Draft bill on the modernization of the German arbitration law of the Federal Government of Germany

Today the Federal Government of Germany has presented a draft bill on the modernization of the German arbitration law [BMJ - Aktuelle Gesetzgebungsverfahren - Modernisierung des deutschen Schiedsverfahrensrechts]. The draft bill follows a longer public consultation process, in which possible changes and amendments were identified and discussed.

Developments like the revision of the UNICITRAL Model Law on International Commercial Arbitration in 2006, as well as various reforms of national arbitration laws and arbitration rules of arbitral institutions, plus the constantly advancing digitalisation of procedural law, were considered for the draft bill as well.

The key objective of the proposed draft bill is (i) to make German arbitration law more efficient, (ii) to adapt it to modern needs and (iii) to promote Germany's attractiveness as a place for arbitration. The last comprehensive reform of the German arbitration law dates back to 1998. With the draft bill, the Federal Government of Germany does not want to regulate German arbitration law anew, but to (i) eliminate some ambiguities that have emerged over time and (ii) adapt it to the realities of today's world. Therefore, the Federal Government of Germany has included only very few completely new regulations and only slightly adapted others to adjust or clarify their scope of application:

1. The New Commercial Courts, Sec. 1062 (5), 1063a, 1065 (3) ZPO-Draft

The biggest innovation in German arbitration law is the introduction of commercial courts which was already introduced in the "Justizstandorts-Stärkungsgesetz" [see our blog: Federal Government of Germany approved on the establishment of Commercial Courts | Advant Beiten (advant-beiten.com)]. The German arbitration law delegates the competence to introduce commercial courts to the Federal States (which are referred to as "Land", or plural "Länder" in the draft). The idea is to establish special divisions at a particular Higher Regional Court or a Supreme Court in the "Länder". Those divisions will be the commercial courts with special expertise in trade and commerce. "Länder" may also create a joint commercial court. Over time the commercial courts will acquire special experience in the deciding of arbitration matters.

What makes a commercial court special is not merely the expertise but that the proceedings can be conducted in English. If such proceedings are appealed to the Federal Court of Justice, the Federal Court of Justice may also on application of a party conduct the proceedings in English. The commercial courts shall promote Germany as a place for arbitration and establish a useful basis of case law.

This regulation depends very much on whether the Federal Court of Justice agrees to the proceedings being conducted in English. It could nullify the advantages of the commercial courts if the Federal Court of Justice does not play along.

2. Loosening of the Form Requirement for an Arbitration Agreement, Sec. 1031 ZPO-Draft

Generally, the arbitration agreement must be in writing. This form requirement shall be abandoned for all-party commercial transactions. The form requirement was entered into the German arbitration law in the changes as to 1 January 1998. Since 2006 the UNCITRAL Model Law foresees the possibility to agree on arbitration without any form requirement, Article 7 Option II. This approach was introduced to the working group by Mexico. It is notable that Art. 1416 (1) sentence 2 Mexican Commercial Code now stipulates that arbitration agreements must be included into a contract or an independent agreement while in Belgium, Luxembourg, Ireland, Scotland and Sweden there is no form requirement. However, most countries still require some form of writing, especially to ensure proof (e.g. Austria, Spain, Italy and the US).

In the event of an all-party commercial transaction the parties do not require the special protection given by the form requirement. The free form of the conclusion of arbitration agreements shall live up to the complex supply chains and framework agreements. If it is unclear which parties may be involved and has obligations to fulfil, the parties may not include an arbitration agreement at first even though they in general agree on arbitration as mechanism for dispute resolution.

Nevertheless, each party is entitled to demand that the other party provides a confirmation of the arbitration agreement's substance in text form. This serves the interest of the parties in documenting their transactions and clarifying the substance of the agreement. Whether such documentation exists, however, has no effect on the existence of the arbitration agreement. Being one of the most criticized changes for its potential to raise conflicts about the existence of an arbitration agreement it remains to be seen whether this change will make it to the final draft. This provision will cause further uncertainties for the parties whether arbitration is the agreed forum for dispute resolution or not. The risks of the provision outweigh in our view the benefits by far.

3. English language, Sec. 1063a/b ZPO-Draft

The introduction of commercial courts and the possibility to conduct proceedings in English is accompanied by the new regulation that any document in English that had been prepared or submitted in arbitral proceedings may be submitted without a translation in a proceeding that is conducted in German. This should help to save time and most importantly costs for the parties as English is the lingua franca in arbitration. A translation must only be submitted if there is a special need. The Federal Government of Germany explains that such a special need may exist if the court does not have sufficient command of the English language. However, the court has the discretion to decide when the threshold of a special need is met.

This proposal follows the needs of arbitration practice. It also follows the practice of many judges at the German courts not asking for translations of English language documents.

4. Electronic documents and video hearing, Sec. 1054 (2), (5), 1064 (1), 1047 (2), (3) ZPO-Draft

The Federal Government of Germany tries to keep up with the constantly advancing digitalisation with the following two innovations. For one, the arbitral award may be issued as an electronic document, if the parties have not agreed otherwise. In any event, it remains possible to request a traditional hard-copy of the arbitral award signed by all arbitrators as an electronic document may not be recognized in other jurisdictions as an arbitral award for enforcement. However, in Germany an arbitral award in the form of an electronic document may be declared enforceable even if only the electronical form is transmitted to the state court.

The other innovation is the recognition of video hearings. The German arbitration law thereby follows the increasing practice of the last years. The arbitral tribunal may hold an oral hearing via video conference. The parties do not have a right to be heard in person. The arbitral tribunal has the procedural discretion to order a video hearing. In deciding this, the arbitral tribunal must weigh the right to be heard of the opposing party with the other party's right to access to justice. Additionally, factors such as climate neutrality, the substance of the arbitration, and the obligation to conduct arbitral proceedings in an efficient manner may also be taken into consideration.

Those steps are welcomed to help German arbitration law to keep up with digitalization. Especially the introduction of video hearings eliminated uncertainties in practice where they are already widely used and accepted.

5. Publication of Awards, Sec. 1054b ZPO-Draft

Generally, arbitral awards are confidential and do not get published like judgments from state courts. This is a source for criticism for years: the confidentiality leads to a lack of development regarding those disputes which are almost exclusively heard by tribunals like post M&A disputes. Following this critique, the Federal Government of Germany has included a provision on the publication of arbitral awards. With the consent of the parties, the award and any concurring or dissenting opinion may be published, as a whole or in part, in anonymised or pseudonymised form. The balance between the interest to further develop law on one hand and the interest of the parties in confidential proceedings on the other hand is held by the fact that the parties must agree to the publication which will be anonymous or pseudonymised. However, the agreement of the parties is assumed if they don't object to publication within one month of being requested to do so by the arbitral tribunal. It is doubtful whether the suggested change will lead to more transparency. The users value the confidentiality of arbitration highly. In many cases no matter what is undertaken competitors will be able to identify the parties of the dispute. And the "German way" may lead to unpleasant surprises if the parties do not pay attention at a time when the arbitration is already closed.

6. Request for retrial, Sec. 1059a ZPO-Draft

The draft bill introduces a novel possibility that allows an arbitral award to be set aside by a state court even though the deadline for set aside proceedings has expired. The arbitral award may be set aside by a state court if the party filing the request shows sufficient cause that the prerequisites for an action for retrial of the case are given. A request for retrial is only admissible if the party filing the request was unable, through no fault of its own, to assert the cause for retrial in earlier proceedings. The request must be filed within a statutory period of one month following the detection of the grounds for retrial. As grounds for a retrial are in general quite rare, the number of successful applications for a retrial are expected to be low.

Grounds for a retrial may exist if (i) a document on which the award is based was falsely drawn up or falsified, (ii) in a testimony or expert opinion on which the arbitral award is based, the witness or expert is guilty of a punishable breach of the duty to tell the truth, (iii) the arbitral award was influenced by an offence committed by a party's representative or by the opposing party or its representative in relation to the dispute, (iv) an arbitrator who is guilty of a criminal offence in relation to the dispute has participated in the making of the arbitral award, (v) the judgment of a court or another award on which the award is based has been set aside by another final judgment or a final order, (vi) the party finds or is enabled to use a judgment or arbitral award rendered in the same case which has previously become final and binding or (vii) the party discovers or is enabled to use another document which would have resulted in a more favourable decision.

7. Clarifications

There are several points the Federal Government of Germany has now clarified with the draft bill by slightly adapting already existing regulations.

7.1 Appointment of arbitrators in Multi-party arbitration, Sec. 1035 (4) ZPO-Darft

Regarding the appointment of arbitrators, a paragraph has been added to clarify the appointment of an arbitrator in multi-party arbitrations. This will only apply to arbitral proceedings with more than one arbitrator. Unless otherwise agreed, joined parties must jointly make the appointment of an arbitrator. If an arbitrator is not appointed within one month following receipt of a corresponding request to do so from the other party, then the state court is to appoint the arbitrator upon request of the other party. However, the court may also appoint an arbitrator for the other party as well. The mandate of the arbitrator already appointed ends upon such an appointment. Therefore, the regulation grants judicial discretion to the state court as to appoint an arbitrator only for one side or to appoint arbitrators for both sides.

​​​​​​​7.2 Enforcement of foreign arbitral awards on interim measures, Sec 1025 (2), 1041 (2) ZPO-Draft

The question of whether foreign arbitral awards on interim measures can be enforced by German state courts are a matter of dispute under the current German arbitration law. Sec. 1025 (2) ZPO-Draft now clarifies that interim measures issued by foreign arbitral tribunals may be enforced in Germany by way of a state court order.

The Federal Government of Germany has also clarified the wording of Sec. 1041 (2) ZPO. This provision governs the procedure for the state court order permitting enforcement. The new Sec. 1041 (2) ZPO-Draft contains in particular a statement of reasons as to when an application for enforcement is to be dismissed, such as (i) if one of the grounds for setting aside the arbitral award is given, (ii) if an application for a corresponding interim measure already has been filed with a state court, (iii) if the arbitral tribunal's requirement as to the provision of security has not been complied with or (iv) if the interim measure has been terminated or suspended by the arbitral tribunal.

This regulation is welcomed in order to reduce the existing uncertainties. It facilitates the enforcement of foreign arbitral awards on interim measures. However, it is unclear whether this section also applies to foreign arbitral awards on interim measures by emergency arbitrators.

​​​​​​​​​​​​​​7.3 Court Review, Sec. 1040 ZPO-Draft

The state courts already have the jurisdiction to review a decision by an arbitral tribunal in which it declares itself to have jurisdiction. The state courts' jurisdiction has now been extended to review also negative decisions, i.e. when an arbitral tribunal holds that it does not have jurisdiction to decide the dispute. This possibility had been repeatedly called for by German legal scholars to strengthen a valid arbitration agreement.

​​​​​​​​​​​​​​7.4 Concurring or dissenting opinion, Sec. 1054a ZPO-Draft

With the draft bill it has now been clarified that, in arbitration proceedings seated in Germany with more than one arbitrator, it is possible to submit a concurring or dissenting opinion. This is to eliminate the concern that arbitral awards which contain a concurring or dissenting opinion do not comply with procedural public policy (ordre public) in Germany. This concerns date back to an internationally and nationally badly received obiter dictum by the Higher Regional Court of Frankfurt (OLG Frankfurt, decision dated 16. January 2020 – 26 Sch 14/18, BeckRS 2020, 4606). The Federal Government of Germany clarifies that such opinions do not violate the principle of secrecy of deliberations. A violation of the principle would only occur if insights into the deliberation process were to be provided. Thus, the draft achieves legal clarity and internationally accepted standards.

8. Summary

The draft bill includes various provisions which may increase efficiency or adapt to the needs of today's world. The DIS has provided a markup version of the relevant provisions of the ZPO comparing the current ZPO with the draft bill (Deutsches_Schiedsverfahrensrecht_mit_den_vom_RegE_vorgesehenen_Aenderungen.pdf (disarb.org)). As the Federal Government of Germany follows the suggestion of the draft bill of the Federal Ministry of Justice, it will be interesting to see which ideas will survive the debates of the Bundestag (Federal Parliament) and whether the comments from the arbitration scene will have any influence on the draft.

Dr Ralf Hafner
Dr Tobias Pörnbacher