A. LEGISLATION AND RULES
A.1 Legislation
In the 2017-2018 and 2022-2023 editions of this yearbook, we reported about a working group tasked with the review of German arbitration law.[1] On 18 April 2023, the Federal Ministry of Justice presented a key issues paper on the modernization of German arbitration law, which had last been comprehensively reformed in 1997. The aim is to adapt the law to current requirements and to increase Germany’s attractiveness as an arbitration venue. The arbitration law reform complements the ministry’s parallel legislative project on commercial courts.[2]
The paper covers 12 issues, the most interesting points of which are the following[3]:
- The reform seeks to allow informal arbitration agreements. Using option 2 in Article 7 of the UNCITRAL Model Law (as adopted in 2006), the aim is to abolish the need that arbitration agreements must, in principle, “be set out either in a document signed by the parties or in letters, telefax copies, telegrams or other forms of communication exchanged between them that ensure documentary proof of the agreement” (Section 1031 para. 1 of the German Code of Civil Procedure (ZPO)), thus reverting to the state of law prior to the 1997 reform.
- In multiparty proceedings, the reform seeks to introduce a — so far missing — statutory rule for the appointment of arbitrators if the parties have not agreed on an appointment mechanism.
- The reform seeks to introduce a statutory clarification to ensure that hearings before arbitral tribunals can be conducted by video conferencing.
- To increase transparency, promote the development of the law, and provide public access to arbitration case law, the reform seeks to allow the publication of arbitration awards, subject to the agreement of the parties.[4]
- The reform seeks to establish the statutory prerequisites to ensure that the arbitration award and documents from the arbitration proceedings can also be submitted in English when applying for a declaration of enforceability or vacation of arbitral awards, for the taking of evidence in court, or for the performance of other judicial acts that the arbitral tribunal is not authorized to conduct. This is in line with the intended introduction of English as a procedural language in German civil proceedings.[5]
- Where an arbitral tribunal orders interim measures, the reform seeks to allow the enforcement of such measures in Germany even if the place of arbitration is abroad. To date, it is doubtful whether interim measures of foreign arbitral tribunals can be declared enforceable in Germany.
Besides these key issues, the paper addresses several points that are to be discussed in the further course of the legislative process. These include the introduction of an emergency arbitrator in the Code of Civil Procedure, as well as a provision to allow dissenting opinions in arbitration awards.[6] The latter issue, as well as the abovementioned points, is now included in a draft bill [7] published on 1 February 2024.
A.2 Institutions, rules and infrastructure
2023 was a record year for the German Arbitration Institute (DIS), with a total of 191 cases managed by the institution. To be able to handle these cases, the DIS team was significantly strengthened: Dr. Ramona Schardt, LL.M. (Virginia) took over the office of Secretary General of DIS on 1 January 2023; and Thomas Klich and Paulus Suh were appointed as Deputy Secretaries General on 1 October 2023. Seven additional colleagues joined the DIS in various functions, increasing the size of the team to 23 members.
In September 2023, the DIS launched “DIS eFile,” an electronic case management system that facilitates faster and more efficient case handling. As of January 2024, 13 cases have already been managed by the new system.
Meanwhile, the number of female arbitrators in DIS arbitrations has increased significantly. In 2023, almost 54 % of arbitrators appointed by the DIS were women, compared to only 13.33 % a decade ago.
By signing the Green Pledge, the DIS reaffirmed its commitment to environmentally sustainable arbitration.
In previous editions of this yearbook, we reported that the DIS had created various working groups dealing with: (i) a review of the 2018 DIS Arbitration Rules; (ii) supplementary rules for notices of dispute to third parties; (iii) efficiency and communication; (iv) the role of expert witnesses; (v) the settlement of disputes; and (vi) the use of technology. In the reporting period, the working group tasked with the review of the 2018 DIS Arbitration Rules published its report, the working group on notices of dispute to third parties presented a revised draft of the proposed supplementary rules, and the working group on the use of technology organized a roundtable discussion. None of the projects have so far led to changes or adjustments to the DIS Rules. All projects are still a work in progress. We will continue to keep an eye on them.
B. CASES
B.1 Upstream national legal protection possible against intra-EU investor-state ICSID arbitration proceedings on the basis of the Energy Charter Treaty
Since the “Achmea” judgment of the European Court of Justice (ECJ),[8] the validity of arbitration clauses in bilateral investment treaties (BITs) between member states of the European Union has become a never-ending story. In July 2023, the German Federal Supreme Court held in three investor-state disputes involving Germany that EU member states are allowed to use upstream national judicial protection against arbitral proceedings that had been initiated against them by investors from other EU member states on the basis of the ECT before the ICSID.[9]
In the first case,[10] the dispute related to legislative amendments in the field of wind and solar energy. The respondents, who belong to a group of companies from another EU member state, were of the opinion that these amendments violated Germany’s obligations under the ECT and thereby inflicted damage to their investments in the field of wind and solar energy. The respondents, therefore, initiated investor-state arbitration proceedings against Germany with the ICSID on the basis of the arbitration clause of Article 26 ECT.
The two other cases[11] are related to Germany’s decision to phase out electricity generation from coal by 2030. Again, the respondents, who have their seat in another EU member state, considered this decision to be a violation of Germany’s ECT obligations, which damaged their investments. Both initiated ICSID investor-state arbitration against Germany on the basis of the arbitration clause of Article 26 ECT.
In the wind and solar energy case, while the ICSID arbitration was still pending, Germany asked the Court of Appeal Berlin to determine the inadmissibility of the ICSID arbitration in accordance with Section 1032 para. 2 ZPO. In the two coal energy cases, similar applications were filed with the Court of Appeal Cologne. Section 1032 para. 2 ZPO provides that a Germany state court can rule on a request to determine the admissibility or inadmissibility of arbitral proceedings. However, according to the clear wording of the provision, such an application can only be made before the arbitral tribunal has been constituted.
The Court of Appeal Berlin denied the request under Section 1032 para. 2 ZPO as inadmissible and held that the norm was not applicable to arbitral proceedings under the ICSID Convention, as these proceedings constitute a closed system of rules under international law.
The Court of Appeal Cologne took a different view. It held that the applications were admissible and well-founded due to the supremacy of EU law. It referred to the decisions of the ECJ in the Achmea and Komstroy[12] cases, according to which arbitration clauses in investment treaties are ineffective in intra-EU investment disputes under Article 267 and 344 TFEU.
The Federal Supreme Court confirmed the inadmissibility of the ICSID arbitral proceedings initiated by the respondents. The court conceded that a request under Section 1032 para. 2 ZPO to determine the inadmissibility of arbitral proceedings was “in principle” not admissible, at least from the time of registration of the ICSID arbitral proceedings due to the overriding competence of the arbitral tribunal to be the judge of its own competence under Article 41 para. 1 ICSID Convention. Nevertheless, the court held that the blocking effect of ICSID arbitral proceedings did not preclude the admissibility of an application under Section 1032 para. 2 ZPO in the special constellation of intra-EU investor-state arbitration proceedings. The court argued that in such cases, the principle of effectiveness required that the application of EU law be given primacy over the competence of the arbitral tribunal. The starting point for the court’s considerations was the fact that, in an intra-EU context, a downstream review of an ICSID arbitral award by a national court is mandatory in accordance with the case law of the ECJ for reasons provided in EU law and contrary to the system of rules of the ICSID Convention. The court argued that such a review may be preempted bindingly by an upstream court review as provided for by the German legislature in Section 1032 para. 2 ZPO because the determination of inadmissibility of the arbitral proceedings under Section 1032 para. 2 ZPO prevents that an ICSID award could be declared enforceable in Germany.
In line with the case law of the ECJ, the German Federal Supreme Court then held that respective arbitral proceedings were inadmissible due to the lack of an effective arbitration agreement. The court argued that according to the case law of the ECJ, the arbitration clause contained in Article 26 para 2 lit. c, para. 3 and para. 4 ECT violates EU law in the case of intra-EU investor-state arbitration, thus precluding the conclusion of an effective arbitration agreement. Due to the incompatibility of the arbitration provisions of the ECT, in particular with Articles 267 and 344 TFEU, the Federal Supreme Court held that there was a lack of effective consent, and thus of an offer by Germany in the three cases at hand to conclude an arbitration agreement.
The decisions of the Federal Court of Justice are not surprising, but they are certainly problematic. As pointed out, the binding force of international law depends on whether state or supranational law is willing to follow it. Invoking the provisions of internal law as justification for the failure to comply with a treaty constitutes a breach of Article 27 of the Vienna Convention on the Law of Treaties, and leads to international law losing its universal significance. The case law of the ECJ and the German Federal Supreme Court on intra-EU investor-state arbitration could serve as a pretext for other states to ignore the principles of international law.[13] This should certainly be avoided.
B.2 The Achmea decision of the ECJ does not apply to extra-EU investor-state arbitration
In the Achmea[14] and Komstroy[15] cases, the ECJ had held that investor-state arbitration clauses in intra-EU BITs or in the ECT (when applied intra-EU) violate EU law and are thus ineffective under Article 267 and 344 TFEU as they would otherwise affect the autonomy of EU law by establishing a dispute resolution mechanism that escapes the supervision of the ECJ. As pointed out in B.1, based on this jurisprudence of the ECJ, the German Federal Supreme Court had even allowed upstream national judicial protection against ICSID arbitral proceedings initiated against Germany by investors from other EU member states.[16]
One open question was whether these principles would also apply to investment disputes with investors from outside the EU. On 12 October 2023, the German Federal Supreme Court answered this question in the negative.
The underlying dispute was between Deutsche Telekom and India. It related to an investment of Deutsche Telekom in an Indian company. An Indian state-owned company had cancelled a contract with the company in which Deutsche Telekom had invested, and Deutsche Telekom considered this to be in violation of the BIT between Germany and India. An arbitral tribunal seated in Switzerland eventually awarded USD 93.3 million in compensation plus interest and costs to Deutsche Telekom, and the Court of Appeal Berlin declared the award enforceable in Germany.
Relying on the Achmea and Komstroy decisions of the ECJ, India filed an appeal against this decision with the Federal Supreme Court. The Federal Supreme Court held that the ECJ’s reasoning in the Achmea and Komstroy cases does not apply to extra-EU disputes.[17] Referring to Komstroy — in which the ECJ had expressly confirmed that the dispute resolution mechanism in the ECT is compliant with EU law in extra-EU investment disputes — the Federal Supreme Court confirmed the decision of the Court of Appeal Berlin that the award was enforceable in Germany.
B.3 Violation of the right to be heard possible if a request for a postponement of a hearing is rejected
The German Federal Supreme Court recently held that the rejection of an application to postpone a hearing by an arbitral tribunal may violate the applicant’s right to be heard.[18]
In the case at hand, a physician who had worked in a joint practice alleged that a former colleague had received practice fees that allegedly had not been paid into the practice account. He initiated arbitration proceedings against the former colleague for payment of damages. The sole arbitrator, appointed by the Association of Statutory Health Insurance Physicians, informed the parties that he intended to decide the case without a hearing. The claimant challenged the arbitrator on the grounds of suspicion of partiality and requested an oral hearing. The arbitrator scheduled a hearing. Prior to the hearing, the claimant informed the arbitrator and the respondent that his lawyer was seriously ill and that she could not be expected to participate in a hearing for several weeks. The arbitrator rescheduled the hearing but only for a few days. The hearing took place without the claimant and his lawyer, and subsequently, an arbitral award was issued, dismissing the claim. The claimant asked the Court of Appeal Hamburg to set aside the award, declare the award unlawful, and transfer the arbitration proceedings to another arbitration tribunal. The Court of Appeal Hamburg rejected this application and declared the arbitration award enforceable. It held that there were no grounds for annulment. As to the claimant’s concern that the arbitrator was biased, the Court of Appeal Hamburg was of the opinion that the claimant was precluded because he had not substantiated his concern within three months after receipt of the award, as provided in Section 1059 para 3 ZPO.
The claimant’s appeal to the Federal Supreme Court was successful. The court held that the rejection of the request for a postponement of the hearing may have led to a violation of the right to be heard. If a hearing takes place, the parties are entitled to express themselves at the hearing. This fundamental procedural provision also applies to arbitration proceedings. Thus, the arbitrator should have postponed the hearing date at the claimant’s request if this was necessary to safeguard fundamental procedural rights. The illness of the lawyer could have been a considerable reason. Furthermore, the Federal Supreme Court held that the necessary substantiation of the grounds for setting aside an award is not subject to the three-month time limit under Section 1059 para. 3 ZPO. The deadline only applies to the application for an annulment. The Federal Supreme Court thus referred the case back to the Court of Appeal Hamburg.
B.4 Federal Supreme Court grants the right to seek declaratory relief against enforcement proceedings in Germany even before such proceedings are commenced by the successful party
In a decision of 9 March 2023, the Federal Supreme Court strengthened the rights of parties against whom a foreign arbitration award was rendered and who now face the insecurity of whether and when the successful party can enforce the award in Germany.[19]
The underlying facts were as follows: The claimant, a German entrepreneur who had carried out operations in Russia over a longer period of time, had initiated arbitration proceedings against the respondents in Russia in which he claimed damages for the alleged frustration of cooperation agreements with the respondents, several limited liability companies belonging to an international beverage manufacturer.
The respondents had objected to the jurisdiction of the arbitral tribunal, but the tribunal had rejected this application and had ordered the respondents to pay damages of more than EUR 49 million, plus interest and costs. The respondents unsuccessfully attempted to challenge the award in Russia, exhausting all legal remedies.
Even before the successful party commenced enforcement proceedings in Germany, the respondents applied for a declaration of non-recognition of the Russian arbitral award with the competent court of appeal in Germany. The claimant requested that the application be rejected and that the arbitration award be declared enforceable instead. The court of appeal rejected the respondents’ application for declaratory relief. The German Federal Supreme Court reversed this decision.
To start with, the Federal Supreme Court confirmed the long-established position under German law that a foreign decision rejecting an application to set aside an arbitral award has no binding effect on the German court’s decision as to whether or not to declare the award enforceable.
More importantly, however, the Federal Supreme Court held that the future opponent in proceedings for the declaration of enforceability pursuant to Section 1061 para. 1 ZPO is entitled to file an application for a declaration of non-recognition of the foreign arbitration award in the analogous application of Section 1062 para. 1 no. 4 case 2 and Section 1061 para. 2 ZPO.
The Federal Supreme Court did not share the opinion of the court of appeal that Section 1026 ZPO does not allow such action. According to this provision, a court may only act in arbitration matters if Sections 1025 to 1061 ZPO expressly confer jurisdiction for such matters on the court. Section 1061 para. 1 ZPO provides that the courts have jurisdiction to decide about applications for the recognition and enforcement of foreign arbitral awards. If the prerequisites for the recognition are not met, the courts have to declare that the foreign arbitration award is not to be recognized in Germany (Section 1061 para. 2 ZPO). Accordingly, the Federal Supreme Court held that the power for a declaration of non-recognition of a foreign arbitral award exists in the analogous application of Section 1062 para. 1 no. 4 case 2, Section 1061 para. 2 ZPO.
The decision of the Federal Supreme Court strengthens the position of German courts when they have to decide on the recognition of foreign arbitration awards. It also strengthens the position of parties who have lost a foreign arbitration case and who now face the insecurity of whether and when the successful party will commence enforcement proceedings in Germany. With the authorization of an application for a negative declaratory decision, the Federal Supreme Court has created a preventative legal remedy that can provide legal certainty at an early stage.
B.5 Unconditional payments hinder an application to set aside an arbitral award
In a decision of 26 October 2023, the German Federal Supreme Court held that the application to set aside an arbitral award before a German state court is inadmissible if the applicant has already paid the amount awarded by the tribunal without reservations.[20]
In the case decided by the court, an arbitral tribunal had ordered that the respondent had to pay a certain amount to the claimant. The respondent paid this amount to the claimant without explicitly declaring any reservations. A few weeks later, the respondent filed an application to (partially) set aside the arbitral award with the Court of Appeal Hamburg, which rejected the application as inadmissible because the respondent had lost its “legal interest” in setting aside the award by fulfilling the award without reservations. The respondent filed an appeal against this decision with the Federal Supreme Court.
In its decision, the Federal Supreme Court relied on a generally acknowledged principle in appeal proceedings. In appeal proceedings against a state court judgment, the losing party is no longer “burdened” by a judgment if it has paid the awarded amount to the winning party without reservations. The unreserved payment settles the dispute, and a legal interest to appeal the judgment no longer exists. The appeal becomes inadmissible. The Federal Supreme Court held that the same principle applies if arbitral awards are challenged. With the unreserved payment, the losing party expresses its intent to accept the arbitral award as final and binding, thereby extinguishing its “legal interest” in the setting aside of the award.
The decisive (factual) question in the proceedings for the setting aside of an award is whether the payment was indeed made without reservations. The courts must answer this question by taking into account all circumstances of the individual case that were recognizable to the recipient of the payment.[21]
[1] The Baker McKenzie International Arbitration Yearbooks 2017-2018 and 2022-2023, Germany, A.1.
[2] For details see Juergen Mark, Germany wants to introduce English speaking commercial courts, Global Litigation News (https://globallitigationnews.bakermckenzie.com/2023/02/15/germany-wants-to-introduce-english-speaking-commercial-courts/).
[3] For more details, cf. Maximilian Sattler/Tim Robben, Efficiency, Transparency and Digitalization – Germany’s Plans for Modernizing its Arbitration Law, Global Arbitration News (https://www.globalarbitrationnews.com/2023/05/02/efficiency-transparency-and-digitalization-germanys-plans-for-modernizing-its-arbitration-law/).
[4] However, an empirical study conducted by the DIS showed that only 5 % of the parties agreed to anonymized publication of arbitral awards, cf. Stellungnahme_der_DIS_zu_den_Eckpunkten_zur_Modernisierung_des_deutschen_Schiedsverfahrensrechts.pdf (disarb.org), p. 3.
[5] Cf. Juergen Mark, Germany wants to introduce English speaking commercial courts, Global Litigation News (https://globallitigationnews.bakermckenzie.com/2023/02/15/germany-wants-to-introduce-english-speaking-commercial-courts/).
[6] This is regarded as a reaction to a decision of 16 January 2020 (File No. 26 Sch 14/18, BeckRS 2020, 4606; GWR 2020, 301) in which the Court of Appeal Frankfurt “left open whether a … ground for annulment … for a violation of public policy” existed because one arbitrator had disclosed his dissent from the majority of the tribunal, cf. The Baker McKenzie International Arbitration Yearbook 2020 – 2021, Germany, B.3.
[7] https://www.bmj.de/SharedDocs/Downloads/DE/Gesetzgebung/RefE/RefE_Modernisierung_Schiedsverfahrensrecht_2024.pdf?__blob=publicationFile&v=1
[8] Judgment of the Court (Grand Chamber) of 6 March 2018, Case C-284/16, Slovak Republic v. Achmea BV (CURIA – Documents (europa.eu)).
[9] File nos. I ZB 43/22, I ZB 74/22 and I ZB 75/22, SchiedsVZ 2023, 289.
[10] File no. I ZB 43/22.
[11] File nos. I ZB 74/22 and I ZB 75/22.
[12] Judgment of the Court (Grand Chamber) of 2 September 2021, Case C-741/19.
[13] Christian Tietje, comment on the ICSID decisions of the German Federal Supreme Court, SchiedsVZ 2023, 304.
[14] Judgment of the Court (Grand Chamber) of 6 March 2018, Case C-284/16.
[15] Judgment of the Court (Grand Chamber) of 2 September 2021, Case C-741/19.
[16] Cf. B.1.
[17] Decision of 12 October 2023, File no. I ZB 12/23.
[18] File no. I ZB 36/21, SchiedsVZ 2023, 59.
[19] File no. I ZB 33/22, SchiedsVZ 2023, 228.
[20] File no I ZB 14/23.
[21] For details see Nicolas Gremminger and Rebecca Liebig, Germany: Better Think Twice – Unconditional Payments Hinder Application to Set Aside the Award, Global Arbitration News (https://www.globalarbitrationnews.com/2024/02/01/germany-better-think-twice-unconditional-payments-hinder-application-to-set-aside-the-award/).
