FMJ proposes German arbitration law reform

Book 10 of the German Code of Civil Procedure (ZPO) was last extensively revised 25 years ago. The draft bill presented on 1 February follows on from the key points paper published on 18 April 2023, which presented 12 key points for a draft bill as well as four other topics as further possible reform subjects for German arbitration law.

The draft aims to make arbitration law, especially with regard to commercial arbitration, up-to-date, to increase its efficiency and to strengthen Germany as an internationally attractive arbitration location.

In order to achieve this goal, four main changes are proposed: the freedom of form for arbitration agreements in commercial transactions; the strengthening of transparency and the promotion of legal development; the strengthening of the digitalisation of procedural law; and the promotion of the English language in proceedings before state courts.

Hear Sandra Gröschel discuss this story on The Pinsent Masons podcast here or wherever you get your podcasts.

Freedom of form in arbitration agreements in commercial transactions

“The amendment was already provided for in the key issues paper and is now to be implemented by a newly inserted para. 4 in Section 1031 of the draft Code of Civil Procedure,” said Dr. Sandra Gröschel, arbitration and litigation expert at Pinsent Masons. “Accordingly, compliance with the form referred to in paragraph 1 is not required if the arbitration agreement is a commercial transaction for all parties. If the arbitration agreement was concluded informally, either party may request that the other party confirm the content of the arbitration agreement in text form. For consumer arbitration agreements, however, the current high level of protection is not to change.”

This is intended to provide greater clarity and certainty for parties and to avoid disputes about the validity or enforceability of such clauses. It can save parties time and money and increase the efficiency of the arbitration process.

However, this proposal is highly controversial. The old arbitration law before 1998 already had this casual option of making arbitration agreements. It was only abandoned and replaced by today's Section 1031 of the Code of Civil Procedure in order to bring it into line with the requirements of the UNCITRAL Model Act 1985.

In particular, the Federal Bar Association (BRAK), German Bar Association (DAV) and German Chamber of Industry and Commerce (DIHK) have spoken out against such an informal conclusion option. This is because disputes over the conclusion and content of arbitration agreements would be inevitable and difficulties of proof would arise, as it is difficult to imagine agreeing on all the details of a customary arbitration clause (place of arbitration, institution, number of arbitrators, language of proceedings, etc.) purely orally. On the other hand, the German Arbitration Institute (DIS) is one of the voices in favour of concluding arbitration agreements informally. By lowering the formal requirements for arbitration agreements, DIS believes that party autonomy would be respected, and the customs of electronic legal transactions would be taken into account.

Improving transparency through the publication of arbitral awards

Another focus of the draft bill is the creation of more transparency through the publication of arbitral awards. The newly planned Section 1054b of the draft Code of Civil Procedure stipulates that, with the consent of the parties, the arbitral tribunal may publish the arbitral award and any dissenting opinion in whole or in part in anonymised or pseudonymised form or arrange for such publication. A party's consent shall be deemed to have been given if the party has not objected to the publication within one month of receiving the request for approval by the arbitral tribunal and has been previously made aware of this consequence.

The parties' right of veto ensures that the parties' interest in secrecy and the privacy rights of third parties are protected, if necessary. Measured against the previous willingness of arbitration parties to publish the arbitral awards made, however, the question arises as to whether the provision can actually create more transparency.

“It seems much more likely that the parties will not give their consent and will already regulate this accordingly in a procedural order. Ultimately, it is probably precisely the non-public nature of arbitration proceedings that prompts parties to conclude an arbitration agreement in the first place. It is understandable that the legislature has an interest in supporting the development of the law in areas in which arbitration proceedings are traditionally conducted (e.g. post-M&A proceedings). However, the provision in the current draft bill is unlikely to lead to any improvement in this regard because the parties will not agree to it. Consequently, it would be necessary to consider alternatives capable of serving the public interest in the development of the law,” said Lisa Oettig, arbitration and litigation expert at Pinsent Masons.

Furthermore, the draft bill is intended to further promote digitalisation in German arbitration law. The planned reform allows video hearings before arbitral tribunals (Section 1047 (2) and (3) of the draft Code of Civil Procedure) and allows arbitral tribunals to issue arbitral awards electronically, provided with a qualified electronic signature of the arbitrators (Section 1054 (2) of the draft Code of Civil Procedure).

It is not very surprising that there is a proposal for a conclusive legal rule for how oral hearings can be done using video and audio transmissions, since different institutional rules already allow this option. Moreover, in recent years, arbitration practice has benefited from the use of digital technology in many ways, such as reducing the cost and increasing the efficiency of travel that would otherwise be required or using transcription technologies to record negotiations more easily and affordably.

Deviating from the model of an arbitral award under Section 1054 (1) of the Code of Civil Procedure, Section 1054 (2) of the draft Code of Civil Procedure is intended to make it possible for an arbitral award to also be preserved in an electronic document. This way, the legal situation for arbitral awards is aligned with that for court judgments and orders. Some other jurisdictions already provide for the possibility of issuing an arbitral award in electronic form.

“The execution of the arbitral award in an electronic document pursuant to Section 1054 (2) of the draft Code of Civil Procedure, however, is dispositive, meaning the parties can object to an electronic copy. Against the background of a possibly simpler international recognition or declaration of enforceability of a correspondingly issued arbitral award, it may be advantageous to stick to the previous regulation. In addition, not every arbitral tribunal has the necessary technical equipment at its disposal,” said Sandra Gröschel.

English as the language of the proceedings, even in the event of a transition to state proceedings

The draft bill proposes that "any document" in English that has been used or provided in arbitral proceedings can also be used or provided in English by the parties in proceedings before state courts that are related to arbitration (Section 1063b of the draft Code of Civil Procedure.)

The term "document" has been chosen to cover all types of deeds, electronic documents and other documents and thus to ensure the widest possible applicability. Thus, in principle, there is no need for the parties to provide a translation for the document in question, which saves the parties not only the costs incurred but also the time required for it.

“For the purposes of the application of § 1063b of the draft Code of Civil Procedure, it does not matter before which court or before which panel of judges the hearing is held. Rather, the provision is to be applied to all proceedings referred to in § 1062(1) and (4) of the draft Code of Civil Procedure and conducted in German,” Oettig added.

With the introduction of commercial courts at certain higher regional courts or supreme regional courts, the German states will be able to provide that these courts conduct their proceedings entirely in English after the parties have agreed to this effect.

Section 1063a(1) of the draft Code of Civil Procedure makes it possible for commercial courts designated by Land ordinance to decide the proceedings referred to in Section 1062(1) of the draft Code of Civil Procedure to conduct these proceedings entirely in English, if the parties have so agreed. This possibility is also created for any subsequent appeal proceedings before the Federal Court of Justice (Section 1065 (3) and (4) of the draft Code of Civil Procedure). First of all, it can be assumed that commercial courts will be established in the states of Baden-Württemberg, Bavaria, Hamburg, Hesse and North Rhine-Westphalia.

Both amendments are intended to underline the international orientation of German arbitration law.

New: Regulation on dissenting votes

The key issues paper also contained other topics that were to be examined in an "open-ended" manner in the course of the drafting of the draft law. Of the topics listed in the key issues paper (emergency arbitrators, dissenting opinion, the formation of joint arbitration panels at the Higher Regional Court across state borders and the transfer of judicial support acts pursuant to §§ 1062 (4), 1050 ZPO from the Local Court to the Higher Regional Court), only one provision relating to so-called dissenting opinions was included in the draft bill.

Section 1054(1) of the draft Code of Civil Procedure provides that an arbitrator may express his or her dissenting opinion on the award or on the grounds thereof in a dissenting opinion unless the parties agree otherwise. The dissenting opinion is not intended to form part of the arbitral award. It must be put in writing and signed by the arbitrator.

The admissibility of arbitral dissenting opinions in the case of a German arbitration venue has so far been the subject of lively dispute. For the future, it should be clarified that in arbitration proceedings with more than one arbitrator, a dissenting opinion can also be cast at a German arbitration venue. Arbitral awards which are followed by a dissenting opinion should therefore no longer be subject to any doubts with regard to their compatibility with procedural ordre public.

By allowing dissenting opinions to be legally included, an arbitrator who did not agree with the others can still share his dissenting opinion and send it to the parties. This can improve the quality of arbitral dispute resolution and show the parties by writing down the reasons – which were not in the majority – that the arbitral tribunal has considered those arguments that did not support the arbitral award.

Dispute resolution made in Germany

The modernisation of German arbitration law is intended to increase the flexibility and efficiency of the arbitration procedure provided for by law, making it a more attractive option for resolving disputes. The "recipe" for this should be "less formalism" and "more openness to digital solutions". It remains to be seen whether the planned changes will bring new impetus to the system of German arbitration law, which has existed for 25 years and has been tried and tested in principle.

Interested parties now have until 14 March 2024 to comment on the planned amendments.