law follows this tendency. To be valid, an arbitration agreement with a consumer requires a separate document that contains only the arbitration agreement and that must be signed personally by the parties.68 This formal requirement may only be replaced if the whole transaction is notarised. Arbitration clauses contained in general or standard business conditions are, therefore, per se invalid if the conditions are used in a consumer context. However, if the consumer participates in an arbitration on the basis of an invalid arbitration clause without objecting to the arbitration, the arbitration agreement thereby becomes valid and binding.69
Since consumer protection is part of Germany public policy, a standard form arbitration clause remains invalid if its invalidity is invoked by the business party, even when the consumer wishes to rely on it.70
Arbitration agreements with consumers related to future disputes resulting from financial or investment service contracts are invalid per se regardless of the form used.71 This is a statutory limitation of subjective arbitrability. The limitation in financial transactions with consumers may not be bypassed by the general business conditions of the service provider that contain an arbitration clause providing for a seat of the arbitral tribunal outside Germany and a substantive law clause excluding German law as the applicable law in the relationship with the consumer. The BGH has therefore held an arbitration clause to be invalid that provided for New York as the seat of the tribunal and New York law as the applicable law.72
Stay of court proceedings
Should a party initiate court proceedings on a substantive dispute in spite of an arbitration agreement, the other party may request the court to stay its proceedings and refer the parties to arbitration. However, Section 1032 I of the CCP (Article 8 of the Model Law) requires that objection to the court proceedings be made immediately and at least prior to the hearing. If the objection is not made in a timely manner, the court proceedings may continue regardless of a valid arbitration agreement. Such timely objection is to refer specifically to the arbitration agreement between the parties. Should the objecting party rely on an arbitration agreement in which in reality it is not participating, its objection is rejected by the court. If the date for a timely objection has passed, such party may not later rely on another arbitration agreement to which it is a party. This happened to an American broker company, which had first relied on the arbitration agreement between its German trader and his client, to which it was not a party. Only at a late stage of the court proceedings had it based its objections on its own arbitration clause with its client. The BGH held that the request to stay the court proceedings was therefore not timely made.73
Recognition of foreign awards under the New York Convention
A foreign arbitral award may be recognised and declared enforceable under the regime of the New York Convention.74 The operative part of a domestic award is enforced by using the same rules of the CCP applicable to the enforcement of court judgments. These CCP rules apply also for the enforcement of foreign awards. If the operative part of a foreign award does not fit under those rules at first sight, then the court deciding on the enforcement application has to interpret the award in a way enabling its enforcement – if such interpretation is possible without changing the content of the award. To do so, the court may have to take evidence related to the foreign law on which the award has been based. Only if such interpretation does not lead to the required homogeneity may the application to declare the award enforceable be rejected.75
Enforcement of foreign awards – objections
As far as objections under Article V of the New York Convention to the recognition and enforcement of a foreign arbitral award are concerned, the BGH has changed tack on an important aspect. Under its old line of decisions, objections were waived that could and should have been raised in setting aside proceedings before the courts at the country of origin of the arbitral award, but that had not been raised there.76 Such objections, if found to be valid by a German court, may now bar the recognition and enforceability of a foreign award, even if they are raised for the first time.77 This change is a sound one as far as international commercial arbitration is concerned. Often the parties choose a neutral country as the seat of their arbitration. Whether the award is to be recognised and declared enforceable is a matter exclusively for the courts to decide where the winning party wishes the award to be enforced and executed against the losing party. The courts at the neutral seat of the arbitration have no self-interest in this matter, if no setting aside proceedings are initiated there.
Enforcement of foreign awards – set-off with counterclaims
The possibility for the losing party to thwart the execution of a foreign award in Germany by counterclaims is very limited. Any counterclaim falling under the arbitration clause, which has come to exist prior to the rendering of the award and which therefore could have been raised with the arbitral tribunal, is precluded per se.78 For any new counterclaim, the court has to refer the parties to arbitration.79 For any counterclaim not falling under the arbitration agreement, the court must have international jurisdiction subject to German international procedural law to be able to decide on it during the enforcement proceedings of a foreign award. This is not the case if, inter alia, the counterclaim is based on foreign public law and not civil law.80
Enforcement of foreign awards – annulled in the country of origin
Foreign awards that have been annulled by a court in the country of origin based on a violation of that country's public policy may nevertheless be declared enforceable in Germany if the country of origin is a Member State of the European Convention on International Commercial Arbitration 1961: its Article IX(2) specifically excludes the application of Article V(1)(e) of the New York Convention in enforcement proceedings.81 If the foreign public policy on which the annulment has been based is not recognised in Germany under Article V(2) of the New York Convention, the award will be recognised and declared enforceable in Germany.82
Intra-EU bilateral investment treaties and European community law – the Achmea case
It is much disputed between the European Commission, Member States of the EU and arbitral tribunals operating under intra-EU bilateral investment treaties (BITs) whether BITs concluded in the early 1990s between (old) Member States and East European countries, which in 2004 and 2007 had joined the European Union as new Member States, have become void due to their act of accession. The BGH had the issue referred to the European Court of Justice (ECJ) under Article 267 of the Treaty on the European Union (TFEU), asking whether an arbitration agreement contained in an intra-EU BIT was incompatible with Articles 344, 267 or 18 of the TFEU. The BGH stated in its request that in its view, none of the reasons offered by the European Commission were valid to justify the nullity of the arbitration agreements under EU law.83 The General Advocate Wathelet shared this view.84
In the Achmea judgment of 6 March 2018, issued by the ECJ Grand Chamber, the ECJ held otherwise, and ruled that the arbitration provided for in Article 8 of the Netherlands–Slovakia BIT was incompatible with EU law.85 It based its decision on a joint interpretation of Articles 267 and 344 TFEU.86 The BGH followed the ECJ's judgment and annulled the award rendered under the Dutch–Slovak BIT.87 Achmea in the meantime has filed a constitutional complaint with the German Constitutional Court.
The ECJ may have overstepped its competence under Article 5 Section 1 and 2 TEU88 with the joint interpretation of Article 344 and 267 TFEU. The German Constitutional Court had already put the ECJ on notice that it does not enjoy Kompetenz-Kompetenz, and that decisions of the ECJ that are outside its limited jurisdiction according to Article 5 of the Treaty on the European Union are contrary to German public policy and will not be recognised in Germany.89 It has also advised the ECJ that it will not permit the ECJ to extend the scope of its jurisdiction on its own without the EU treaties being changed.90 It may be argued that the joint interpretation of Article 267 and 344 TFEU by the ECJ (Nos. 31–60) has extended the scope of its jurisdiction under Article 344 TFEU beyond those limits. In its clear wording, Article 344 TFEU91 is concerned only with disputes among Member States, as the ECJ has frequently decided.92 Its judgment of 6 March 2018 has extended the scope of Article 344 TFEU to cover also disputes between Member States and private persons. However, none of the decisions cited by the ECJ allow such a conclusion.93 Comments from leading authorities are of the opinion that the Achmea judgment will end investment arbitration within the EU.94
Enforcement of awards in Germany rendered under non-intra-EU BITs
Germany invented BITs, of which there are now over 2,000 worldwide, including multilateral investment treaties such as NAFTA. It concluded its first BIT in 1959 with Pakistan.95 Since most host countries maintain assets in Germany, it is only natural that the beneficiary of an award against a host country under a non-intra-EU BIT will try to have this award enforced and executed in Germany. If it is a foreign BIT award, it needs to be recognised and declared enforceable in Germany under the New York Convention.
However, execution against assets held in Germany by a foreign state is rather difficult due to the sovereign immunity doctrine. The beneficiary of a BIT award rendered in Stockholm in 1998 against Russia, Sedelmayer, tried in vain to have this award executed against assets held by the Russian state in Germany for more than 16 years. Russia successfully blocked each attempt to have the award executed by claiming sovereign immunity for the assets seized. This technique had been confirmed by the BGH.96 It is therefore fairly easy for a foreign state to thwart execution by claiming that an asset that the beneficiary of an award intends to execute is serving a sovereign purposes of the state. This is evident if the creditor would try to execute, for example, the building of an embassy that the guest state maintains in Berlin. It is less obvious if the creditor tries to execute claims for lease payments of property owned by the host state in Germany that the host state has leased to third parties. Here, the BGH has held that simply claiming that the income derived from a lease is used for sovereign purposes within Germany is sufficient to block the execution. It has lowered the usual standard of proof to the benefit of the host country. To rely on sovereign immunity against the execution of an arbitral award, it is sufficient for the responsible officer of the foreign state – the ambassador or his or her deputy – to assert and declare in the execution proceedings that the assets seized are used for sovereign purposes of that state within Germany.
The Sedelmayer saga finally reached a happy ending with the execution of the 1998 award regarding real estate owned by Russia in the city of Cologne, which has been confirmed by the BGH.97 Russia did not give up, however, and tried to block the execution via a set off with an alleged tax claim against Sedelmayer of US$65,612,140. The BGH did not recognise the Russian tax claim, and therefore allowed the execution to proceed.98
Enforcement of BIT awards – review of the arbitral tribunal's jurisdiction
German courts review the jurisdiction of a BIT tribunal in full under Article V(1)(c) of the New York Convention if the host state raises, during recognition and enforcement proceedings, an objection that the arbitral tribunal had no jurisdiction under the applicable BIT.99 A BIT award is therefore treated as a normal foreign commercial award and not as an award based on international public law, even if the tribunal had confirmed its jurisdiction in the award, rejecting the state's objection.100 This is contrary to proceedings before the US federal courts. There, the US Court of Appeals, Second Circuit, has held that the US courts should not second-guess decisions by arbitral tribunals assuming jurisdiction once it has been established that the parties had clearly and unmistakably referred the question of arbitrability to the arbitral tribunal.101
Enforcement of BIT awards – security required from the host state
During the recognition and enforcement proceedings of an award rendered against Thailand under the Germany–Thailand BIT, the Crown Prince of Thailand landed his private jet plane at a German airport, where the plane was attached under the award as security by the German creditor. The plane was released after Thailand provided the creditor with a bank guarantee issued by a German bank as security covering the amount of the award plus costs. The BGH held that the creditor remained entitled to the bank guarantee until a final and binding decision as to whether the BIT award is enforceable in Germany.102
Preliminary relief in enforcement or annulment proceedings
Arbitration and insolvency
According to German substantive and procedural law, the insolvency of a party to an arbitration agreement does not render an arbitration agreement void or inoperable. Should the arbitration clause be part of an agreement stipulating that the agreement shall become null and void should one party become insolvent, this stipulation does not affect the validity of the arbitration clause in the agreement. This is due to the fact that an arbitration clause under Section 1040(1) CCP105 (Article 16(1) Model Law) is regarded to be independent from the other content of the agreement.106 Therefore, the insolvency administrator of the insolvent party in principle remains bound by an arbitration agreement as the legal successor of the insolvent party. Correspondingly, a party becoming insolvent during the arbitration thereby loses its capacity to function as a party and is replaced in the arbitration by the administrator; the arbitral tribunal may not continue the arbitration with the insolvent party. If the insolvent party is not replaced by the administrator, this violates German procedural public policy.107
However, the scope of the arbitration agreement binding the administrator is limited to the rights and duties of the insolvent party under the agreement. Original rights and duties of the administrator that are derived directly from insolvency law and that may not be exercised or used by the insolvent party do not fall under the arbitration agreement.108 The administrator may therefore sue the other party before the courts if, under the insolvency law, he or she contests a transaction performed by the insolvent party prior to becoming insolvent.
If the respondent becomes insolvent during the arbitration, the claimant must comply with the requirements of German insolvency law as part of public policy regardless of the ongoing arbitration. The claimant is therefore obliged to register its claim with the administrator within the time period determined by the competent insolvency court.109 If the subject matter of the arbitration is a monetary claim, the claimant is also obliged to change its request for relief from a judgment to order payment into a declaratory judgment verifying and admitting its monetary claim to the schedule of creditors' claims. The dispositive part of the award would then read that the '[c]laimant's claim of $1 million is hereby deemed to be admitted to the schedule of creditors' claims maintained by the respondent according to Section 175 of the German Insolvency Law'. An arbitral award that admits a monetary amount to the schedule of creditors' claims that has not previously been registered with the administrator violates German public policy and is therefore annulled.110
III OUTLOOK AND CONCLUSIONS
The Model Law, in the form of the German version of the CCP, has passed the test as a modern and practical law for commercial arbitration in its 20 years of existence. The DIS in 2018 issued completely revised DIS Rules. It is in constant contact with the government, and is monitoring the practice of domestic and international arbitration in Germany and the application of German arbitration law by the state courts. The arbitration law contained in the CCP is currently under review by a working group at the Federal Ministry of Justice. It can be safely said that commercial arbitration in Germany is in line with best international arbitration practice.
1 Hilmar Raeschke-Kessler, Rechtsanwalt beim Bundesgerichtshof, is a member of the Bar of the German Federal Court of Justice.
3 See Article 7-10 of the ICC Rules 2012 or Article 18,19 DIS Rules 2018.
4 Article 2 of the Consultation on Evidentiary Issues:
- The Arbitral Tribunal shall consult the Parties at the earliest appropriate time in the proceedings and invite them to consult each other with a view to agreeing on an efficient, economical and fair process for the taking of evidence.
- The consultation on evidentiary issues may address the scope, timing and manner of the taking of evidence, including:
- the preparation and submission of Witness Statements and Expert Reports;
- the taking of oral testimony at any Evidentiary Hearing;
- the requirements, procedure and format applicable to the production of Documents;
- the level of confidentiality protection to be afforded to evidence in the arbitration; and
- the promotion of efficiency, economy and conservation of resources in connection with the taking
- The Arbitral Tribunal is encouraged to identify to the Parties, as soon as it considers it to be appropriate, any issues:
- that the Arbitral Tribunal may regard as relevant to the case and material to its outcome; and/or
- for which a preliminary determination may be appropriate. See www.ibanet.org/publications/publications_home.aspx.
5 Article 2A(1) Model Law 2006: in the interpretation of this Law, regard is to be had to its international origin, and to the need to promote uniformity in its application and the observance of good faith.
6 The author is a member of the working group established at the German Federal Ministry of Justice.
7 Section 1030 of the CCP.
8 See BGH, 17 November 2009 – X ZR 137/07, BGHZ 183, 182, ann 5; all decisions by the BGH referred to in this chapter are available (in German only) at www.bundesgerichtshof.de. Search terms in English are available under the Common Portal of Case Law of the Network of the Presidents of the Supreme Courts of the European Union at www.reseau-presidents.eu/rpcsjue.
9 BGH, 30 September 2010, III ZB 69/09, BGHZ 187, 126, ann 9 et seq.
10 See ECJ, case C-40/08 Asturcom Telecommunicaciones SL  ECR I-9579; Green Paper on consumer protection in the European Union (COM (2001) 531 final).
11 Statute on Costs in Court Proceedings (BGBl I 2004, p. 718); and Statute on Lawyers' Fees (BGBl I 2004, p. 788).
12 Section 91 of the CCP.
13 BGH, 3 May 2011 – XI ZR 373/08, WM 2011, 1465, ann 21–38.
14 BGH, 8 June 2010 – XI ZB 349/08, SchiedsVZ 2011, 46, ann 22.
15 BGH, 8 June 2010, XI ZR 41/09, WM 2010, 2034: US-broker/Austrian consumer; BGH, 25 January 2011, XI ZR 100/09, WM 2011, 645: US-broker/German consumer; BGH, 25 January 2011, XI ZR 350/08, WM 2011, 548: US-broker/German consumer.
16 BGH, 3 May 2011 – XI ZR 373/08, WM 2011, 1465, ann 21–38.
17 Seat of the arbitration in Germany, no party having its residence outside Germany.
18 BGH, 30 October 2008 – III ZB 17/08, SchiedsVZ 2009, 66, ann 5.
19 Section 1059 II 2(b) = Article 34(2)(b)(ii) of the Model Law.
20 Section 1061 of the CCP.
21 According to Article 1(3) of the Model Law, an arbitration is international if the parties to the arbitration agreement have their places of business in different states.
22 BGH, 15 January 2009 – III ZB 83/07, SchiedsVZ 2009, 126, ann 7.
23 BGH, 25 February 2016 – I ZB 111/14, NJW-RR 2016, 700, ann 19.
24 BGH, 31 March 2016 – I ZB 76/15, SchiedsVZ 2016, 343, ann 9.
25 BGH, 7 June 2018, I ZB 70/17, SchiedsVZ 2018, 318, ann 12.
26 BGH, 22 November 2017, I ZB 92/17, SchiedsVZ 2018, 193, ann 5.
27 BGH, 28 January 2014 – III ZB 40/13, SchiedsVZ 2014, 98, ann 6.
28 BGH, 8 May 2014 – III ZB 371/12, SchiedsVZ 2014, 151, ann 29.
29 BGH, 28 January 2014 – III ZB 40/13, SchiedsVZ 2014, 98, ann 4.
30 BGH, 14 January 2016 – I ZB 8/15, juris, ann 9.
31 BGH, 28 January 2016 – I ZB 37/15, juris, ann 6 et seq.
32 BGH, 10 March 2016 – I ZB 100/14, juris, ann 18 and 30 et seq.
33 BGH, 7 June 2016 – KZR 6/15, SchiedsVZ 2016, 218, ann 48.
34 Section 1065 of the CCP.
35 Section 1062 of the CCP.
36 Section 1062 II of the CCP.
37 Section 1032 I of the CCP = Article 8 of the Model Law.
38 BGH, 13 January 2009 – XI ZR 66/08, NJW-RR 2009, 790, ann 29 et seq.
39 The court of appeal may grant leave for a further appeal only on issues of law to the BGH, Section 543 of the CCP. Without such permission the losing party may ask the BGH itself to grant certiorari, Section 544 of the CCP.
40 BGH, 30 April 2009 – III ZB 91/07, NJW-RR 2009, 1582, ann 8 et seq.
41 Section 1050 CCP (= Article 27 of the Model Law) in conjunction with Section 1062 IV of the CCP.
42 Section 1025 Section 2 of the CCP, acceding to Article 1, Section 2 of the Model Law.
43 See Section ۱۴۲ and Sections ۳۵۵–۴۹۴ of the CCP.
44 BayObLG – 4 Z SchH 9/04, NJW-RR 2005, 505.
45 The German Arbitration Institute (DIS), Marienforster Strasse 52, D-53177 Bonn. Tel: +49 228 391 8150; fax: +49 228 391 815 222; email: firstname.lastname@example.org.
46 The author has been co-drafter of the DIS Rules 1998 and has been involved in the review process for the DIS Rules 2018.
47 Article 17 – 20 DIS Rules.
48 Article 34.2 DIS Rules.
49 Article 33.3 DIS Rules.
50 Article. 34.4 DIS Rules.
51 Article. 37 DIS Rules.
52 Article 27 DIS Rules in conjunction with Annex 3.
53 DIS Rules, annex 6.
54 Hobeck/Mahnken/Koebke, SchiedsVZ 2007, 225 et seq.; the late Dr Paul Hobeck had been the General Counsel of Siemens AG.
55 Article 27.4 (iii) DIS Rules.
56 Article 26 DIS Rules:
Unless any party objects thereto, the arbitral tribunal shall, at every stage of the arbitration, seek to encourage an amicable settlement of the dispute or of individual disputed issues.
57 BGH, 14 July 2011 – III ZB 70/10, SchiedsVZ 2011, 284, ann 1–2 on a clause referring to a non-existing domestic arbitration institution.
58 BGH, 6 April 2009 – II ZR 255/08, BGHZ 180, 221 = NJW 2009, 1962.
59 See Article V 1 (a) NYC.
60 BGH, 6 April 2017 – I ZB 23/16, SchiedsVZ 2017, 194.
61 See Section 1055 of the CCP.
62 BGH, 6 April 2017 – I ZB 23/16, SchiedsVZ 2017, 194, ann 25.
63 See Article 10 of the ICC Rules.
64 DIS rules, annex 5.
65 BGH, 24 July 2014, III ZB 83/13, SchiedsVZ 2014, 303, ann 13.
66 BGH, 8 November 2018, I ZB 24/18, juris, ann 12.
67 BGH, 30 September 2010, III ZB 69/09, BGHZ 187, 126, ann 6 et seq.
68 See Section 1031 Section 5 of the CCP.
69 Section 1031 Section 6 of the CCP.
70 BGH, 19 May 2011 – III ZR 16/11, SchiedsVZ 2011, 227, ann 7–9.
71 Section 37h Statute on Trade in Securities.
72 BGH, 9 March 2010 – XI ZR 93/09, BGHZ 184, 365; 22 March 2011 – XI ZR 197/08, NJW-RR 2012, 49, ann 19 et seq.
73 BGH, 8 February 2011, XI ZR 168/08, WM 2011, 650, ann 27 et seq.
74 Section 1061 of the CCP.
75 BGH, 30 November 2011 – III ZB 19/11, SchiedsVZ 2012, 41, ann 6.
76 BGH, 23 May 1991 – III ZR 90/90, BGHR ZPO Sections 1044 II No. 1.
77 BGH, 16 December 2010, III ZB 100/09, SchiedsVZ 2011, 105, ann 9 et seq.
78 BGH, 18 December 2013, III ZB 92/12, SchiedsVZ 2014, 31, ann 5.
79 BGH, 29 July 2010 – III ZB 48/09, SchiedsVZ 2010, 275, ann 3 et seq.
80 BGH, 29 January 2015, V ZR 93/14, juris, ann12 , on OLG Köln, 21 March 2014, 11 U 223/12, juris, ann 90.
81 Article IX – Setting Aside of the Arbitral Award:
1. The setting aside in a Contracting State of an arbitral award covered by this Convention shall only constitute a ground for the refusal of recognition or enforcement in another Contracting State where such setting aside took place in a State in which, or under the law of which, the award has been made and for one of the following reasons:
(a) the parties to the arbitration agreement were under the law applicable to them, under some incapacity or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made, or
(b) the party requesting the setting aside of the award was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or
(c) the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration need not be set aside;
(d) the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or failing such agreement, with the provisions of Article IV of this Convention.
2. In relations between Contracting States that are also parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10th June 1958, paragraph 1 of this Article limits the application of Article V (1) (e) of the New York Convention solely to the cases of setting aside set out under paragraph 1 above.
82 BGH SchiedsVZ 2013, 229, ann 3.
83 BGH, 3 March 2016 – I ZB 2/15, SchiedsVZ 2016, 328 ann 24 et seq.
84 InfoCuria, Opinion of Advocate General Wathelet of 19 September 2017, C-284/16.
85 InfoCuria, ECJ of 6 March 2018, C 284/16 – Achmea.
86 InfoCuria, ECJ of 6 March 2018, C 284/16, ann 31-60.
87 BGH, 31 October 2018, I ZB 2/15, SchiedsVZ 2019, 46, ann 14-18.
88 Article 5 TEU:
1. The limits of Union competences are governed by the principle of conferral. The use of Union competences is governed by the principles of subsidiarity and proportionality.
2. Under the principle of conferral, the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. Competences not conferred upon the Union in the Treaties remain with the Member States.
89 BVerfG, 18.7.2017 – 2 BvR 859/15, NJW 2017,2894, ann 48, 57.
90 BVerfG, 18.7.2017 – 2 BvR 859/15, NJW 2017,2894, ann 63.
91 Article 344 TFEU: Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.
92 InfoCuria, ECJ of 18 December 2014, Opinion 2/13, ann 201-211.
93 See InfoCuria, ECJ of 6 March 2018, C 284/16, ann 36-49, 55, 57.
94 See as example Hess, 'The Fate of Investment Dispute Resolution after the Achmea Decision of the European Court of Justice', MPILux Research Paper Series No. 2018 (3).
95 BGBl 1961 II, 793.
96 BGH, 1 October 2009 – VII ZB 37/08, NJW 2010, 769, ann 25 et seq.; its first decision related to the same BIT award rendered against Russia is from 4 October 2005 – VII ZB 9/05, NJW-RR 2006, 198.
97 BGH, 29 January 2015, V ZR 93/14, juris, ann 4.
98 BGH, 17 December 2015 – I ZR 275/14, juris, ann 17.
99 BGH, 30 January 2013, III ZB 40/12, SchiedsVZ 2013, 110, ann 14, Schneider v. The Kingdom of Thailand.
100 BGH, 30 January 2013 – III ZB 40/12, SchiedsVZ 2013, 110, ann 15 et seq.
101 Werner Schneider v. The Kingdom of Thailand, No. 11-1458 (2nd Cir 2012).
102 BGH, 30 January 2013, III ZB 40/12, SchiedsVZ 2014, 33, ann 3.
103 Section 1063(3) CCP: The presiding judge of the Division for Civil Matters may direct, without having previously heard the opponent, that the petitioner may pursue compulsory enforcement under the arbitration award until a decision has been delivered regarding the petition, or that he or she is allowed to enforce the provisional measures, or measures serving to provide security, ordered by the arbitral tribunal pursuant to Section 1041. Compulsory enforcement under the arbitration award may not extend beyond measures serving to provide security. The respondent is authorised to avert compulsory enforcement by providing security in that amount in which the petitioner may pursue compulsory enforcement.
104 BGH, 7 July 2016 – I ZB 90/15, juris, ann 7 et seq.
105 Section 1040 CCP (1): the arbitral tribunal may decide on its own competence, and in this context also regarding the existence or the validity of the arbitration agreement. In this context, an arbitration clause is to be treated as an agreement independent of the other provisions of the agreement.
106 BGH, 9 August 2016 – I ZB 1/15, juris, ann 17.
107 BGH, 29 January 2009 – III ZB 88/07, BGHZ 179, 304, ann 14.
108 BGH, 30 June 2011 – III ZB 59/10, SchiedsVZ 2011, 281, ann 14.
109 Section 28 of the German Insolvency Law.
110 BGH, 29 January 2009 – III ZB 88/07, BGHZ 179, 304, ann 21 = NJW 2009, 1747.