Arbitration Yearbook Germany

By: Ragnar Harbst,1 Heiko Plassmeier2 and Jürgen Mark3

A. Legislation, Trends and Tendencies

Arbitration in Germany continues to be governed by the 10th Book of the Code of Civil Procedure (ZPO, Sections 1025 to 1066), to which no legislative amendment was made in 2015. However, as a reaction to the decision of the Court of Appeal Munich in the Pechstein case – in which the court held that the arbitration clause in the Constitution of the International Skating Union (ISU), which Ms. Pechstein had accepted by signing the entry form for the Skating World Championship in Hamar in 2009, violated mandatory German antitrust law4 – the German parliament enacted an Anti-Doping Act in November 2015 that includes a provision on sports arbitration. According to Section 11 of the Act, sport associations and athletes may conclude arbitration agreements as a prerequisite for the participation of athletes in sports competitions and tournaments if the arbitration agreements involve sport associations and athletes in national or international sports organizations and have, as their goal, to organize, promote or secure such sports events. This prerequisite is met in particular if the arbitration agreement is intended to enforce the anti-doping codes of the World Anti-Doping Agency.

According to the German legislature, Section 11 of the Anti-Doping Act is only a clarification to remove doubt as to the validity of arbitration agreements between sport associations and athletes. It does not seek to decide whether an individual arbitration agreement is valid. It remains to be seen how German courts will apply the new provision.

B. Cases

B.1 Vacation of Award Following Successful Challenge to Arbitrator

In the Baker & McKenzie International Arbitration Yearbook 2014 – 2015,5 we reported a decision of 3 January 2014 in which the Court of Appeal Munich had – in a domestic case – upheld a challenge to the chairwoman for lack of impartiality after the arbitral tribunal had already rendered an award. The court of appeal had also vacated the award.6 With respect to the decision to vacate the award, the respondent brought an appeal to the Federal Supreme Court. In a decision of 11 December 2014,7 the Federal Supreme Court rejected this appeal based on Section 1059(2)(d) ZPO,8 which provides a ground to set an award aside where “the composition of the tribunal or the arbitration proceedings did not correspond to a provision of [the 10th book of the ZPO] or to an admissible agreement between the parties, and it is to be assumed that this has had an effect on the arbitration award.” The court held that the composition of the tribunal had not been in accordance with German arbitration law, since it included an arbitrator who had been successfully challenged. The fact that the Court of Appeal Munich only rendered a decision on the challenge after the tribunal had already issued the award was held to be immaterial.

As to the requirement that the tribunal’s unlawful composition must have had an effect on the award, the court held that this threshold is not very high. The causal link requirement was only necessary to prevent the vacation of an award on purely formal grounds where the outcome in substance could not have been different. The mere possibility that the tribunal could have come to different conclusions had it deliberated without the successfully challenged chairwoman was held to be sufficient ground to set the award aside. The court rightly disregarded a statement of the two party-appointed arbitrators to the effect that the tribunal had come to a unanimous decision and that they would render an award with the very same wording if a new chairperson were appointed,9 pointing out that it is always possible that one arbitrator influences the others in deliberation and decision-making.

B.2 Arbitration Clause Valid Despite Unworkable Qualification

In a decision of 1 October 2014,10 the Court of Appeal Munich was faced with a dispute over the validity of an arbitration clause between a limited partnership and one of the partners. The arbitration clause in the partnership’s articles of association provided for all disputes to be determined by a sole arbitrator who had to be a “professional colleague.” In the event of failure to agree on an arbitrator, the arbitrator was to be nominated by an association of experts in the industry in which the partnership was active. After a dispute had arisen between the parties, they were unable to agree on an arbitrator, and the association that they had named as a third party refused to make a nomination. The applicant partner then requested a declaration of inadmissibility of arbitration proceedings from the Court of Appeal Munich under Section 1032(2) ZPO, arguing that the arbitration clause had become invalid or incapable of being performed for lack of an arbitrator nomination.

The Court of Appeal Munich rejected the application, confirming once again the pro-arbitration bias of German courts. It held that the parties had agreed to have all disputes arising between them resolved by arbitration and that there was no connection between the agreement to arbitrate on the one hand and the agreement as to the arbitrator’s selection and qualification on the other hand that would render the former agreement invalid or incapable of being performed if the latter turned out to be unworkable. Failing agreement on the sole arbitrator and nomination by the specified third party, the parties fell back on the default rules in Section 1035(4) ZPO,11 which provide for nomination of an arbitrator by a state court upon application of one of the parties.

B.3 Jurisdiction in Claim for Unconscionably Obtained Award

In a judgment of 7 August 2015, the Court of Appeal Cologne12 had to deal with a claim for damages by a former respondent in arbitration proceedings. The former respondent had lost the arbitration to a large extent, and the tribunal ordered reimbursement of the former claimant’s costs of approximately EUR730,000, including lawyers’ fees in an amount of approximately EUR460,000. As it subsequently turned out, the former claimant had in fact only paid its lawyers a contingency fee of approximately EUR280,000. The former respondent initiated proceedings to recover the overpaid amount before the District Court Bonn as “unconscionable damage” under Section 826 of the German Civil Code (Bürgerliches Gesetzbuch – BGB), arguing that it had been defrauded by the former claimant with respect to the amount of lawyers’ fees paid. The district court dismissed the claim. On appeal, the Court of Appeal Cologne reversed the judgment, holding that neither the res judicata effect of the arbitral award nor the arbitration agreement between the parties rendered the claim inadmissible. In the court’s view, a state court may disregard the res judicata effect if the award was obtained or is used in an unconscionable way. The claim for damages was held not to be covered by the arbitration agreement because it did not relate to a dispute which arose out of the underlying contract, but was rather based on the former claimant’s behavior in the arbitration. The basis of the claim was an incorrect decision of the tribunal that had been prompted by unconscionable conduct of a party (e.g., fraud), and the action sought to create the financial situation that would have existed but for the incorrect award.

The judgment establishes the jurisdiction of state courts to correct unconscionably obtained arbitral awards. Essentially, the court reopened the proceedings and rendered a fresh decision on the merits, based on newly ascertained facts. However, the court’s jurisdiction is doubtful, as it arguably misconstrues the arbitration agreement between the parties. The former respondent should rather have been referred to arbitration, as the agreement that “all disputes arising out of or in connection with the contract” shall be settled by arbitration would appear also to cover the damage claim. Although the claim at issue resulted from a party’s behavior in the arbitration, and although it is statute- and not contract-based, it still resulted from a dispute that had arisen “in connection with” a contract that included an arbitration agreement.

The judgment is also irreconcilable with Section 1059, paragraphs 4 and 5 ZPO: where an arbitral award has been set aside, the case has to be tried again in arbitration proceedings, yet the Court of Appeal Cologne assumes jurisdiction to remedy the consequences of an incorrect award. Based on this rationale, German state courts would even have jurisdiction to correct unconscionably obtained foreign arbitral awards if the creditor intends to enforce the award in Germany.

As a basis to disregard res judicata, the Court of Appeal Cologne relied on settled case law from the German Federal Supreme Court13 (Bundesgerichtshof) relating to state court judgments. Where a German court finds that a judgment has been obtained or is used unconscionably (e.g., in the case of fraud, forged evidence, threat or compulsion), the court is free to reevaluate the case despite a final and binding judgment. This principle also applies to arbitral awards that – under Section 1055 ZPO – have the same effect as a final and binding state court judgment.

In the case of a domestic arbitral award, the defrauded party can choose to have the award set aside and/or to claim damages. The Federal Supreme Court accepts an annulment of a domestic award in particular in two cases, namely in the case of a violation of public policy (Section 1059 paragraph 2 No. 2 lit. b ZPO) or in the case of unconscionable intentional damage (Section 826 BGB), which – according to the Federal Supreme Court – is not quite the same. For an annulment based on a violation of public policy, the applicant has to show all statutory requirements for the annulment of a state court judgment or for retrial of the case within the meaning of Sections 579 et seq. ZPO. In particular, there must be a final and binding criminal sentence against the party that has unconscionably obtained the award. For an annulment of the award due to unconscionable intentional damage, the court “only” requires an incorrect decision that is based on one party’s unconscionable conduct.

An application for annulment is no longer admissible if the award has been declared enforceable (Section 1059 paragraph 3 sentence 4 ZPO). In this case, the only remedy for a defrauded party is an action for prohibition of enforcement and disgorgement of the award and the exequatur decision under Section 826 BGB before the court of appeal. This applies to both domestic and foreign awards.

B.4 Failure to Raise Jurisdictional Objection Amounts to Waiver

In its decision dated 12 January 2015,14 the Court of Appeal Munich had to rule on an application for a declaration of enforceability concerning a French arbitral award. The claimant had initiated arbitral proceedings for payment claims against an insolvent company based in Belgium. In a departure from the contractual arbitration clause, the claimant had entered into an UNCITRAL arbitration agreement with the respondent’s insolvency administrator. In the final award, the sole arbitrator ordered the respondent to effect certain payments to the claimant. By application of 26 July 2013, the claimant asked the Court of Appeal Munich to declare the award enforceable. The respondent argued that the insolvency administrator had not been permitted to enter into the arbitration agreement without permission of the insolvency court in Belgium, which allegedly rendered the arbitration agreement invalid. The respondent added that, in line with German case law, the fact that the responding party had not challenged the final award before the French courts did not amount to a waiver of jurisdictional objections at the enforcement level. The Court of Appeal Munich held that the responding party was prevented from objecting to the tribunal’s jurisdiction at the enforcement level because it had failed to raise the objection during the arbitral proceedings. To start with, the court confirmed earlier case law that the respondent’s decision not to challenge the final award at the seat of the arbitration does not amount to a waiver of jurisdictional objections at the enforcement level.15 However, according to the court, the general principle of good faith prevents a party from asserting certain rights if the assertion contradicts earlier conduct (venire contra factum proprium). This principle, according to the court, also applies to international arbitral proceedings. Accordingly, if a party fails to raise jurisdictional objections during the arbitral proceedings, this conduct demonstrates that the party has no objections to the arbitral proceedings. It generally has to be considered as contradictory if such objections are then raised at the enforcement level. The decision underlines the importance of timely objections during arbitral proceedings. While the failure to initiate challenge proceedings at the seat of the arbitration will, in most cases, not amount to a waiver of rights at the enforcement level, a failure to raise such objections during the arbitral proceedings may very well do.

C. Costs in International Arbitration

C.1 Allocation of Costs

The basic cost allocation principles in German arbitration law are enshrined in Section 1057 ZPO, which provides that unless the parties have agreed otherwise,16 the tribunal has to decide on the respective shares of the costs that the parties have to bear, including the costs that were “necessary to file a request for arbitration proceedings or to defend against such a request appropriately.” The cost decision can be included in the final award on the merits, or in a subsequent cost award in the event the tribunal cannot ascertain them when it issues the final award on the merits. It follows from this statutory rule that parties to German arbitration proceedings do not expressly have to apply for a decision on costs.

As a rule, costs in German awards follow the event,17 consistent with the general principle applicable to state court proceedings (Section 91 ZPO). However, Section 1057 ZPO affords to arbitral tribunals a greater degree of discretion than Section 91 ZPO provides for state courts: an arbitral tribunal is to rule on costs “according to its due discretion, taking into account the circumstances of the individual case, in particular the outcome of the proceedings.” The decision on the merits is thus only one – albeit important – factor to be considered when a tribunal allocates costs. Other factors18 that tribunals in German proceedings have considered include:19

• The parties’ behavior in the course of the proceedings or in the pre-arbitration phase (e.g., extra costs caused by delays,20 or lack of cooperation before the proceedings)

• The claimant’s failure to submit all relevant facts in support of his claim in a conclusive manner (e.g., submission of extensive exhibits without properly explaining their meaning)

• A party’s failure to contribute to the continuation of the proceedings (e.g., jurisdictional, res judicata or time-bar objections that turn out to be unfounded or a respondent’s unjustified refusal to participate in the proceedings)

However, as the Deutsche Institution für Schiedsgerichtsbarkeit e.V. (DIS) rightly notes, “the ‘costs follow the event’ principle clearly reflects general arbitral practice and arbitrators (…) depart from it only reluctantly.”21

C.2 Security for Costs

There is no express statutory basis in German arbitration law that empowers the tribunal to order one party to provide security for the opposing party’s costs. However, a tribunal may, by way of an interim measure,22 grant such an order in its general discretion to conduct the proceedings within the framework of the applicable rules, but in practice, this is the exception rather than the rule.23 Circumstances in which security for costs has been considered24 include those in which a German state court may issue a corresponding order: under Section 110 ZPO, a plaintiff in state court proceedings who does not have his habitual residence in the European Union or the European Economic Area has to provide security for costs if the defendant so applies. Whether third party funding of one party’s costs in arbitration that does not cover the opposing party’s claim to reimbursement of its costs may be another instance in which the tribunal can order security has been subject to some debate recently, but remains an “unsolved problem.”25 There does not as yet appear to be a published decision on this issue, and this is unlikely to change soon, as there is no obligation to disclose third party funding.

C.3 Recovery of Costs

The scope of costs recoverable in arbitration26 includes the costs of the tribunal (fees and expenses), the costs of the arbitral institution, if applicable (registration fees and administrative charges) and the parties’ costs. As to the costs of the tribunal, it had in former times been almost common ground that where the arbitrators’ fees are proportionate to the amount in dispute, a tribunal does not have the power to fix the amount at issue, since it would be acting as a “judge in its own affairs.”27 It was only as late as 2012 that the Federal Supreme Court28 drew a distinction between the relationship between the parties on the one hand and the relationship between the parties and the arbitrators on the other hand and held that, while the arbitral tribunal’s determination of the amount in dispute is binding between the parties, it is not binding with respect to the arbitrators’ fee claims. Arbitrators may thus now rule on the amount at stake, even where this indirectly determines their fees.

Recoverable party costs comprise lawyers’ fees and the party’s expenses that are “necessary to file a request for arbitration proceedings or to defend against such a request appropriately.” As reported in previous editions of the Baker & McKenzie International Arbitration Yearbook,29 one of the critical issues under this heading used to be whether lawyers’ time charges are recoverable. German law is different from many other legal systems in that in litigation before state courts, the attorneys’ fees that the prevailing party can recover are capped by the amount of fees derived from a statutory fee schedule that is part of the Attorneys’ Remuneration Act (Rechtsanwaltsvergütungsgesetz – RVG). For clients who pay their attorneys by the time they spend on their case, this restriction frequently means that they cannot recover the entire fee paid, even if they prevail in full. For a long time, the same restriction was held also to apply to German arbitration proceedings. However, in recent years, arbitral tribunals have allowed parties also to recover attorneys’ fees billed by the hour. Two courts of appeal30 have approved this tendency, and a decision from the Federal Supreme Court31 is taken to have tentatively endorsed the same view,32 so that it can now be regarded as all but settled that time charges are recoverable in German arbitration proceedings.

To prove that the lawyers’ fees were incurred, it is best practice to provide copies of the summaries of the lawyers’ invoices that show the names of the attorneys involved, the number of hours worked and the hourly rates, but not the detailed descriptions of the work invoiced.33 There will not normally be disputes over the necessary amount of counsel’s work unless there are large discrepancies between the sums invoiced by the parties’ respective lawyers. In addition, the arbitrators will normally be in a position to judge the appropriateness of the sums invoiced from their own experience.34 If the hours worked are nevertheless still disputed, Risse/Altenkirch suggests that a possible solution could be to have an independent expert assess their appropriateness.35 Proof of payment does not normally go beyond a party’s assertion that the fees invoiced were paid.

Costs of a party’s in-house counsel and other members of a party’s staff (contract managers, engineers, etc.) are not considered recoverable, as they are said to be incurred in any event and regardless of a specific dispute.36 However, it should be recognized that the use of in-house counsel saves outside counsel’s costs37 and enhances the presentation of well-prepared documents, and tribunals in domestic cases should start to award at least in-house counsel costs, just as international tribunals do.

  1. Ragnar Harbst is a partner in Baker & McKenzie’s Frankfurt office. He has acted in numerous international arbitration proceedings, both as party representative and as arbitrator. His practice focus is on construction and infrastructure related disputes. Mr. Harbst is also qualified as a solicitor in England and Wales.
  2. Heiko Plassmeier is a counsel in Baker & McKenzie’s Düsseldorf office. He advises and represents clients from various industries, including the energy and automotive sectors, in domestic and international litigation and arbitration cases, and has acted as an arbitrator. Besides his dispute resolution practice, he also handles insolvency matters.
  3. Jürgen Mark is a partner in Baker & McKenzie’s Düsseldorf office. He practices in the areas of litigation and domestic and international arbitration. Mr. Mark has also acted as arbitrator in ad hoc, ICC and DIS arbitration proceedings relating to corporate and post-M&A disputes, major construction projects, product distribution and product liability.
  4. Decision of the Swiss Federal Tribunal rejecting a challenge of Ms. Pechstein against an arbitral award issued by CAS reported in the 2010/2011 edition of this Yearbook, p. 420-423; decisions of the District Court Munich and the Court of Appeal Munich reported in the 2014/2015 edition of this Yearbook, p. 134-136.
  5. P. 131 et seq.
  6. File no. 34 SchH 7/13, NJOZ 2014, 449.
  7. File no. I ZB 23/14, ZIP 2015, 1363.
  8. Largely identical to Article 34(2)(a)(iv) of the UNCITRAL Model Law.
  9. In itself, this statement is quite incredible, as it violates the secrecy of the tribunal’s deliberations. As the Federal Supreme Court remarked in passing, this statement “raises doubts as to the arbitrators’ impartiality and their suitability for the post of an arbitrator.”
  10. File no. 34 SchH 11/14, WM 2015, 949 = BB 2015, 1812, with affirmative note Jerczynski, https://globalarbitrationnews.com/germany-validity-of-arbitration-agreement-despite-impracticable-provision-as-to-the-appointment-of-the-arbitrator-20150601/
  11. Equivalent to Article 11(4) of the UNCITRAL Model Law.
  12. File No. 1 U 76/14, SchiedsVZ 2015, 295, with critical note Jerczynski, https://globalarbitrationnews.com/germany-no-jurisdiction-of-state-courts-over-damage-claim-resulting-from-unconscionably-obtained-arbitral-award-20150112/
  13. Judgments of 27 March 1968, file no. VIII ZR 141/65, BGHZ 50, 115, and of 2 November 2000, file no. III ZB 55/99, BGHZ 145, 376.
  14. Court of Appeal Munich, file no. 34 Sch 17/13.
  15. Federal Supreme Court, decision of 23 November 2009, file no. 34 Sch 13/09, BGHZ 188, 1.
  16. The most obvious case of a diverting agreement is the choice of institutional rules that include a provision on the allocation of costs. Section 1057 ZPO thus mostly applies to ad hoc proceedings, Trittmann, ZVglRWiss 114 (2015), 469 (472 et seq.).
  17. Cf., e.g., Sec. 35 (2) of the DIS Rules 1998: “In principle, the unsuccessful party shall bear the costs of the arbitral proceedings. The arbitral tribunal may, taking into consideration the circumstances of the case, and in particular where each party is partly successful and partly unsuccessful, order each party to bear his own costs or apportion the costs between the parties.”
  18. Schlosser (Stein/Jonas, ZPO, Sec. 1057, note 4) suggests to resort to Rule 44.4 (3) of the UK Civil Procedure Rules to determine factors to be taken into account.
  19. Cf. the DIS contribution to the ICC Commission Report “Decisions on Costs in International Arbitration” of 1 December 2015, p. 28 et seq. (ICC Dispute Resolution Bulletin 2015, Issue 2).
  20. V. Schlabrendorff/Sessler in Böckstiegel/Kröll/Nacimiento, Arbitration in Germany, 2nd ed., Sec. 1057 ZPO, note 34.
  21. Decisions on Costs in International Arbitration, ibid.
  22. Stein/Jonas- Schlosser, Section 1057, note 17.
  23. Böckstiegel/Kröll/Nacimiento, Arbitration in Germany, General Overview, note 33.
  24. Haase, BB 1995, 1252.
  25. Trittmann, ZVglRWiss 114 (2015), 469 (488).
  26. For a comprehensive overview, cf. v. Schlabrendorff/Sessler, Sec. 1057 ZPO, note 5 et seq.
  27. Cf. the cases reported in the 2007 edition of this Yearbook, p. 55 et seq.
  28. Order of 28 March 2012, file no. III ZB 63/10, SchiedsVZ 2012, 154 = BGHZ 193, 38, reported in the 2012/2013 edition of this Yearbook, p. 175 et seq.
  29. 2012 – 2013, p. 177 et seq., 2013 – 2014, p. 128.
  30. Court of Appeal Munich, decision of 11 April 2012, File No. 34 Sch 21/11, SchiedsVZ 2012, 156; decision of 23 July 2012, File No. 34 Sch 19/11, SchiedsVZ 2012, 282, both reported in the 2012/2013 edition of this Yearbook, p. 177 et seq.; Court of Appeal Frankfurt/Main, decision of 2 April 2013. File No. 26 Sch 28/12, reported in the 2013/2014 edition of this Yearbook, p. 128.
  31. Decision of 18 December 2013, File No. III ZB 92/12, NJW-RR 2014, 953.
  32. Trittmann, ZVglRWiss 114 (2015), 469 (470).
  33. Risse/Altenkirch, SchiedsVZ 2012, 5 (11).
  34. v. Schlabrendorff/Sessler, Section 1057 ZPO, note 26. This was for instance the case in “Case 5” reported in the ICC Commission Report “Decisions on Costs in International Arbitration,” p. 29, where the respondent’s costs were twice as high as the claimant’s for reasons within the claimant’s responsibility.
  35. Risse/Altenkirch, ibid.
  36. Lachmann, Handbuch für die Schiedsgerichtspraxis, 3rd ed. (2008), note 1991.
  37. Risse/Altenkirch, p. 12; Kreindler/Schäfer/Wolff, Schiedsgerichtsbarkeit (2006), para. 1225; v. Schlabrendorff/Sessler, Section 1057 ZPO, note 20.