Strengthening Germany’s position as an arbitration venue – Federal Government decides to reform German arbitration law

Initial position

Following the revision in 2006 of the UNCITRAL Model Law on International Commercial Arbitration, which served as a model for German arbitration law regulated in sections 1025 to 1066 German Code of Civil Procedure (Zivilprozessordnung – ZPO), on 26 June 2024, the Federal Cabinet approved the draft bill to modernise German arbitration law (Entwurf eines Gesetzes zur Modernisierung des Schiedsverfahrensrechts; Federal Council printed matter 386/24). The objective of this draft bill is to align German arbitration law to current needs and strengthen Germany’s attractiveness as a venue for arbitration proceedings. To this end, the draft bill provides for specific amendments to German arbitration law to take account recent arbitration developments at the European level and revisions to arbitration rules by the most important arbitration institutions.

Scope of application

German arbitration law, contained in Book 10 of the German Code of Civil Procedure, provides the statutory framework for arbitration proceedings conducted in Germany. It allows the parties considerable discretion to regulate arbitration proceedings either individually or by referring to the procedural rules of an arbitration institution (section 1042 para. 3 German Code of Civil Procedure). In the event that the parties are unable to reach an agreement, the German arbitration law provides a statutory fall-back system of rules. It should be noted that this also only provides a framework; subject to a party agreement, the arbitral tribunal determines the detailed procedural rules at its own discretion (section 1042 para. 4 sentence 1 German Code of Civil Procedure).

The provisions of the German Code of Civil Procedure also contain rules on support and review activities that can be provided by the German state courts. Thus, German state courts may, for example, assist the arbitral tribunal in taking evidence upon request (section 1050 German Code of Civil Procedure). This even applies to arbitration proceedings conducted abroad (section 1025 para. 2 German Code of Civil Procedure).

As regards the enforcement of interim measures ordered by the arbitral tribunal, the supporting competence of German state courts is now also extended to foreign arbitral tribunals. In the future, German state courts shall also be authorised to enforce interim measures issued by foreign arbitral tribunals (sections 1025 para. 2, 1041 para. 2 Draft of the German Code of Civil Procedure (Zivilprozessverordnungsentwurf – ZPO-E) (ZPO Draft). 

No formal requirements for arbitration agreements

One major change proposed by the draft bill is that arbitration agreements no longer need to be concluded in written form. Previously, arbitration agreements had to be set out either in a document signed by the parties or in letters, telefax copies, telegrams or other forms of communication exchanged between the parties to ensure documentary proof of the agreement (section 1031 para. 1 German Code of Civil Procedure). However, this requirement will no longer apply and according to the new legal framework, informal arbitration agreements, including oral arbitration agreements, will also be permitted. The only exception to this is in respect of arbitration agreements with consumers, which must be a personally signed document containing only the arbitration agreement and no other provisions (section 1031 para. 5 German Code of Civil Procedure – in future: section 1 ZPO Draft). 

Thus, in an international context, Germany is now joining a minority of states (led by France) which do not have formal requirements for arbitration agreements. The majority of states however, in particular, major arbitration centres (i.e. England, Singapore, Hong Kong, Switzerland), adhere to a written or at least text form requirement. There are good reasons for such an approach - oral arbitration agreements increase legal uncertainty and may result in disputes regarding the existence and content of an arbitration agreement, which must then be additionally resolved.

But that’s not all: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) also contains a written form requirement in Article II (2) and the signatories are obliged only to recognise arbitration agreements and refer the parties to arbitration proceedings (Art. II (1) and (3) New York Convention) in the case of ‘written agreements’ (although a signature under a contractual document is not necessarily required - an exchange of letters containing an arbitration agreement is deemed sufficient). The signatories to the New York Convention are therefore not obliged to recognise oral arbitration agreements. 

However, the ‘most favourable right’ principle set out in Article VII (1) of the New York Convention, stipulates that a party may invoke an arbitral award or arbitration agreement in accordance with the national law of the country where the arbitration agreement is sought to be relied upon (which may be subject to less stringent formal requirements). However, this only has limited value if other signatories rely on the written form requirement.

It is therefore not certain whether oral arbitration agreements will be recognised by the courts of other states. In light of this, the complete abolition of the formal requirement appears somewhat overzealous. A better option might have been to introduce a text form requirement following the Swiss model (cf. Art. 178 (1) Swiss Code on Private International Law (Bundesgesetz über das Internationale Privatrecht – IPRG): “The arbitration agreement shall be in writing or in another form verifiable by text.”), which is in line with what is required under the New York Convention.

In order to avoid legal uncertainty, parties are advised to avoid concluding arbitration agreements in oral form. 

Presentation of English documents in state court proceedings conducted in German

Although most arbitration proceedings are conducted in the English language, parties previously had to conduct any subsequent discussions in German, for example regarding the setting aside of proceedings or proceedings for the issue of a declaration of enforceability before state courts. After the reform of arbitration law, the parties will be able to submit English documents in the such proceedings (section 1063b ZPO Draft). This change aims to make state court proceedings more efficient and save the parties extensive translation costs. 

This reform will not apply to proceedings before the Federal Court of Justice and local courts (which, as noted above, remain competent to provide assistance i.e. by taking evidence and other judicial acts for which the arbitral tribunal is not authorised; sections 1062 para. 4, 1050 German Code of Civil Procedure). In this context, the possibility of submitting English language documents to all courts would have been a welcome change. 

Commercial courts

The modernisation of arbitration law also involves the establishment of so-called commercial courts, which has been decided upon only recently by the German Bundestag. State governments may now assign judicial support and review activities which previously fell within the competence of the higher regional courts, to a commercial court (e.g. appointment or rejection of arbitrators, determination of admissibility or inadmissibility of arbitration proceedings, enforcement of interim measures by arbitral tribunals, setting aside or enforcement of arbitral awards) (section 1062 para. 5 sentence 2 ZPO Draft).

Proceedings before commercial courts may be conducted in English at the parties’ request (section 1063a ZPO Draft). This is a well-intentioned amendment and, with a view to strengthening Germany’s position as a legal venue and promoting international competitiveness, certainly a step in the right direction. However, the utility of these provisions will ultimately depend on the extent to which the federal states actually make use of them. Where commercial courts have not been set up or where state governments have not transferred the respective powers to them, higher regional courts will remain competent and section 184 sentence 1 German Courts Constitution Act (Gerichtsverfassungsgesetz – GVG) will continue to apply: “The language to be used in court is German.” However, even if proceedings before commercial courts are conducted in English, this may not necessarily apply to all instances. In case of appeal proceedings before the Federal Court of Justice, proceedings may only be in English if the Civil Panel grants a corresponding application (section 1065 para. 3 ZPO Draft). How liberal and modern the Federal Court of Justice really is in this respect therefore remains to be seen when it comes to practical implementation.

Digitalisation: video hearings and decisions issued in electronic form

Digitalisation has also found its way into German arbitration law. Based on positive experience of oral hearings via video conferencing in arbitration practice, the draft bill contains a non-mandatory provision on the conduct of video hearings (section 1047 para. 2 ZPO Draft). This is intended not only to expressly clarify the admissibility of this already common practice and promote procedural efficiency, but also to increase the attractiveness of Germany as an arbitration venue for international proceedings, where parties are often spread across several continents.

The draft bill also continues to promote digitalisation by permitting arbitral tribunals to issue awards in the form of electronic documents, provided that no party objects. Consequently, arbitral awards will no longer necessarily have to be signed by hand, but may alternatively be issued electronically, i.e. in form of an electronic document containing a qualified electronic signature (section 1054 para. 1 sentences 2 and 3 ZPO Draft).

Final decision on arbitration agreements in the context of the application for determination of the admissibility or inadmissibility of arbitration proceedings

Another new feature is that, in the context of an application for determination of the admissibility or inadmissibility of arbitration proceedings filed prior to the constitution of the arbitral tribunal, the state court may also decide upon the existence or validity of an arbitration agreement (section 1032 para. 2 sentence 2 ZPO Draft). This decision is capable of having legal effect and is therefore binding in any subsequent setting aside or enforceability declaration proceedings.

Appointment of arbitrators in multi-party proceedings

If joined parties in multi-party proceedings are unable to agree on an arbitrator, the draft bill now provides (in section 1035 para. 4 ZPO Draft) that the arbitrator must be appointed by a state court at the request of one of the parties.

Setting aside of false-negative jurisdiction decisions

If an arbitral tribunal, after an objection as to its jurisdiction, wrongly declares that it does not have jurisdiction, this decision can in future be set aside by a state court at the request of one of the parties (section 1040 para. 4 ZPO Draft). The court can then refer the matter back to the arbitral tribunal at the request of a party (section 1059 para. 4 German Code of Civil Procedure).

The German Code of Civil Procedure thereby establishes an additional ground for setting aside, which is not provided for in the UNCITRAL Model Law. This may seem somewhat superfluous since – unlike in case of a false-positive jurisdiction decision (the arbitral tribunal wrongly considers itself to have jurisdiction) – the parties’ right to justice, i.e. the right to access to the state courts, is not affected. It does, however, promote the conduct of arbitration proceedings and, thus, the enforcement of the parties’ intent, which generally is to be welcomed.

Facilitation of publication of arbitral awards

Under the new section 1054b ZPO Draft, arbitral tribunals will in future be able to completely or partially publish their arbitral awards in anonymised or pseudonymised form. This is intended to promote further development of the law and increase transparency of decisions in commercial arbitration. Although the parties’ consent is required for publication, such consent is deemed granted if the respective party does not object within three months as of the arbitral tribunal’s request. This is an opt-out solution: a party which does not wish to have its award published must actively object. In practice, however, this will probably have little effect, as it is expected that parties represented by lawyers will generally object to publication.

Application for restitution against arbitral awards

Another new development is the introduction of an application for restitution against arbitral awards. This is based on the model of the restitution action in state court proceedings (section 580 German Code of Civil Procedure) against arbitral awards in which an ordinary application for setting aside (due to lapse of time) is no longer possible (section 1059a German Code of Civil Procedure). A successful application for restitution, for example, in the case of falsified documents, punishable false testimony by witnesses, or discovery of new evidence, leads to the setting aside of the arbitral award and, at the request of one of the parties and at the discretion of the court, if necessary, to the referral of the case back to the arbitral tribunal (sections 1059a para. 6, 1059 para. 4 ZPO Draft).

Conclusion

The draft bill makes a valuable contribution to modernising and adapting German arbitration law to international standards and, thus, to strengthening Germany’s position as a venue for arbitration proceedings. However, some potential still remains untapped, for example, when it comes to the fact that the possibility to conduct proceedings before the Federal Court of Justice in the English language is not guaranteed even if commercial court proceedings are conducted entirely in English. The newly introduced freedom in relation to the form of arbitration agreements increases legal uncertainty and could complicate the recognition of arbitration agreements and enforceability of German arbitral awards abroad. The next step will be for the Bundestag to deal with the Federal Government’s draft bill. It remains to be seen what the outcome of the parliamentary procedure on the draft bill will be.