Arbitration in Germany — Explained by an German Attorney

German arbitral tribunal for commercial disputes

Economic and commercial disputes can have a major impact on a company. Complex disputes in Germany are often resolved by arbitral tribunals or other alternative dispute resolution (ADR) procedures. Arbitration proceedings are an effective form of dispute resolution in Germany. Our German lawyers regularly handle national and international disputes before arbitral tribunals. They act as arbitrators as well as party representatives in German and international arbitral proceedings.

Importance of arbitration proceedings in Germany and worldwide

Arbitration proceedings play a major role in the settlement of corporate and commercial disputes in Germany and worldwide. Almost all sectors of the economy, including the chemical, energy, IT, pharmaceutical and construction industries, rely on arbitration, particularly in international business relationships.

If a company waives an arbitration clause in an international commercial relationship, it must bring its claims before the state court of the contracting party's place of business. If the contractual partner is based abroad, the problem of foreign procedural rules and a foreign procedural language often arises. Furthermore, the rule of law is in certain Countries not always guaranteed. In some countries, companies face a major problem of corruption in state courts. Finally, the enforcement of a foreign judgement can be a challenge. Therefore, an arbitration clause which leads to an arbitration proceeding in Germany or another country with legal certainty can prevent many problems.

Arbitration proceedings vs. state court proceedings

Opting for arbitration instead of state court proceedings has numerous advantages. If legal systems are involved that are known for long proceedings (Italian Torpedo), a delay in the event of a dispute can be avoided by choosing arbitration proceedings.

Furthermore, an arbitration award cannot be contested, thus eliminating the need for a multi-stage process. Only the (very limited) action for annulment before state courts can affect the arbitration judgement. Overall, a faster and more efficient solution can therefore be found for commercial law conflicts in many cases. Speed often goes hand in hand with a reduction in costs. However, this does not necessarily have to be the case for every arbitration procedure. It is quite possible that arbitral proceedings are more expensive than state court proceedings. However, you can buy arbitration decisions that have been made by experienced arbitrators and are also enforceable not only in Germany but also abroad.

In any case, the decisive factor for arbitration is enforcement. Enforcement of foreign judgements can pose enormous legal and factual problems for the courts in the country of enforcement and may fail. In contrast, arbitral awards are subject to an international treaty: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958. This treaty provides only very limited possibilities for refusing enforcement and usually leads to successful enforcement of the judgment obtained.

Furthermore, the conditions of arbitral proceedings are flexible: The place, language and rules of the proceedings can be agreed quite freely by the parties within the legal framework.

The possibility for the parties to choose the arbitrators can significantly improve the dispute resolution in terms of expertise and efficiency. The confidentiality of arbitral proceedings also offers the opportunity to resolve disputes without the influence of the press and the public.

Course of arbitral proceedings

The requirements for arbitral proceedings under German law are governed by the provisions of Sections 1025 et seq. ZPO ("Zivilprozessordnung", this means German Code of Civil Procedure). The German national regulations are in line with UNCITRAL Model Laws. The statutory German ZPO framework for arbitration proceedings conducted under private law therefore complies with international standards.

Parties who wish to conduct arbitral proceedings must comply with mandatory procedural rules. In Germany, Section 1042 ZPO stipulates that parties who wish to conduct arbitration proceedings must comply with important mandatory provisions of German ZPO. However, they are free to determine the details of the arbitral proceedings. Many of the companies supported by our lawyers use formulated sets of rules from national or international arbitral institutions. In Germany, the DIS (Deutsche Institution für Schiedsgerichtsbarkeit) plays a leading role in providing such procedural rules. Each arbitration system usually includes steps such as the initiation of proceedings, the selection of arbitrators, the presentation of evidence and arguments and the final award. With clear procedural rules, arbitration ensures efficient and customised dispute resolution. The arbitration procedure can be customised to the specific needs of the parties.

Below you will find a general, highly simplified description of the course of arbitration proceedings in which German companies can be involved as claimants or defendants:

Arbitration agreement: Before a dispute arises, the parties conclude an arbitration agreement. This can be part of a contract or concluded separately. In this agreement, the parties stipulate that they will settle any disputes through arbitration rather than before state courts. However, the parties can also agree such an arbitration agreement after a dispute has arisen.

Initiation of arbitral proceedings: When a dispute arises, the claimant submits a written arbitration claim to the arbitration institute or in accordance with the agreed arbitration rules. The statement of claim should clearly set out the relevant facts and legal claims.

Appointment of arbitrators: In accordance with the arbitration agreement or the applicable arbitration rules, the parties select arbitrators jointly or through the arbitration institute. As a rule, the arbitral tribunal shall consist of an odd number of arbitrators (for example 3 arbitrators).

Reply and possible counterclaim: As in all state courts, the defendants have the opportunity to submit a written reply to the claim within a specified period of time. In some cases, defendants may also file a counterclaim.

Present hearing or written proceedings: The arbitration tribunal decides whether an oral hearing is necessary or whether the proceedings will be limited to written submissions. The present hearing refers to a physical meeting of all parties involved. However, meetings by video conference are also possible, as they can be conducted efficiently and cost-effectively. During an present meeting, both parties have the opportunity to present their arguments, present witnesses and submit evidence.

Decision of the arbitral tribunal: At the end of the proceedings, the arbitration tribunal issues a written decision, known as the arbitral judgement or award. This is binding and can be enforced in state courts in many countries.

Enforcement of the judgement: In the event of a prevailing judgement, the prevailing party must apply to the state courts for the arbitration decision and enforce it in accordance with national laws.

It is important to note that the exact course of arbitration proceedings depends on various factors, including the arbitration agreement, the applicable arbitration rules and the procedures of the chosen arbitration institution.

Arbitral proceedings: Flexibility and enforceable arbitral award

The flexibility of arbitral proceedings is a decisive factor in conflict resolution. The parties have the opportunity to determine the procedural rules according to each party's requirements. Every German attorney knows that the flexible procedure can help to ensure that a dispute resolution is customized and effective. The high degree of flexibility of the arbitration procedure also paves the way for numerous ways to reach an agreement quickly. In spite of the conflict, a further co-operation between the business partners should always be attempted.

In addition, the arbitral tribunal's decision is generally enforceable. This ensures that the results of the arbitration proceedings can be enforced in a national and international context.

However, it should be noted that arbitration awards can be contested before state courts in certain situations. The annulment of an enforceable arbitral award becomes possible if the award was made on the basis of serious procedural errors. It is therefore important to choose a procedural law that avoids the risk of subsequent challenges. Lawyers specializing in arbitral proceedings and arbitration should be involved in these issues. It is often advisable to choose institutionalized arbitration rules, such as those of the German Institution of Arbitration (DIS) or the International Chamber of Commerce (ICC).

Dispute prevention starts with the conclusion of the contract

An arbitration clause being agreed at the beginning of a business relationship can prevent long and expensive litigation proceedings.  When concluding important contracts with business partners in Germany or abroad, the worst-case scenario should at the beginning always be taken into consideration. Our certified specialists for commercial and corporate law will be happy to help you analyze the legal risks and to choose the suitable arbitration clause.

A major advantage of arbitration proceedings is that they can be established as a means of conflict resolution before the contract is concluded and before any dispute arises. By integrating arbitration clauses into contracts, German and international companies can create clear regulations from the outset in the event of any disputes. This not only promotes trust between the contracting parties, but also enables efficient conflict resolutions when disagreements arise. Arbitration clauses and arbitral proceedings increase the chances that disputes can be settled quickly and without publicity to enable a business relationship to continue after the conflict has ended.

Q&A - Arbitral proceedings, arbitral tribunal, arbitral award

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