2.1  In this chapter, we explore the arbitration agreement from a variety of perspectives. Section B deals with the required content and the validity of an arbitration agreement. In Section C we look at its scope, effects, and issues of termination. Finally, Section D deals with typical additional contents of arbitration agreements, in particular as regards the place of arbitration, the language of the proceedings, the selection of the applicable substantive law, and the selection of ad hoc or institutional arbitration.

2.2  Despite the length of this chapter, it should be noted at the outset that arbitration agreements in Germany are typically short and crisp. The arbitration clause recommended by the DIS is a good example:

All disputes arising in connection with this contract or its validity shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration (DIS) without recourse to the ordinary courts of law. [ … ] The place of arbitration is … The number of arbitrators is … The language of the arbitral proceedings is … The applicable substantive law is …¹

2.3  An arbitration agreement is first and foremost an agreement between the parties under the law of contracts (below paras 2.11 et seq.) that needs to have a certain minimum content in order to qualify as an arbitration agreement (below paras 2.32 et seq.). As an agreement, it is subject to grounds for invalidity (below paras 2.44 et seq.) and, once found valid, subject to interpretation (below paras 2.105 et seq.). We end this section with examples of what should be “dos and don’ts” in drafting arbitration agreements with a German nexus (below paras 2.117 et seq.). Before addressing these points in turn, a word on the applicable law is in order (below paras 2.4 et seq.).

2.4  Naturally, the analysis below focuses on German law and thus assumes that German law applies to these issues. However, in an international context, one first needs to establish the law applicable to the determination of the content and the validity of an arbitration agreement (Schiedsvereinbarungsstatut). The law applicable to arbitration agreements needs to be distinguished from the law governing the arbitral proceedings (Schiedsverfahrensstatut—lex arbitri) and the law governing the substance of the parties’ agreement.²

2.5  Frequently, arbitration agreements do not contain a stipulation of the law applicable specifically to the arbitration agreement itself (as opposed to frequent choice-of-law clauses applying to the underlying transaction).³ This applies in particular to arbitration clauses contained in the main agreement of the parties.

2.6  Depending on the forum in which a dispute on the law applicable to the arbitration agreement arises, different methods for determining the applicable law may need to be considered. For state-court litigation the Rome I Regulation⁴ provides a particular choice-of-law regime for contractual relations under German law. However, according to the express derogation in Art 1 para 2 lit e Rome I Regulation this regime does not apply to arbitration agreements. Section 1059 para 2 no 1 lit a ZPO may be used as a point of departure for the analysis, providing for party choice, and, as a default option, for the application of German law, ie the law of the seat of the arbitration. However, in the absence of an express agreement by the parties, (p. 31) German law need not necessarily be the only remaining alternative. Instead, the most prominent options are to look at the law applicable to the substantive law agreement under which the dispute arises or the law of the seat of arbitration.⁵ Each situation requires a careful case-by-case analysis.

2.7  Importantly, because arbitration clauses are to be treated separately from the main agreement (s 1040 para 1 cl 2 ZPO), the law applicable to the main agreement need not necessarily apply to an arbitration clause.⁶ Nevertheless, applying the same law as to the main contract may often reflect the intentions of the parties since commercial parties will not necessarily even be aware of the separability principle. In such a case, the main contract’s choice of law clause may give rise to an implied agreement on the law governing the arbitration agreement.⁷

2.8  Conversely, where the parties chose to enter into a separate arbitration agreement without express reference to an unambiguous choice-of-law agreement, the application of the lex loci arbitri will often be preferable. This is in line with the provisions of s 1059 para 2 no 1 lit a ZPO and Art V para 1 lit a of the New York Covention (NYC) which create a special choice-of-law regime:⁸ in the absence of an indication regarding the applicable law, the request to the state court to set aside an award based on the contention that the arbitration agreement is invalid is to be determined under the law of the country where the award was made.⁹

2.9  The situation may be less clear where the parties have chosen German substantive law, but a foreign place of arbitration. In such a case, unless there is some indication that the parties wanted German law to govern the arbitration clause, it may be preferable to use the law of the place of arbitration as the default.¹⁰ As we explain below (para 2.177), the definition of a place of arbitration contains the choice to submit a dispute to the mandatory procedural rules at this place. Given that the arbitration agreement is a substantive-law agreement on procedural-law relations (below para 2.12), it seems reasonable to assume that the parties wanted to subject its content to the selected procedural rules. Another difficult situation may arise where the place of arbitration has not yet been determined (cf s 1025 para 2 alt 2 ZPO). In this scenario, the most appropriate test is to look for the closest connection, which may be the seat or residence of the parties, the place of the arbitral institution chosen by the parties or, as a default, the law governing the main agreement.¹¹

(p. 32) 2.10  Where the determination of the applicable law leads (in all likelihood) to a legal system outside Germany, Art II NYC applies and there is no room for the requirements under the ZPO, as far as the NYC contains autonomous provisions of law, ie in particular with regard to form. Pursuant to Art II para 1 NYC, each Member State shall recognize a written agreement in which the parties submit their differences in respect of a defined legal relationship to arbitration. Pursuant to Art II para 2 NYC, it is sufficient that the agreement be signed by both parties or that it be contained in written correspondence. In other words, where and to the extent German law is not applicable, courts must recognize an agreement once it meets this standard and need not deal with the requirements of the specific legal system.

2.11  For purposes of the analysis that follows, we will assume that German law applies to the arbitration agreement at hand. As a first step, the legal nature of an arbitration agreement needs to be established; under today’s prevailing view in Germany, it is a substantive-law agreement on procedural-law relations (below paras 2.12 et seq.). Thus, it needs to satisfy the general requirements under German civil law to form a contract (below paras 2.18 et seq.). In addition, an arbitration agreement can be formed by trade usage (below paras 2.24 et seq.). The amendment of arbitration agreements follows rules similar to their original formation (below paras 2.29 et seq.).

2.12  For several decades, German scholars have debated as to the legal nature of arbitration agreements. The two main schools of thought were (1) to qualify arbitration agreements as substantive-law agreements, and (2) to view them as procedural agreements.¹² German courts have adopted a compromise view, qualifying arbitration agreements as substantive-law agreements on procedural-law relations.¹³ This formula captures well what an arbitration agreement is about. Its effects relate primarily to procedural issues. It provides that a legal dispute between the parties shall be decided by an arbitral tribunal to the exclusion of the ordinary courts. It regulates how arbitral proceedings shall be conducted, either as a result of an express agreement of the parties or by reference to a default set of rules, such as the rules of an arbitral institution or the rules of the lex arbitri.

2.13  Nevertheless, an arbitration agreement also has substantive-law elements. Specifically, it triggers ancillary obligations of the parties, including the duty to act (p. 33) in a way that furthers the proceedings and their conclusion by way of an arbitral award or otherwise (for details see below para 2.148).¹⁴ In addition, the qualification as a substantive-law agreement has the advantage of offering a ready-made set of rules governing issues such as formation, validity, interpretation, and termination of agreements, which in Germany can be found in the BGB. The proponents of a pure procedural-law qualification would need to look for an applicable set of rules, possibly defaulting to the provisions of the BGB at least by way of analogy—a methodological complication that seems unnecessary.

2.14  German law recognizes two types of arbitration agreements (Schiedsvereinbarung): (i) an arbitration agreement in the form of a separate agreement (Schiedsabrede), and (ii) an arbitration clause contained in a main contract (Schiedsklausel) (s 1029 para 2 ZPO). In a commercial context, arbitration clauses are much more common than separate arbitration agreements. The latter may be used when a dispute arises and the parties then agree to submit it to arbitration.

2.15  This is fairly rare in German practice. Once a dispute has arisen, very often only one side will find arbitration advantageous, while the other may think it has tactical advantages by having the dispute decided by a state court. Nevertheless, separate arbitration agreements are sometimes concluded on an ad hoc basis, for instance where both parties are intent on having confidentiality. This may occur in cases that involve wrongdoing which could trigger claims by third parties if it became visible in open (state) court. German state courts often notify the public prosecutor when they spot serious criminal behavior in connection with a civil law dispute in front of them. Thus, for instance, where possible corruption is at issue, not only may the perpetrator be intent upon confidentiality, but also the corporation on whose behalf it occurred, because otherwise—as a matter of German administrative offences law—it might be subject to painful sanctions such as disgorgement of profits. Similarly, management liability cases may lend themselves to arbitration, because quite often the wrongdoing alleged against a manager may also be the basis for contract or tort claims of a third party against the corporation. For example, in the context of the recent global financial crisis there have been numerous cases of allegedly faulty risk management, which may trigger management liability as well as contract claims based on improper disclosure (Informationshaftung).¹⁵

2.16  The arbitration agreement itself needs to be distinguished from agreements of the parties on the conduct of arbitral proceedings and other procedural issues,¹⁶ even though the general standards outlined above for concluding agreements also apply to (p. 34) agreements regarding the conduct of arbitration proceedings.¹⁷ Such procedural agreements are clearly permissible pursuant to s 1042 para 3 ZPO. They are separate and different from the arbitration agreement. Thus, for instance, the form requirements set forth in s 1031 ZPO do not apply to procedural agreements (paras 2.70 et seq.).

2.17  The distinction is clear beyond doubt where the parties conclude such agreement on procedural issues separately, which in most cases happens only after conclusion of the arbitration agreement or in close connection with the actual arbitration. Where the document containing the arbitration agreement also contains provisions on the conduct of the arbitral proceedings, the distinction becomes less clear. This distinction is relevant primarily where the alleged nullity of a procedural clause may affect the arbitration agreement as a whole. In line with the general preference to uphold the validity of arbitration agreements,¹⁸ invalid parts relating to the conduct and the procedure of the arbitration should be interpreted in case of doubt as not being material to the parties’ fundamental choice to submit their dispute to arbitration (cf s 139 BGB).¹⁹

2.18  Given the substantive-law nature of arbitration agreements governed by German law, the general provisions for formation and validity of (substantive-law) agreements under German civil law apply (ss 104 et seq. BGB). Under general German civil law, in order to form an agreement an offer and a corresponding acceptance are required, ss 145 et seq. BGB.²⁰ Offer and acceptance need to correspond with respect to their substance—a meeting of the minds is required to conclude an arbitration agreement, ie a legally binding agreement to submit disputes regarding a certain legal relationship to an arbitral tribunal which shall render a final and binding decision (s 1029 para 1 ZPO).

2.19  As with any other contract, an arbitration agreement can be formed by a full-fledged offer that the other side accepts. Likewise, it is possible for the parties to negotiate and then write down the arbitration agreement together. An offer needs to be accepted within the stipulated time frame, or, in the absence of such stipulation, within a reasonable time; otherwise, it expires and thus becomes ineffective (s 148 BGB). Changes to the offer by the other party are considered a rejection of the offer, combined with a new counter-offer (s 150 para 2 BGB).

2.20  A contract is not formed unless and until the parties have agreed on all essential aspects of their agreement (s 154 para 1 BGB), which for an arbitration agreement (p. 35) are set forth in s 1029 para 1 ZPO (below para 2.32). Failure to agree on non- essential (immaterial) aspects does not prevent the finding of an agreement (s 155 BGB). Therefore, if the parties abstained from agreeing on the minimum contents required to form an arbitration agreement, then they did not form a valid arbitration agreement at all. Questions regarding the formation of the agreement arise especially where the parties refer to a “separate agreement” in their main agreement which was actually never concluded. Some German courts have found such a clause sufficient to serve as a binding arbitration agreement where it contained the essential elements of s 1029 ZPO.²¹ Missing parts were substituted by supplementary interpretation or by the Tenth Book of the ZPO. Conversely, where not even this minimum content was present, the parties’ election of arbitration remained disregarded.²² Only in specific circumstances do the courts find in such a clause at least a pre-contractual arrangement manifesting an intention to enter into a separate arbitration agreement (Schiedsvorvertrag).²³

2.21  Such circumstances were found in a slightly different case where the court held that the parties did not enter into an arbitration agreement but the clause contained in negotiation minutes clearly expressed their intention to conclude an arbitration agreement.²⁴ While it is obvious that each situation needs to be decided on its specific facts, as a general matter, and in line with general principles of German contract law, we believe that where the parties state that they intend to do something later, this expression of their will should be taken seriously. This seemingly restrictive approach has nothing to do with the question whether Germany is an “arbitration friendly” jurisdiction. The threshold question is always whether there is arbitration in the first place. And as long as the parties have not agreed in a binding manner to arbitration, there is none. Imposing arbitration instead of state-court litigation even though at least one party has not (yet) entered into a final and binding agreement to arbitration would not appear to be a sign of “arbitration friendliness,” but rather a sign of disrespect to party autonomy.

2.22  As an alternative, the arbitration agreement can be concluded by referring to an arbitration clause recommended by an arbitral institution or contained in general terms and conditions (AGB). In the case of AGB used vis-à-vis consumers, formation of an arbitration agreement is subject to the further requirements for inclusion and validity of AGB contained in s 305 paras 2 and 3 BGB.²⁵ By contrast, as far as (p. 36) commercial parties are concerned, it is sufficient to satisfy the general requirements for contract formation outlined above (s 310 para 1 cl 1 BGB).²⁶

2.23  In case of conflicting AGB, the general principles governing such situations apply. This means that the AGB apply only to the extent they are congruent; the conflicting parts do not apply at all, no matter who had the first or the last say in the negotiations.²⁷ Whether and to what extent a congruent part remains needs to be analyzed on a case-by-case basis. The mere fact that both parties somehow wished to have arbitration will not be sufficient if the differences between their clauses are too great.²⁸ For instance, where one party’s AGB provide for DIS arbitration seated in Germany and the other party’s AGB stipulate AAA²⁹ arbitration seated in the US, it will be hard to see a common ground for excluding the jurisdiction of the state courts.

2.24  Because general principles of contract formation apply to arbitration agreements, an arbitration agreement can be formed by trade usage (s 346 HGB). The most relevant trade usage in the context of arbitration agreements with a German nexus are the principles of commercial confirmation letters (kaufmännisches Bestätigungsschreiben). Under this doctrine, a contract is deemed to be concluded according to the content of a confirmation letter from one side summarizing prior contract negotiations between the parties if the other side, a merchant, does not object without undue delay after receipt of this letter. This applies even where the contents of the confirmation letter are somewhat different from the prior discussions of the parties which they purport to summarize, unless the difference is so significant that the party sending the letter could not reasonably expect that the other side would accept it without further discussion.³⁰

2.25  Under German law, this concept can easily be applied to arbitration clauses contained in commercial confirmation letters, even where the prior discussions of the parties did not address arbitration. This is implied by s 1031 para 2 ZPO which stipulates that the written form required by s 1031 para 1 ZPO may also be complied with by acceptance via trade usage, and trade usage includes silence upon receipt of a commercial confirmation letter.³¹ However, it is important to note that s 1031 para 2 ZPO is only a clarification with respect to form. The substantive prerequisites of the commercial confirmation letter doctrine still need to be (p. 37) fulfilled. The analysis therefore turns on the issue of whether a specific arbitration clause, if added without prior discussion, would still fall within the parameters of what the other side needs to expect in the context of a commercial confirmation letter or not. As far as arbitration as such is concerned, it is certainly not unusual in the context of international trade; in some instances, it may even be the norm. In a purely domestic context, the business practices may be different. Nevertheless, arbitration is, as a matter of German law, principally equivalent to state-court litigation, and merchants must be expected to be familiar with it. Thus, in our view, adding an arbitration clause as such generally falls within the parameters of the commercial confirmation letter doctrine and any different assessment requires exceptional circumstances.³²

2.26  The analysis does not end at this point, though. In a next step, the specific contents of the clause need to be looked at. The contents may be so unusual that the sender of the letter could not reasonably expect the recipient to accept it without further discussion. For instance, an arbitration agreement stipulating that the arbitral tribunal shall decide ex aequo et bono (s 1051 para 3 ZPO) would seem to be too unusual, unless there are reasons in the specific case to assume otherwise. It is notable that in the context of commercial confirmation letters German courts tend to give little weight to the separability principle pursuant to s 1040 para 1 cl 2 ZPO. The Higher Regional Court of Hamburg, for instance, held that there was no valid arbitration agreement in such a letter reasoning that the price contained in the letter was completely unexpected, even though the price is clearly an issue relating to the main agreement of the parties and not the arbitration clause.³³ This approach appears reasonable with a view to the characteristics of trade usage because it would be inappropriately time consuming to abstract and reject single provisions of one overall confirmation letter.³⁴

2.27  In contrast to the rules governing commercial confirmation letters, it will generally not be sufficient to include an arbitration clause in an invoice even if it was issued in the close context of negotiations regarding its contents. In this case, the unilateral declaration regarding arbitration would be considered as a mere offer to conclude an arbitration agreement.³⁵ Unless there is acceptance of the offer, no agreement is concluded under general German standards of contract formation. Mere silence on the part of the invoice recipient, or payment of the invoice without objection, is not sufficient to be qualified as acceptance, whether under general principles of contract law or under the principles of commercial confirmation letters.³⁶ However, (p. 38) the invoice recipient is free to accept the offer to conclude an arbitration agreement by express or implied declaration.

2.28  More generally, trade usage can be the basis for an arbitration agreement where there is a commercial conduct that typically includes the conclusion of arbitration agreements,³⁷ even though “real life” examples seem to be rare. One example would be an industry where nearly all conflicts are solved by arbitration, in particular if such an industry formed specialized arbitration bodies or institutions.³⁸

2.29  Amendments to arbitration agreements follow the general principles for amendment of contracts. Unless one party has a unilateral right to amend the contents of the arbitration agreement, an agreement of the parties will be required. The formation of such an amendment agreement again follows the general principles of contract formation outlined above, ie offer and corresponding acceptance. Here, too, trade usage—in particular the principles of commercial confirmation letters—apply. In addition, the form requirements set forth in s 1031 ZPO need to be observed as far as the parties intend to change any of the essential elements contained in s 1029 ZPO, in particular where the parties intend to broaden the personal or subject matter scope of the arbitration agreement (see below para 2.72).³⁹

2.30  Complementary amendments can become necessary or desirable while the parties contemplate starting arbitration or even while an arbitration is already pending. For instance, the parties may find that the number of arbitrators or the seat of the arbitration no longer fits the purpose of the potential or present arbitration case. Similarly, the arbitral institution may have amended its rules, and the parties may agree that the amended rules have features that are not acceptable to them. Conversely, the parties may have agreed to the rules of an institution as of a certain date, and in the meantime amendments may have been put into place that both parties actually find more suitable. This may happen in particular with M&A⁴⁰ agreements where certain German practitioners still believe that for purposes of satisfying form requirements it is safer to refer to a static set of rules as of a certain date. Even though this view may seem overly cautious under German law (see below para 2.90), the practice still occurs. In case the institution has since amended its rules, parties should seriously consider using the new rules for a new dispute. Most of the time, institutional reform is a balanced exercise that tends to benefit all parties of a dispute. In addition, arbitrators may have become used to the new rules, and may find it awkward or even difficult to apply the former ones.

(p. 39) 2.31  Finally, the parties may have conducted an arbitration under the arbitration agreement and may agree that for future additional disputes, they would like to optimize the arbitration agreement, for instance by introducing mandatory ADR/mediation or a dispute resolution board before arbitration. Such an amendment to the original arbitration agreement is not subject to the form requirements of s 1031 ZPO.

2.32  In order to qualify as an arbitration agreement, pursuant to s 1029 para 1 ZPO, an agreement must relate to a dispute within a defined legal relationship (below paras 2.33 et seq.) and must provide for arbitration—as opposed to other mechanisms—for binding conflict resolution (below paras 2.39 et seq.). It is easy to satisfy these minimum requirements, as the model clause suggested by the DIS demonstrates (see above para 2.2). The same applies to the ICC model clause:

All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.⁴¹

2.33  Pursuant to s 1029 para 1 ZPO, the arbitration agreement must relate to a dispute regarding a defined legal relationship. Dispute means a legal controversy, as opposed to a controversy merely on facts or theoretical questions of law.⁴² The German law thereby tracks the terminology of the Model Law.⁴³ The ZPO uses the term “legal relationship” also in other contexts, such as s 256 ZPO, which addresses requests for declaratory judgments and which also must relate to such a defined legal relationship. A defined legal relationship in this regard can be understood broadly as a specific legal relation of one person to another person or of a person to a right or an object, such as legal claims and rights as well as contracts.⁴⁴ Unlike the dispute, the relationship need not necessarily exist between the parties to the arbitration agreement.⁴⁵ Thus, for instance, third parties may invoke rights out of a contract.

2.34  The term “legal relationship” is broader than the term “subject of the dispute” (Streitgegenstand) within the meaning of s 253 ZPO. In order to bring a claim before a German state court, the plaintiff in its statement of claim must specify such “subject of the dispute” (s 253 para 2 ZPO) with regard to a certain set of facts and (p. 40) a resulting claim. By contrast, an arbitration agreement can take an entire legal relationship away from the jurisdiction of the state courts without the need for the parties to define the individual disputed subjects.

2.35  On the other hand, the relationship must at least be a defined legal one. It is not sufficient to state that all disputes arising between two persons or all disputes arising from a certain commercial or business relationship shall be subject to arbitration.⁴⁶ The parties may instead agree that they want to choose arbitration for any and all present or future disputes arising out of or in connection with a certain contract. It is not even required that the legal relationship already be validly formed at the time when the arbitration agreement is concluded.⁴⁷ It is well established that an arbitration agreement contained in a framework agreement is also valid for services and other subsequent actions based on the framework agreement.⁴⁸

2.36  Notably, s 1029 ZPO does not require the parties to submit any and all disputes arising out of a legal relationship to arbitration, but allows limiting the submission according to the parties’ needs. For instance, in M&A agreements governed by German law, it is not uncommon to refer disputes regarding closing accounts (for purposes of purchase price adjustments) to expert determination, and to refer all other disputes to arbitration.⁴⁹ Another example may be that the parties subject disputes from a certain legal relationship to arbitration only to the extent they exceed certain thresholds, eg in terms of amounts in dispute.⁵⁰ This option should be used with caution, since the amount in dispute may well vary over the lifecycle of a dispute (including counterclaims). Speaking more broadly, parties should generally be cautious in narrowing down the scope of arbitration agreements or carving out certain disputes. If they choose to do so, they should carefully consider the interface between arbitration and whatever other dispute resolution mechanism exists for disputes not covered by the arbitration agreement. If they fail to do so, they risk finding themselves in unnecessary and costly disputes as to which dispute resolution mechanism should apply.

2.37  The parties may also choose to subject only a separable part of a dispute to arbitration. For instance, the arbitration agreement may refer only to liability, but not quantum, or vice versa. However, parties must again be cautious regarding separability. For instance, it would not be possible to separate defenses (eg statute of limitations) from the claim as such.⁵¹

(p. 41) 2.38  As far as the Tenth Book of the ZPO is concerned, the legal relationship must be civil in nature (s 13 GVG, art 3 EGZPO).⁵² An arbitral tribunal under the Tenth Book of the ZPO may replace a state court only within the limits of the state court’s own jurisdiction pursuant to the ZPO.⁵³ State courts acting under the ZPO have jurisdiction only over civil matters (art 3 EGZPO). Thus, for instance, criminal matters may not be brought before an arbitral tribunal. The same applies to matters that are referred to the jurisdiction of the German social courts and the German tax courts.⁵⁴ Regarding disputes related to administrative law (s 40 para 1 VwGO), s 173 VwGO contains a special provision allowing for arbitration and referring to the provisions of the Tenth Book of the ZPO, which shall apply mutatis mutandis, unless the principal differences between administrative law and civil law proceedings require otherwise (para 1.82). Insolvency proceedings follow their own rules under the German Insolvency Statute (InsO). Thus, an arbitral tribunal cannot conduct insolvency proceedings. However, individual disputes in connection with an insolvency may—to some extent—be referred to arbitration insofar as the choice of arbitration does not infringe the genuine rights of the insolvency administrator (Insolvenzverwalter; for details see below para 2.130).⁵⁵

2.39  Arbitration is the final and binding resolution of a dispute between the parties to the exclusion of the ordinary courts. Thus, the parties must be found to have intended the agreed mechanism to result in a decision, as opposed to mere recommendations or other forms of support in resolving a dispute, as may be provided by other means of alternative dispute resolution, such as, eg, mediation, conciliation (Schlichtung), or expert determination (see above paras 1.84 et seq.).

2.40  The parties must further intend the decision to be final and binding, to the exclusion of the ordinary courts. This is not the case where an agreement refers disputes to particular association courts (Verbandsgerichte) which can be found mainly in the areas of sports and labor law. Those institutions are mere executive bodies for decisions on specific issues like penalties or expulsion. As these decisions are as such not enforceable and subject to judicial review by the state courts, association courts are not recognized as arbitral tribunals—even where the parties erroneously use this term.⁵⁶ On the other hand, the parties need not expressly use the words (p. 42) “exclusion of the ordinary courts” if such effect is clear from their intentions.⁵⁷ However, where the parties merely expressly exclude the jurisdiction of the ordinary courts, they need not necessarily have agreed to arbitration if they fail to say so. It is well possible that the parties intended to completely exclude the enforceability of a claim (pactum de non petendo).⁵⁸

2.41  The parties may agree that arbitration is only an option next to state-court litigation, and that the party commencing the dispute may elect between litigation and arbitration.⁵⁹ The parties may even agree—at least outside the scope of AGB—that only one party may be entitled to make the election.⁶⁰ Likewise, the parties may agree that there is a choice between two different arbitration mechanisms, eg two different arbitral institutions. It is not possible, however, that the parties agree to litigate the same legal dispute in parallel in front of both a state court and an arbitral tribunal, or before two arbitral tribunals.⁶¹

2.42  Under the precedent of the German Federal Supreme Court (BGH), a dispute resolution mechanism can still be qualified as an arbitration agreement, even where the parties have provided that an arbitral award is subject to judicial review.⁶² Under this doctrine, the parties can therefore set forth in the arbitration agreement that the arbitral award can be subject to judicial review or to appeal levels of jurisdiction.⁶³ The above decision of the BGH is contrary to the pre-existing prevailing view in German legal doctrine, and it has been met with considerable criticism, which we share.⁶⁴ Section 1029 ZPO requires a “decision” by an arbitral tribunal, and s 1055 ZPO accords such “decision” the same effects as a final and binding judgment of a state court. For purposes of legal clarity, a dispute resolution mechanism that does not result in such a decision, but is subject to court review beyond the limits of the set aside grounds set forth in s 1059 para 2 ZPO should not qualify as “arbitration,” but is to be regarded as another form of alternative dispute resolution more akin to conciliation (Schlichtung).⁶⁵

(p. 43) 2.43  Finally, it goes almost without saying that the parties need not designate a certain arbitral institution, but may rely instead on the rules for ad hoc arbitration provided for as default by the Tenth Book of the ZPO. We will explore more deeply the choice between institutional and ad hoc arbitration in paras 2.198 et seq.

2.44  When looking at the validity of an arbitration agreement, as a first step, we need to look at the separability principle (below paras 2.45 et seq.). In other words, the fact that there may be grounds for invalidity of the remainder of the parties’ agreement containing an arbitration clause does not necessarily render the arbitration clause invalid. An arbitration agreement can be invalid for lack of objective or subjective arbitrability (below paras 2.48 et seq. and paras 2.64 et seq.). In addition, depending on the parties to the agreement, certain form requirements apply (below paras 2.67 et seq.). It goes almost without saying that further general grounds for invalidity applying to all agreements may be relevant to arbitration agreements as well, in particular lack of proper representation (below paras 2.91 et seq.). Finally, the German law on AGB provides for further invalidity grounds related to arbitration clauses contained in such AGB (below paras 2.95 et seq.).

2.45  Pursuant to s 1040 para 1 cl 2 ZPO, in line with international standards,⁶⁶ an arbitration clause is to be treated separately from the remainder of the agreement in which it is contained. Thus, grounds for invalidating the remainder of the agreement do not necessarily render an arbitration agreement invalid. This overrides the general principle of German contract law as expressed in s 139 BGB. Pursuant to s 139 BGB, in case of doubt, where one provision of an agreement is invalid, the entire agreement is deemed invalid unless it can be established that the parties would have concluded the agreement even without the invalid provision. The separability principle helps concentrate a legal dispute before an arbitral tribunal, without “front-loading” the jurisdiction phase of an arbitration with a discussion of grounds for invalidity, which in most cases are substantive issues (eg, error, fraud, duress, violations of statutory prohibitions etc).

2.46  Thus, the contents of the overall agreement may be in violation of the law or against good morals (ss 134, 138 BGB), and the arbitration clause can still be valid. For example, an agreement may be induced by corruption and therefore be invalid. A dispute regarding claims for performance or compensation under the agreement would still need to be brought before the competent arbitral tribunal under the arbitration clause of the agreement, and it will be upon the tribunal to decide whether the remainder of the agreement is indeed invalid or not. In general, (p. 44) a finding of invalidity will not do away with the arbitration clause and thus the very basis of the tribunal’s jurisdiction.⁶⁷ Likewise, the overall agreement containing an arbitration clause may well be invalid for failure to follow the proper form (eg notarization pursuant to s 128 BGB). This, in our view, would not render the arbitration clause invalid, as long as the arbitration clause satisfies the specific form requirements of s 1031 ZPO.

2.47  As a result of the separability principle, an arbitration agreement can be considered invalid only if the defect at issue specifically applies to or is inherent to the arbitration agreement itself. In the corruption context mentioned above, one scenario could be that the parties concluded the arbitration agreement specifically for the purpose of effecting a corrupt payment or to enable some other form of money laundering.⁶⁸ Similarly, defects such as deception and duress may apply to the arbitration agreement itself.⁶⁹ These examples may be rare; nonetheless, they exist in practice.

2.48  Objective arbitrability of a dispute means that a certain subject matter of a dispute can be submitted to arbitration because the law has not reserved the dispute to the ordinary courts. Under German law, a broad concept of objective arbitrability applies, which is enshrined in s 1030 ZPO. The German legislator considers arbitration to be principally equivalent to state-court litigation.⁷⁰ Based on a liberal concept of freedom of contract (Vertragsfreiheit) and private autonomy (Privatautonomie), the parties are free to derogate the competence of state courts in favor of “private justice,” unless the law contains a specific exception in order to protect certain public or private interests.⁷¹ As a rule of thumb, in case of doubt, a dispute is arbitrable.⁷² The German rules on objective arbitrability are mandatory for arbitrations seated in Germany and may not be derogated by party agreement.⁷³

2.49  Thus, as a general matter, all disputes on claims involving economic interests (vermögensrechtliche Ansprüche) are objectively arbitrable without limitation (s 1030 para 1 cl 1 ZPO). Economic means that the dispute arises from or relates to a right (p. 45) with a quantifiable financial value. This includes all disputes on payment claims, but also claims for declaratory judgment regarding economic interests⁷⁴ and non-waivable economic interests. The latter already follows from the wording of s 1030 para 1 cl 1 ZPO, which includes all economic interests regardless of their capability of settlement. Accordingly, the BGH classified the non-waivable claim of a limited liability company (GmbH) against its shareholders for their capital contributions (s 19 para 2 cl 1 GmbHG) as arbitrable.⁷⁵ Damage claims are generally considered to be monetary claims.⁷⁶ IP-related disputes are generally arbitrable, with the exception of patent annulment claims (see below para 2.55).

2.50  Disputes on non-economic interests are arbitrable under German law to the extent the parties can dispose of a dispute by way of settlement (s 1030 para 1 cl 2 ZPO). Thus, disputes on matters of personal status, eg the divorce of a marriage, are not arbitrable, whereas monetary claims resulting from a divorce (support payments and the like) are, at least in principle, arbitrable.⁷⁷ Other examples of non-economic interests, which are arbitrable, are violations of personality rights⁷⁸ or disputes about exclusions from associations.⁷⁹

2.51  Where an arbitration agreement relates to disputes which are not covered by s 1030 ZPO, the agreement is null and void as far as this dispute is concerned.⁸⁰ Apart from that, objective arbitrability of a dispute is subject to review by state courts in several respects. First, prior to the formation of the arbitral tribunal, a party can apply to the German state courts in order to determine the admissibility or inadmissibility of arbitral proceedings (s 1032 para 2 ZPO, for details see below paras 2.142 et seq.). In that context, the requesting party can point to the lack of arbitrability of a dispute. Second, where an arbitral tribunal renders a preliminary ruling affirming its jurisdiction, each party can file an action with the state courts challenging such preliminary ruling (s 1040 para 3 cl 2 ZPO) by arguing lack of arbitrability. Third, lack of arbitrability is a ground for set aside pursuant to s 1059 para 2 no 2 lit a ZPO (see below para 2.64). Fourth, it is a recognized objection against enforcement of an arbitral award (s 1060 para 2 ZPO).

2.52  Where an arbitration agreement relates to both arbitrable disputes and non-arbitrable disputes, the agreement is without effect as far as non-arbitrable disputes are concerned. The remainder of the agreement is generally valid and (p. 46) binding. Some authors derive this result from the structure of s 1030 ZPO and the fact that lack of arbitrability is the exception, and arbitrability is the rule.⁸¹ In our view, the general provisions of German contract law need to be applied, given that an arbitration agreement is a substantive-law agreement (see above para 2.12). Thus, in principle, s 139 BGB applies. This means that the question is first one of contract interpretation. In other words, would the parties have refrained from concluding an arbitration agreement at all, had they considered the lack of arbitrability, or would they have restricted the arbitration agreement to the arbitrable disputes? In case of remaining doubts, s 139 ZPO provides for the invalidity of the entire agreement. In most cases, however, it should be possible to find that the parties would still have elected arbitration for those disputes that are arbitrable.⁸² For instance, where an arbitration clause covers all sorts of corporate disputes between a shareholder and a corporation, but it does not follow the stringent requirements of the German courts for disputes relating to the validity of shareholder resolutions (see para 1.78), it is reasonable to assume that in most cases the parties—had they been aware of the defect of their arbitration agreement—would still have subjected the remaining types of corporate disputes to arbitration. On the other hand, where the main subject of an arbitration agreement is not arbitrable (eg divorce, see above para 2.50), it is probably against the will of the parties to uphold the arbitration agreement for ancillary monetary disputes as this would lead to a costly split of fora.

2.53  In addition to the broad concept of objective arbitrability, German law contains very few specific exclusions. For instance, arbitration is not permissible for certain disputes regarding residential leases (s 1030 para 2 ZPO).⁸³ The exclusion applies to disputes regarding the “existence” of the residential lease. This means, in particular, termination and eviction disputes, whereas, for instance, disputes regarding lease payments are arbitrable.⁸⁴ The purpose of this exclusion is to protect tenants and to guarantee their access to the state courts. Where a lease agreement nevertheless contains such an arbitration clause, it is invalid, whereas the remainder of the lease agreement is valid and binding (s 1040 para 1 cl 2 ZPO, in derogation of s 139 BGB).⁸⁵ The exception to arbitrability contained in s 1030 para 2 ZPO is a narrow one, and it does not lend itself to any extensions regarding other private or consumer-related disputes.⁸⁶ In fact, the (p. 47) exception is itself questionable from a political and public policy point of view, but from a legal perspective it has to be accepted as is stands right now.

2.54  Furthermore, there are limited exceptions to arbitrability contained in provisions outside the ZPO (s 1030 para 3 ZPO). The mere fact that German law provides for the exclusive jurisdiction of certain courts for certain types of disputes does not mean that such disputes are not arbitrable.⁸⁷ Rather, exclusive jurisdiction is a means to allocate jurisdiction among state courts, provided state courts are competent to decide on a dispute in the first place. Where the parties have deprived the state courts of such competence by way of an arbitration agreement, the provisions on exclusive jurisdiction are no longer relevant.

2.55  Two clear and practically important examples of non-arbitrability are patent validity disputes and individual employment disputes.⁸⁸ The prevailing opinion in German practice continues to be that German patent courts have exclusive jurisdiction for declaring patents invalid (ss 65, 81 PatG).⁸⁹ As a patent in Germany is granted by an administrative deed, it cannot be subject to party disposition and requires declaration of invalidity with effect erga omnes.⁹⁰ Nevertheless, arbitral tribunals may deal with patent issues. They may even consider a patent invalid as a threshold issue, if such a determination is necessary to come to a decision on the claim brought by one of the parties (eg a damage claim).⁹¹

2.56  Regarding labor law disputes, German law provides for arbitration mainly with regard to disputes between the parties of collective bargaining agreements (Tarifvertragsparteien).⁹² By contrast, individual disputes between an employer and the employee, eg regarding the termination of an employment agreement or the payment of wages, are considered non-arbitrable by the German labor courts.⁹³ The reason is that the strict procedural rules in labor court proceedings are meant to ensure a high level of security and consistency in case law which typically concerns the sensitive area of fundamental rights of employees.⁹⁴

(p. 48) 2.57  Another example occasionally mentioned in the present context can be found in the decision of the Munich Higher Regional Court (OLG München), which has held that compensation claims of a commercial agent pursuant to s 89b HGB cannot be subjected to dispute resolution by an arbitral tribunal seated outside the EU.⁹⁵ It is highly doubtful whether the decision is correct. In any event, it does not deal with arbitrability as such, but the potential consequences of the binding nature of s 89b HGB, and cannot be generalized beyond the narrow scope of its underlying facts.

2.58  A number of other disputes that may be doubtful in other jurisdictions are clearly arbitrable under German law. For example, generally, anti-trust related disputes are arbitrable, both relating to a party seeking damages in arbitral proceedings (offensive) and to a party invoking anti-trust infringements as a defense (Art 101 para 2 TFEU).⁹⁶ In arbitration proceedings, the latter will usually play a bigger role. The arbitral tribunal has to apply the mandatory anti-trust rules ex officio.⁹⁷ Offensive anti-trust cases, where a third party is seeking to enforce claims for compensation or injunctive relief based on anti-trust violations are also increasingly of importance, however this would require that the parties conclude an arbitration agreement before the dispute.⁹⁸ Regardless of an offensive or defensive matter, if mandatory anti-trust law is violated by an arbitral award it may be set aside pursuant to s 1059 para 2 no 2 lit b ZPO and not be declared enforceable pursuant to s 1060 para 2 ZPO.⁹⁹ Set aside of an award can be sought only within the applicable three-month time limit, also with regard to alleged violations of anti-trust laws.¹⁰⁰ Nevertheless, arbitral awards based on violations of anti-trust laws are not binding upon third parties or the European Commission invoking anti-trust violations.¹⁰¹ Unlike state courts, arbitral tribunals are generally not allowed to present anti-trust related questions (or for that matter, any other issues regarding the interpretation of EU law) to the ECJ pursuant to Art 267 TFEU.¹⁰²

2.59  In principle, under German law, corporate law disputes are arbitrable. Arbitration is of course a recognized and frequently used means of dispute resolution regarding corporate matters, eg regarding rights and obligations of shareholders among themselves and towards the company, disputes arising from the acquisition or disposal of shares and issues related to non-compete agreements. However, special rules apply regarding certain types of disputes, especially those between a shareholder and a corporation relating to the validity of shareholder resolutions (Beschlussmängelstreitigkeiten). For a long time, German courts were reluctant to accept that disputes regarding the validity of shareholder resolutions of a corporation are arbitrable.¹⁰³ The main concerns were to ensure that like a state court decision, arbitral awards declaring shareholder resolutions null and void are binding not only upon the parties, but all shareholders, and hence to ensure that all shareholders have a fair opportunity to participate in such arbitral proceedings which may affect their rights.

2.60  As the German legislator decided not to address the issue in the course of the reform of the German arbitration law in 1998, but to continue to leave the issue to the courts to develop adequate solutions, the German Federal Supreme Court (BGH) in April 2009 took up the issue and developed a set of rules addressing disputes related to the validity of shareholder resolutions (Schiedsfähigkeit II, see above para 1.78). The DIS provides rules on such types of arbitration which the parties can choose in order to ensure that their arbitration agreement conforms with these types of requirements.¹⁰⁴

2.61  Thus, where a company and its shareholders wish to subject disputes regarding the validity of shareholder resolutions to arbitration today, they have a convenient and safe set of rules to choose from. Historic arbitration agreements that pre-date the above-mentioned leading case of the BGH are usually problematic. German courts have applied the requirements of the BGH in a strict fashion. If the arbitration agreement does not reflect all of the above criteria, even if the arbitration agreement has been inserted in the company by-laws many years before the pertaining decisions of the BGH, the arbitration agreement is regarded as null and void.¹⁰⁵

2.62  If the parties nevertheless agree that the pertaining dispute should be resolved by way of arbitration, they ought to conclude a new arbitration agreement implementing the above criteria. It is in all likelihood not enough that one party starts arbitration on the basis of the existing but void arbitration agreement and the other party does not object. The voidness will usually result from the fact that the rights of third parties, ie the other shareholders, are not sufficiently respected. As long as they are not brought “on board,” the clear rules specified by the BGH do not allow the assumption of a (new) valid arbitration agreement as a consequence of (p. 50) preclusion (s 1040 para 2 ZPO).¹⁰⁶ By contrast, a different situation arises where the opposing party is not the company but other shareholders. As the legal effect of a claim under s 256 ZPO affects only the involved parties, the other shareholders need not be protected and an implied arbitration agreement or the application of s 1040 para 2 ZPO have to be considered.¹⁰⁷

2.63  In light of the right to be heard and the fair trial doctrine as well as the tribunal’s own interest in producing an award that is enforceable and not subject to set aside (ss 1059, 1060 ZPO), the arbitral tribunal may need to make the parties aware of the issue at the appropriate time if the parties apparently fail to see the issue.¹⁰⁸ It may of course be that the respondent (usually the company) then takes a tactical approach and refuses to cooperate in the conclusion of a valid arbitration agreement. From a corporate law perspective, it could be argued that the company and the shareholders are obliged, as a result of their corporate duties of loyalty, to participate in good faith in the “ repair” of an invalid arbitration agreement.¹⁰⁹ Whether such a duty exists in general was expressly left open by the BGH; pursuant to the BGH, it does not exist with respect to an already pending case.¹¹⁰ As a consequence, where a party wants to rely on corporate duties of loyalty to repair an invalid agreement, this has to be done before any dispute arises. However, it may be possible to uphold an arbitration agreement for certain types of disputes. For instance, the arbitration agreement may be invalid only with respect to disputes regarding the validity of shareholder resolutions, but it may be valid and binding regarding all other arbitrable disputes (cf s 139 BGB).

2.64  Subjective arbitrability means the power of a party to a dispute to enter into an arbitration agreement. Section 1059 para 2 no 1 lit a ZPO provides that lack of subjective arbitrability is a ground for set aside. The Tenth Book of the ZPO does not expressly address the prerequisites for subjective arbitrability in the way it addresses objective arbitrability in s 1030 ZPO. In general, subjective arbitrability is equal to the power to enter into a binding agreement (Geschäftsfähigkeit). For full-aged German citizens and corporations domiciled in Germany, subjective arbitrability is not an issue. For foreign corporations, it is somewhat unclear whether the statutory seat (Satzungssitz) or the seat of the headquarters (Verwaltungssitz) should be looked at;¹¹¹ in any event, in most cases, subjective arbitrability is not an issue either, as long as corporations established under private law are concerned.

(p. 51) 2.65  Subjective arbitrability can be more of an issue when sovereigns or corporations established by or owned by sovereigns are involved. Historically, such types of parties have often raised the defense of lack of (subjective) arbitrability, contending that under the applicable law they do not have the power to conclude arbitration agreements. More and more authors—both internationally and in Germany—consider such defense to be unavailing. Sovereign entities making such argument usually violate the fundamental prohibition against contradictory behavior when raising this objection in the arbitral proceedings, despite having entered into an arbitration agreement with the other side without any reservation as to its own laws governing its legal capacity and relations.¹¹²

2.66  German law recognizes only very few specific statutory limitations on subjective arbitrability, confined to exceptional and rare scenarios, such as disputes on certain types of securities transactions (s 37h WpHG).¹¹³

2.67  German law distinguishes form requirements for arbitration agreements among commercial parties on the one hand and arbitration agreements involving at least one party who is a consumer on the other hand (s 1031 ZPO; for the precise legal distinction between commercial parties and consumers see below paras 2.81 et seq.). The general writing requirement contained in s 1031 para 1 ZPO follows the approach taken by art 7 para 2 Model Law 1985 which is mirrored in art 7 (in its Option 1) para 2 Model Law 2006. German law contains modifications favoring the conclusion of arbitration agreements among commercial parties (incorporation by trade usage and by reference, s 1031 paras 2 and 3 ZPO) as well as restrictions concerning arbitration agreements with consumers which require separate documentation (s 1031 para 5 ZPO). Apart from conventional agreements, German law also recognizes arbitration clauses contained in unilateral deeds, such as wills or corporate charters, and subjects them to the same rules that apply to arbitration agreements (s 1066 ZPO). Objection as to the lack of form needs to be raised prior to entering into argument on the merits; otherwise, form defects will be deemed cured, both with regard to commercial parties and consumers (s 1031 para 6 ZPO).

2.68  Section 1031 ZPO is mandatory for arbitration seated in Germany (s 1025 ZPO); the parties cannot contract out of s 1031 ZPO except by agreeing on arbitration with a seat outside Germany.¹¹⁴ Interestingly, under German law it is “easier” to exclude the jurisdiction of the state courts entirely and to submit a dispute to arbitration (p. 52) than it is to pre-agree on the jurisdiction of a certain state court. Pursuant to s 38 ZPO, consumers generally cannot validly pre-agree to the jurisdiction of a certain state court (eg a certain venue), whereas they can fairly easily conclude an arbitration agreement with any seat within Germany, provided that they do so in a separately signed document or within the framework of a notarized agreement (s 1031 para 5 ZPO).¹¹⁵ This is an inconsistency in the German law which the German legislator should resolve soon by allowing consumer choice also for state-court jurisdiction within the same form limits that s 1031 para 5 ZPO imposes for arbitration agreements.

2.69  Section 1031 ZPO contains genuine form requirements. The party relying on the validity of an agreement bears the burden of proof that applicable form requirements are observed.¹¹⁶ Under German law, failure to observe the requisite form makes an agreement null and void (s 125 BGB).¹¹⁷ In limited and exceptional circumstances, it can be against good faith and fair dealing (Treu und Glauben, s 242 BGB) to invoke the lack of form. Generally, German courts have held that this can be the case where insisting on the form requirement would lead to a result that is absolutely incompatible with the requirements of justice.¹¹⁸ In the context of arbitration agreements, such a case can arise where a party has first successfully challenged the jurisdiction of the state courts by invoking and relying on a certain arbitration agreement, and in subsequent arbitral proceedings brought on the basis of this arbitration agreement the same party now invokes the lack of form.¹¹⁹

2.70  Technically, only the arbitration agreement as such needs to follow the form requirements of s 1031 ZPO. By contrast, according to the prevailing view in German literature, agreements on the conduct of arbitral proceedings are not subject to s 1031 ZPO.¹²⁰ Where the arbitration agreement as such follows the proper form, procedural agreements can be concluded in any form and should be enforced accordingly. Conversely, where the arbitration agreement as such does not follow the proper form, procedural agreements—even if validly concluded—may be useless anyway, unless the form defect of the arbitration agreement is cured by failure to object (s 1031 para 6 ZPO, paras 2.87 et seq.).

2.71  It is less clear whether the typical additional content of arbitration clauses, such as regarding the seat of arbitration, the number of arbitrators, the language (p. 53) of the proceedings and the applicable law, needs to be agreed in the form of s 1031 ZPO.¹²¹ In our view, as a starting point, only the statutory essentials contained in s 1029 ZPO are subject to the form requirement of s 1031 ZPO, ie the agreement to submit disputes resulting from a defined legal relationship to the final and binding decision by an arbitral tribunal to the exclusion of the state courts. Whether additional content of an arbitration agreement is subject to form requirements is, in the first step, not a question of s 1031 ZPO. Given that an arbitration agreement is a substantive-law agreement, the provisions and principles of German substantive law apply. Where an agreement contains provisions that require a certain form as well as other provisions that are not subject to form requirements, German courts require that all those provisions follow the form requirement that form part of the agreement.¹²² Thus, in most cases, the above-mentioned typical additional content will be a necessary part of the arbitration agreement from the parties’ perspective and thus need to follow the form requirements of s 1031 ZPO. For instance, an oral agreement on the place of arbitration or the language of the proceedings will not be binding. It is then a question of interpretation what happens to the remainder of the arbitration agreement that follows the proper form. Pursuant to general principles of German law and precedent, in case of doubt, the entire agreement—ie the entire arbitration agreement—should be found invalid (s 139 BGB).¹²³ In the scenario discussed here, however, in our view in most cases the parties would still probably want arbitration to occur, even if their agreement on seat or language is found to be invalid for lack of proper form.

2.72  Further, the form requirements of s 1031 ZPO need to be observed in respect of certain amendments to the arbitration agreement.¹²⁴ Given the objective limitation of s 1031 ZPO for the formation of the agreement itself, not every amendment falls within the scope of this rule. Rather, it applies only where the statutory essentials contained in s 1029 ZPO are affected, meaning the “basic agreement to submit disputes resulting from a defined legal relationship to final and binding decision by an arbitral tribunal to the exclusion of the state courts.” Thus, for instance, it is possible to merely change the seat of the arbitration or the language of the proceedings by way of an amendment agreement without observing special form requirements. The same applies—even though it is an actus contrarius to the formation—for the termination of an arbitration agreement.¹²⁵ Even where s 1031 ZPO is triggered by an amendment, there is no need to repeat the entire arbitration agreement. The authorization (power of attorney) to conclude an arbitration (p. 54) agreement does not need to follow s 1031 ZPO either, unless the authorization is irrevocable (cf s 167 para 2 BGB).¹²⁶ In case of an assignment of rights, an arbitration agreement regarding disputes in connection with such rights automatically transfers to the assignee (s 401 BGB).¹²⁷ The form requirements of s 1031 ZPO do not apply. Thus, the assignment can be without form or in a “lesser” form than the one provided for in s 1031 ZPO.¹²⁸

2.73  For arbitration agreements among commercial parties—ie commercial corporations, commercial partnerships, and entrepreneurs (ss 13, 14 BGB)—German law requires an agreement in writing or an exchange of letters, telefaxes, telegrams, or other form of data transmission that enables proof of an arbitration agreement (s 1031 para 1 ZPO). The purpose of the form requirement is to enable proof of an arbitration agreement and to provide legal certainty as to the exclusion of state court jurisdiction.¹²⁹ The form requirement is a specificity of the ZPO, and it differs from the general requirements contained in German substantive law for agreements that must be “in writing” (s 126 BGB).

2.74  An arbitration agreement among commercial parties need not be contained in one document; s 1031 para 1 ZPO expressly allows the exchange of documents which in combination constitute the arbitration agreement. Consequently, the parties, in an agreement observing the requirements of s 1031 para 1 ZPO, can incorporate by reference a document containing an arbitration clause (s 1031 para 3 ZPO). This is used mainly for general terms and conditions (AGB) as commercial parties are exempted from the requirement of s 305 para 2 BGB. Also, traditional original signatures are not required, because means such as telefax suffice. Finally, not even copies of signatures are necessary; instead, any means of electronic communication is sufficient, as long as it clearly allows proof of an agreement. Thus, this includes a mere exchange of emails.¹³⁰

2.75  It is sufficient that the declaration of one party follows the form stipulated by s 1031 para 1 ZPO, as long as the acceptance by the other party can be deemed to exist pursuant to trade usage, such as silence upon a commercial confirmation letter (s 1031 para 2 ZPO).¹³¹ It is worth emphasizing that s 1031 para 2 ZPO addresses (p. 55) only the question of proper form. In addition, formation of an agreement by silence upon receipt of a commercial confirmation letter can be found only where the prerequisites of that doctrine are satisfied, ie, as discussed above, the parties are merchants (or comparable persons), and the arbitration agreement as such as well as its specific contents are not too “far off” the prior oral understanding of the parties (paras 2.24 et seq.).¹³²

2.76  For arbitration agreements involving consumers, German law contains special form requirements in order to protect consumers from premature or inadvertent submission to arbitration, thereby excluding the jurisdiction of state courts.¹³³ Specifically, unless the parties use the notarized form, s 1030 para 5 ZPO requires (i) a separate “document” containing only the arbitration agreement and other stipulations on the arbitral procedure and (ii) the parties’ signature. This provision is without parallel in the Model Law, since the latter applies only to commercial arbitration (art 1 para 1 Model Law). As the heightened form requirements under s 1031 para 5 ZPO are the exception, the party relying thereon bears the burden of proof that a consumer is involved.¹³⁴

2.77  Under the prevailing view, the separate document requirement does not necessitate a separate piece of paper. The arbitration agreement can be contained on the same piece of paper as the remainder of the parties’ agreement if it is clearly separated therefrom and signed separately.¹³⁵ However, mere arbitration clauses (s 1029 para 2 alt 1 ZPO, as opposed to separate arbitration agreements within the meaning of s 1029 para 2 alt 2 ZPO) with consumers are not possible, unless notarized.¹³⁶ The signature requirement refers to the traditional handwritten signature and means that the parties need to generate an original which contains the original signatures of all parties; an exchange of letters, an exchange of telefaxes or emails is insufficient.¹³⁷ Instead of a traditional signature, a digital signature pursuant to the German Signature Act may be used (s 126a BGB), which is, however, still rare, in particular in the consumer context. Given that para 5 does not require a personal signature, legal representation is possible by way of a separate power of attorney, which in turn is not subject to any form requirements (s 167 para 2 BGB).

(p. 56) 2.78  The separation requirement does not apply where the parties choose to have their agreement notarized (s 1031 para 5 ZPO), because in this case the notary is obliged to advise the parties of the significance of submitting to arbitration. Pursuant to the prevailing view, s 1031 para 5 ZPO applies only to notarization by German notaries, as foreign notaries are not necessarily obliged to provide the same type of advice as German notaries.¹³⁸ However, deeds notarized by Latin Notaries enjoy the benefit of dual presumption of legality and accuracy of content. Given that they meet the standards of the UINL,¹³⁹ they should be recognized in all UINL Member States and have the same authenticity as in their country of origin.

2.79  For the same reason, some commentators doubt whether an arbitration clause involving a consumer may be contained in an award on agreed terms.¹⁴⁰ In our view, a court-approved settlement should fulfil the requirements of s 1031 para 5 ZPO¹⁴¹ because a German court should generally provide the consumer with the same type of explanation and advice that can be expected from a German notary.¹⁴² That being said, the same should again apply in case of an arbitral award instead of a state court judgment. While it is true that the role of arbitrators can be less proactive compared to state court judges, it is the clear decision of the German legislator to recognize arbitration as a means of dispute resolution which is in principle equivalent to state-court litigation.¹⁴³ Given that even the arbitral award is on par with a state court decision (s 1055 ZPO), this should apply a fortiori for a tribunal-approved settlement.

2.80  Failure to follow the form prescribed by s 1031 para 5 ZPO makes the arbitration agreement null and void (s 125 BGB). Voidness may be invoked by all parties, including a party that is not a consumer.¹⁴⁴

2.82  For instance, someone who enters into a purchase or a loan agreement in order to be able to start his or her business technically may do so while still being a consumer and not an entrepreneur yet. However, German courts have held that transactions for the purpose of starting one’s business as an entrepreneur qualify as entrepreneurial transactions, not consumer transactions.¹⁴⁵ Thus, to the extent such transactions contain arbitration agreements, the less stringent form requirements for commercial transactions set forth above apply (s 1031 paras 1–4 ZPO).

2.83  By contrast, a person acting for purposes of administering his or her private assets is a consumer.¹⁴⁶ Accordingly, in the context of an M&A transaction, a seller holding a minority stake in the target may very well be a consumer for purposes of German law. In order for an arbitration clause typically contained in M&A agreements concluded in Germany to be valid and binding upon such a seller, the form requirements of s 1031 para 5 ZPO need to be observed.

2.84  Similarly, German courts have considered the managing directors of a limited liability company (GmbH) and stock corporation (AG) to be consumers for purposes of concluding their services agreements with the corporation, thus triggering the form requirements of s 1031 para 5 ZPO.¹⁴⁷ This case law may seem odd to a foreign observer. In some instances, it is also subject to legal doubt. For example, qualifying managing directors of German stock corporations as “consumers” for purposes of their services agreements conflicts with their corporate law position as independent managers of the stock corporation under s 76 para 1 AktG.¹⁴⁸

2.85  As also set forth above in paras 2.73 et seq., commercial partnerships are entrepreneurs; thus, it suffices that they follow one of the form alternatives contained in s 1031 paras 1–4 ZPO. A private partnership that is not engaged in commercial activity, such as a partnership for purposes of administering one’s own assets, may not qualify as an entrepreneur but rather be regarded as a “consumer,” thereby triggering the form requirement of s 1031 para 5 ZPO.¹⁴⁹ Similarly, private persons joining a partnership may act as consumers to the extent their participation (p. 58) is a matter of administering their own assets.¹⁵⁰ Where a private person joins a commercial partnership as a general partner, the traditional view was that such person would act as an entrepreneur.¹⁵¹ A newer view in literature advocates the application of s 1031 para 5 ZPO.¹⁵² Thus, for practical purposes, where a consumer is a member of a commercial or private partnership, the safest option is to always follow the requirements of s 1031 para 5 ZPO.

2.86  The ECJ has decided that under Directive 93/13/EEC a national court is obliged to assess whether an arbitration clause in a contract with a consumer is non-binding for the consumer even in the absence of any consumer action against the clause or the final award as the national court can proceed ex officio.¹⁵³ Even if there is only a limited basis for a judge to review the award in the absence of a consumer action,¹⁵⁴ the ECJ ruling poses a substantial risk to arbitration agreements with consumers. To compound that uncertainty, the BGH tends to take a more generous view, not necessarily qualifying the European regulations on consumer protection as part of the ordre public.¹⁵⁵

2.87  Form defects will be cured where a party fails to properly object during the arbitral proceedings (s 1031 para 6 ZPO; cf art 4 Model Law). Section 1031 para 6 ZPO applies only to form requirements, but not to other defects. With regard to other defects, s 1027 ZPO may apply. An objection pursuant to s 1031 para 6 ZPO needs to refer specifically to the lack of proper form and needs to be stated before the first argument on the merits, which can be in a party’s first written submission, or, if it occurs earlier, in a pre-trial conference with the Arbitral Tribunal, to the extent it addresses merits issues (which may be rare).¹⁵⁶ Failure to object cures the deficient form of an arbitration agreement with retroactive effect.¹⁵⁷ It applies only for purposes of the arbitral proceedings in which the failure occurs. It does not apply to further proceedings brought or to be brought under the same arbitration agreement.¹⁵⁸

2.88  Under the clearly prevailing view, arbitration agreements never require notarization. Even where an arbitration agreement is concluded in connection with a main contract that requires notarization—such as, eg, real estate transactions (s 311b BGB) or transactions involving the transfer of shares in privately held corporations (s 15 GmbHG)—such arbitration agreement is valid and binding as long as it satisfies the form requirements of s 1031 ZPO.¹⁵⁹ This follows from the clear wording of s 1031 ZPO as lex specialis as well as from the explicit separability principle in s 1040 para 1 cl 2 ZPO. Taken together, both rules show that the arbitration agreement is an independent contract.

2.89  In practice, there has been considerable uncertainty surrounding this issue. Specifically, there were doubts as to what requirements apply where the arbitration agreement is contained in a deed notarizing the main transaction and referring to the arbitration rules of an arbitral institution. Some practitioners expressed the view that in such case, the full set of arbitration rules of said institution need to be read aloud by the notary in order for the arbitration agreement to be concluded in proper form. Besides being cumbersome, this approach has the further disadvantage that only the rules in place at the time of the notarization can be agreed. Later amendments would need to be excluded, and in fact this is often agreed in German notarized documents. As a result, a frequent approach encountered in practice was that the arbitration agreement was contained in a separate, non-notarized document that follows the requirements of s 1031 ZPO, and the notarial deed would merely contain a reference to the effect that “the parties have concluded an arbitration agreement by way of separate document” or the like.¹⁶⁰ The separate arbitration agreement could then contain a reference to the rules of an arbitral institution, which is generally to be understood as a reference to the version in force at the time arbitral proceedings commence (see, eg, s 1.3 DIS Rules).

2.90  Based on recent case law of the BGH¹⁶¹ confirming our view that arbitration agreements never require notarial form, these complicated approaches are no longer necessary.

2.91  As substantive-law agreements, arbitration agreements can be invalid based on further general grounds for invalidity. Most notably, an arbitration agreement can be invalid for lack of proper representation. As stated above (para 2.77), an (p. 60) arbitration agreement can be concluded by a representative acting under power of attorney.¹⁶² Under general principles of German law, the power of attorney—unless it is irrevocable—generally need not follow the same form as is required for the arbitration agreement (s 167 para 2 BGB).¹⁶³ A general power of representation under German commercial law (Prokura) pursuant to s 48 HGB is sufficient authority to conclude an arbitration agreement.¹⁶⁴ Section 49 para 1 HGB expressly states that such a general power of representation empowers its holder to perform “all kinds of judicial and extrajudicial dealings associated with the business.” By contrast, this is not the case with the more limited form of a commercial power of attorney by virtue of s 54 HGB (Handlungsvollmacht).¹⁶⁵ Whether this type of power of attorney is sufficient to conclude an arbitration agreement depends on the typical range and the business practices in the specific industry.

2.92  A lawyer’s power of attorney to represent a client in litigation pursuant to ss 80 et seq. ZPO (Prozessvollmacht) is limited to state-court litigation under the ZPO and generally does not authorize the conclusion of an arbitration agreement.¹⁶⁶

2.93  Finally, arbitration agreements are subject to the invalidity grounds of illegality and immorality (ss 134, 138 BGB). Arbitration as such is generally neither illegal nor immoral; on the contrary, the German legislator views arbitration in principle to be equivalent to state-court litigation.¹⁶⁷ Thus, the illegality or immorality of an arbitration agreement may only result from its specific, extraordinary contents. Special provisions of the Tenth Book of the ZPO protecting an oppressed party take precedence over the application of ss 134, 138 BGB. For instance, where there is an improper imbalance of the parties regarding the composition of the arbitral tribunal, s 1034 para 2 ZPO allows the discriminated party to apply to the state court to appoint the arbitrator(s) differently. In such a situation, the provisions of the Tenth Book of the ZPO serve as leges speciales and there is no reason and in fact no room to resort to ss 134, 138 BGB.¹⁶⁸

2.94  In sum, cases where arbitration agreements are to be considered in violation of ss 134, 138 BGB should be rare. An important example is the decision of the BGH where the court held arbitration agreements to be null and void if they do not meet (p. 61) the whole set of rules which it has developed for disputes related to the validity of shareholder resolutions (Schiedsfähigkeit II; see para 1.78). Another instance may be arbitration agreements that are concluded specifically to cover up illegal activity, such as corruption or money laundering. Similarly, an arbitration agreement designed to adjudicate the distribution of the proceeds of illegal activity should be considered illegal and therefore null and void. Whilst it is true that the jurisdiction phase of such proceedings requires a “front loading” with substantive issues that may be cumbersome and difficult to establish, such “front loading” seems inevitable to protect public interests of very high importance.

2.95  Where an arbitration agreement is contained in AGB, the provisions contained in ss 305 et seq. BGB need to be observed; in case of violations, an arbitration agreement may not be concluded or may be invalid.

2.96  In a commercial context, ie with respect to a transaction between commercial corporations, commercial partnerships, or entrepreneurs (ss 13, 14 BGB), the use of AGB as such generally does not make a difference with respect to the validity of arbitration agreements. Arbitration clauses in AGB can be validly agreed by reference to the AGB (s 1031 para 3 ZPO). In a commercial context, arbitration clauses are common practice and as such should not be considered to fall under the “surprise” provision of s 305c BGB.¹⁶⁹ Standard arbitration clauses in commercial agreements likewise withstand the general fairness scrutiny provided for in s 307 BGB. As we have stated several times, in Germany, arbitration is considered principally equivalent to state-court litigation;¹⁷⁰ thus, the provisions of the ZPO governing state-court litigation may not be regarded as the guideposts for the fairness analysis.

2.97  However, arbitration clauses may be invalid because of “surprise” under s 305c BGB or due to unfairness pursuant to s 307 BGB if they contain unusual provisions or provisions that are unduly burdensome to one party. The application of these provisions requires a careful case-by-case analysis. Thus, generic statements need to be met with caution. Nevertheless, submitting to arbitration on the basis of equity and fairness (s 1051 para 3 ZPO) is probably a “surprise clause” in most cases.¹⁷¹ Some commentators have expressed the view that even in a commercial context, the Swiss Rules contain a surprise clause to the extent that they provide for unlimited jurisdiction of the arbitral tribunal to decide on claims introduced by way of set-off, which goes beyond what most other arbitration rules provide for.¹⁷²

(p. 62) 2.98  Even if they are not “surprising‚” individual contents of an arbitration clause may be invalid under the fairness analysis to be performed pursuant to s 307 BGB because they unduly burden the other party or jeopardize the purpose of the (arbitration) agreement. Two real-life examples where these issues have become relevant are the following:

2.99  First, German courts have dealt with arbitrary or discriminatory choices for the place of arbitration and considered such choices null and void in an AGB context. In the underlying cases, a large Netherlands-based franchisor for a US sandwich chain had obliged its German franchisees to subject themselves to arbitration in the US, which the German courts considered inappropriate in the specific circumstances of these cases.¹⁷³ This does not, of course, mean that a US place of arbitration is now impossible to stipulate in AGB with German counterparties. What made the “sandwich” cases special was the fact that the franchisor was a large corporation located outside Germany, whereas the German franchisees were typically small businesses to whom the inconvenience and cost of bringing an arbitration in the US would seem so prohibitive that they may feel genuinely deterred from enforcing their rights, and the franchisor may have counted on exactly that effect when drafting the AGB. If that is the case, arbitration is indeed no longer equivalent to state-court arbitration. By contrast, it is still permissible, for instance, for a US-based supplier of goods to agree with its German (commercial) customer to arbitration in the US if a dispute arises out of the delivery of the goods.

2.100  Second, German courts have dealt with AGB clauses that give the drafter of the AGB the unilateral choice between arbitration and state-court litigation. According to the BGH, the decisive criterion in this case is whether the right of choice is limited to the role as plaintiff or is unrestricted.¹⁷⁴ In the first alternative, the clause will generally be considered valid as there may be due cause for this right such as questions of confidentiality or the complexity of the claim. By contrast, the court would see unreasonable discrimination if the drafter were allowed to choose arbitration even in the role of the defendant. In this alternative, the AGB clause would enable him to sabotage the other party’s claim after it was brought before a state court. Under normal circumstances, German courts do not recognize a legitimate interest for such a unilateral right.

2.101  Where consumers are involved, a different analysis is required. Given the form requirements of s 1031 para 5 ZPO, it is more difficult to conclude an arbitration agreement by mere reference to AGB.¹⁷⁵ The (p. 63) consumer will need to sign the arbitration clause separately, unless the main contract is notarized (s 1031 para 5 cl 3 ZPO). Where the consumer signs separately, the arbitration clause should not be considered a “surprise” pursuant to s 305c BGB. By contrast, where an arbitration clause in AGB is incorporated by reference through a notarial deed, the prohibition on “surprise clauses” in s 305c BGB may invalidate the arbitration clause, unless the notary has advised the consumer thereon, because in a consumer context arbitration clauses are still much more unusual than in an (international) commercial context. The same applies, of course, where the arbitration clause itself contains unusual provisions.

2.102  Once an arbitration clause is properly included in a consumer agreement and it is not invalid for “surprise” reasons, the clause needs to be subjected to the fairness analysis pursuant to ss 307 et seq. BGB. Again, as a matter of express intent of the drafters of the German arbitration law, arbitration needs to be considered principally equivalent to state-court litigation; thus, there is no need for a special justification in order to include an arbitration clause in a consumer agreement.¹⁷⁶

2.103  Clauses requiring additional scrutiny or caution include the following:¹⁷⁷

• •  Arbitral tribunals unfamiliar with German law, especially consumer protection laws, may under narrow circumstances be held impermissible by German courts. Thus, on a case-by-case basis to be valid the clause may need to provide for at least a chairman who is a German-trained lawyer.¹⁷⁸

• •  Nominations of a sole arbitrator by the drafter of the AGB do not render the arbitration clause invalid; however, the special provisions of s 1034 para 2 ZPO apply (consumer may ask state court to replace arbitrator).¹⁷⁹

• •  Stipulations of a minimum amount in dispute that is wholly disproportionate to the actual amount in dispute are invalid.¹⁸⁰

• •  Language requirements different from the language of the consumer or the transaction require special justification; absent such justification, they are considered invalid.¹⁸¹

• •  Decisions ex aequo et bono or pursuant to lex mercatoria are likely unacceptable in AGB with consumers.¹⁸²

(p. 64) 2.104  As shown above, it is not always entirely clear whether a party is a consumer or not (see paras 2.81 et seq.). The idiosyncrasies of German law regarding AGB and the consumer/non-consumer distinction may seem inappropriate from an international commercial point of view. Thus, there is considerable debate in Germany whether it is possible and desirable to limit the consequences of the approaches taken by German courts as outlined above.¹⁸³ It is entirely debatable to “opt out” of the AGB principles by agreeing to arbitration and excluding the application of ss 305 et seq. BGB in the context of commercial agreements.¹⁸⁴ It must be clear, however, that it is very likely not possible by way of an arbitration agreement to opt out of the consumer/non-consumer distinction. An arbitral tribunal which were to accept such an “opt out” would render an award which likely would be subject to challenge and set aside based on s 1059 para 2 no 2 lit b ZPO (ordre public).

2.105  When interpreting arbitration agreements, again the applicable law needs to be determined first (see above para 2.4). Assuming the application of German law, the general rules of contract interpretation apply. This is a direct consequence of the fact that arbitration agreements are substantive-law agreements.

2.106  Notably, the bottom line for contract interpretation in German law is not to adhere to the literal wording, but to determine the true joint intentions of the parties (s 133 BGB). In addition, pursuant to s 157 BGB, agreements are to be interpreted based on good faith and taking into account common usage. Nevertheless, the wording of an agreement is still the starting point of the analysis.¹⁸⁵ Technical legal terms are generally interpreted pursuant to their technical meaning. Otherwise, a term is to be interpreted based on its meaning in ordinary, everyday language.¹⁸⁶ For instance, where an agreement talks of an arbitral tribunal, it will likely mean just that, and not mediation, expert determination or some other form of (alternative) dispute resolution. What is notable, though, is the fact that the German terms for arbitration (Schiedsverfahren) and expert determination (Schiedsgutachten) are so similar that it may be easy for laymen to confuse them. Should both parties have actually used the wrong term but meant the same (other) thing, their joint true intentions will govern (falsa demonstratio non nocet).¹⁸⁷

(p. 65) 2.107  Where the wording was drafted by experienced counsel, it will be accorded greater weight.¹⁸⁸ However, outside the context of AGB, German law does not follow a general rule of interpretation against the drafter (contra stipulatorem).¹⁸⁹

2.108  In addition to the wording, and as a next step in the analysis, German rules of contract interpretation require consideration of the dealings of the parties prior to and possibly after the conclusion of the agreement, in particular the negotiation history.¹⁹⁰ In case of arbitration agreements, the various versions leading up to the final agreement may be looked at. The fact that the parties expressly negotiated and bargained for a certain wording should be accorded considerable weight.

2.109  Most importantly, the mutual interests of the parties and the purposes of the agreement need to be taken into account.¹⁹¹ Under German rules of contract interpretation, the court or the arbitral tribunal has considerable leeway to give effect to what it considers the “ true intentions of the parties.” A court or an arbitral tribunal should be careful, however, not to replace the contents of an agreement with its own views of what is just and fair. Also as a general rule, agreements are to be interpreted in a way such that they make practical sense and are valid.¹⁹²

2.110  Where form requirements apply, such as the writing requirement in s 1031 ZPO, circumstances outside the written document can be taken into account, but they need to be indicated in some way in the document (Andeutungstheorie).¹⁹³ A written document will be presumed true and complete, and whoever challenges that bears the burden of proof.¹⁹⁴

2.111  Additional rules apply again for arbitration clauses contained in AGB (see paras 2.95 et seq.). Specifically, in case of doubt, AGB are interpreted against the drafter.¹⁹⁵

2.112  Where an agreement contains a gap and the above-mentioned means of interpretation do not allow for a resolution of the issue, the principles of supplementary interpretation may apply (ergänzende Vertragsauslegung).¹⁹⁶ In such a scenario, supplementary interpretation would require to determine what reasonable parties would have agreed had they contemplated and negotiated on what they have left open. The application of these principles requires a showing that without intervention by the court, the commercial goals pursued by the parties in their agreement (p. 66) could not be achieved in a way respecting the interests of both parties,¹⁹⁷ and is thus fairly rare in the context of arbitration agreements. To begin with, where an arbitration agreement is missing, it can generally not be “invented” by way of supplementary interpretation.¹⁹⁸ Furthermore, the provisions of the applicable arbitration law, in our case the Tenth Book of the ZPO, generally contain provisions that allow many gaps to be filled, including by way of using the discretion of the arbitral tribunal (s 1042 para 4 ZPO).

2.113  An example could be a case where the parties have clearly agreed that they do not want ad hoc arbitration, but failed to properly designate an arbitral institution. In such a case, the Higher Regional Court of Berlin has held that the nomination of the non-existing “German Central Chamber of Commerce” as arbitral institution has to be interpreted as nomination of the DIS. Given that the parties undoubtedly wanted to solve their disputes by way of arbitration and an arbitral institution with a seat in Germany, the court drew the conclusion that only the DIS corresponds to their intention.¹⁹⁹ There may well be cases where such determination is not possible, which means that the gap cannot be closed even by supplementary interpretation.

2.114  Against the backdrop of all these general principles of contract interpretation, it is widely accepted in Germany that arbitration agreements should be interpreted broadly as far as their subject matter is concerned.²⁰⁰ This is correct, because in most cases this is presumably in line with the intentions of the parties and the purposes of an arbitration agreement. Unless the parties specify otherwise, they can be assumed to have intended an encompassing application of an arbitration clause, because the alternative would be to split different disputes among them in connection with one agreement and litigate or arbitrate them in front of different decision-making bodies. Since such disputes are often somehow interrelated, addressing them before different fora is usually not what reasonable parties want in terms of procedural efficiency and cost economy. For instance, disputes regarding compensation claims resulting from an agreement should not be separated from disputes regarding non-performance or defective performance, because the latter may be a reason for the delayed or withheld payment. Similarly, concurring claims based on torts, unjust enrichment or pre-contractual claims should in most cases not be separated from contractual claims, as they may all be based on the same set of core facts. By contrast, tort claims against individuals acting for one party to a contract (p. 67) in connection with the performance of that contract are usually not encompassed by an arbitration agreement, because these individuals are usually not party to the arbitration agreement (which is, however, foremost not a matter of interpretation but personal scope of the arbitration agreement).²⁰¹

2.115  In the same vein, German courts generally consider a settlement regarding a dispute arising out of the main contract to be governed by the same arbitration clause as long as the settlement can be considered to be related to the original transaction (as opposed to the settlement being a completely new transaction itself).²⁰²

2.116  A practical example may be a case where the parties, along with the settlement of their dispute, agree on a number of additional issues or topics that were not among the items before the arbitral tribunal. In particular where the parties are successful in agreeing on “win-win solutions,” this may be the case. A settlement of the dispute may thus be embedded in a much larger transaction. The parties may, for instance, agree on the conclusion of a new supply relationship regarding different or additional products, or they may agree on the transfer of certain unrelated assets. Later on, a new dispute may arise with respect to an issue that is related to elements of this larger transaction, but unrelated to the original dispute and its settlement. Without a clear provision in the settlement agreement, it may be highly uncertain whether the arbitration clause in the original contract giving rise to the first dispute still applies. Thus, the parties are well advised to contemplate express dispute resolution mechanisms where they conclude settlement agreements that go beyond a resolution of the issues that were subject to arbitration.

2.117  In many cases, parties are well served by concise arbitration agreements, such as the model clauses recommended by leading arbitral institutions (see above paras 2.2 and 2.32 for the model clauses recommended by the DIS and the ICC).²⁰³ This is in line with the traditional German drafting style for agreements in general. It tends to be in contrast to the drafting styles of certain other jurisdictions, most notably the US, where—along with lengthy contracts in general—detailed arbitration clauses can often be found. Nevertheless, for purposes of an arbitration to be seated in Germany, less is probably more. Where the parties choose institutional arbitration, the rules of the institution and the practices established thereunder will generally provide a much more suitable and predictable framework for arbitral proceedings than seemingly tailor-made, but often faulty party agreements. (p. 68) Likewise, where the parties elect ad hoc arbitration under the Tenth Book of the ZPO, the statutory provisions provide for a framework that should be suitable and satisfactory in most cases.²⁰⁴

2.118  German law allows for considerable flexibility in shaping arbitration clauses. For instance, the parties would be free to agree on a combination of state court and arbitral jurisdiction. It is conceivable to limit the jurisdiction of an arbitral tribunal to amounts in dispute exceeding a certain threshold and to submit smaller claims to a state court.²⁰⁵ Whilst in theory this may sound like a good idea in order to achieve time and cost efficiencies, in practice this often proves different, eg where an initially small claim is increased during the course of the proceedings or substantial counterclaims are raised. All in all, in most cases keeping it short and simple will serve the parties better.

2.119  Mistakes in drafting arbitration agreements occur more frequently than necessary, not least because often the lawyers drafting an arbitration clause are transactional practitioners who are unfamiliar with the field of arbitration.²⁰⁶ Listed below are some frequent drafting mistakes that should be easy to avoid:

• •  Designation of a non-existent arbitral institution: an easy check on the internet can avoid this mistake and costly follow-on litigation on the validity of the arbitration agreement, notwithstanding that German courts tend to be generous in finding a way to uphold the validity of the arbitration agreement.²⁰⁷

• •  Reference to non-existent rules of arbitration: Same remedy.

• •  Reference to a separate arbitration agreement that is, however, never concluded: German courts are split over whether this constitutes an arbitration agreement or not.²⁰⁸

• •  Agreement on arbitration and a choice of forum for the ordinary courts in the same contract: German courts have interpreted such a situation as actually (p. 69) meaning arbitration. Only to the extent there is jurisdiction for ordinary courts, or the parties do not object to a lawsuit brought in an ordinary court, would the choice of forum clause apply.²⁰⁹

• •  Inserting multiple, conflicting arbitration clauses into the same agreement: although this may sound unlikely, this mistake sometimes occurs, in particular where the parties append certain general terms or conditions containing an arbitration clause to an agreement, and the main body of an agreement contains a different arbitration clause. Obviously, litigating which clause applies is unnecessarily costly and time consuming.

2.120  We start with the personal and subject matter scope of the arbitration agreement (below paras 2.121 et seq.) before we turn to the effects of the arbitration agreement (below paras 2.135 et seq.) and its termination (below paras 2.156 et seq.).

2.121  The personal scope of the arbitration agreement certainly extends to its parties, and in certain limited circumstances, it may also extend to third parties. The situations in which the potential inclusion of third parties into an arbitration agreement are discussed most often in German-related arbitration are: (1) successors and assignees; (2) matters of joint liability; (3) agreements for the benefit of third parties; (4) corporate law matters; and (5) insolvency administrators.

2.122  Universal successors (Gesamtrechtsnachfolger) of a party to an arbitration agreement are generally bound by such arbitration agreement. An important example are statutory mergers and other forms of corporate restructurings by means of the German Transformation Act (UmwG); the same applies to the heirs of a party.²¹⁰

2.123  Pursuant to the prevailing view in Germany, assignees, too, are usually bound by arbitration agreements governing the assigned claims, unless there is clear evidence that the parties intended otherwise (see s 401 BGB).²¹¹ Since the agreement to (p. 70) arbitrate forms part of the content of the assigned right, the arbitration agreement is “transferred” to the assignee irrespective of whether the assignment follows the form requirements of s 1031 ZPO.²¹²

2.124  As a consequence, a person acquiring shares in a corporation or a partnership is bound to an arbitration agreement contained in the by-laws or the partnership agreement with regard to disputes between the corporation or partnership on the one hand and the new shareholder on the other.²¹³ The same applies to disputes between the current shareholders and the new shareholder.²¹⁴ By contrast, disputes between the former and the new shareholder arising out of the transfer of the shares are not governed by an arbitration agreement contained in the by-laws or the partnership agreement, unless the former and the new shareholder agree otherwise.

2.125  The scope of the arbitration agreement needs to be determined independently of the underlying claims. Thus, an arbitration agreement generally binds only those parties who conclude the agreement.²¹⁵ An arbitration agreement which was concluded between a joint debtor and the creditor does not generally bind other joint debtors who are not contracting parties or legal successors even though their rights and obligations may depend on the outcome of the arbitral proceedings.²¹⁶

2.126  An arbitration agreement may also extend to disputes with a third party who benefits from the main contract as true third-party beneficiary (Vertrag zugunsten Dritter, s 328 BGB) to the extent that its rights which are conferred as third party beneficiary are concerned. This requires, however, that the arbitration agreement has been formed before or at the time when the third party beneficiary acquired its right. The introduction of an arbitration agreement by later amendment cannot alter the rights already vested to the third party. The third party may bring claims under the arbitration agreement, and it cannot resort to the state courts. The reason is that the third-party right was granted with the arbitration agreement (p. 71) as its inherent characteristic.²¹⁷ By contrast, counterclaims against the third party will typically not be covered by the arbitration agreement, as this would be tantamount to an agreement to the detriment of a third party (Vertrag zulasten Dritter), which is not possible under German contract law.

2.127  An arbitration agreement can extend to a third party as a matter of corporate law. Various scenarios need to be distinguished.

2.128  With respect to general partnerships as respondents,²¹⁸ it is well established in German practice that a claimant may bring arbitration not only against the partnership, but also against its general partners, even if the general partners are not parties to the arbitration agreement.²¹⁹ General partners are generally personally liable for the obligations of the partnership pursuant to or, depending on the form of the general partnership, in analogy to s 128 HGB. By contrast, these principles do not apply to the shareholders of a corporation such as a German stock corporation (AG) or a limited liability company (GmbH).²²⁰

2.129  Also, the fact that two companies belong to the same group of companies (Konzern) does as such not suffice to extend an arbitration agreement entered into by one company to the other.²²¹ In other words, German arbitration law does not recognize a general “group of companies doctrine” as it is sometimes advocated in other jurisdictions or under certain rules of arbitration.²²² The only exception is a situation where under substantive corporate law, the corporate veil of an entity may be “pierced,” and its parent company is liable for the obligations of such entity. In this case, the parent company is subject to an arbitration agreement that the entity has (p. 72) entered into because the arbitration agreement is a characteristic of the obligations pursuant to which the “piercing” applies.²²³

2.130  Insolvency administrators (Insolvenzverwalter) acting pursuant to the German Insolvency Statute (InsO) are generally bound by arbitration agreements concluded by the debtor prior to the institution of insolvency proceedings.²²⁴ Likewise, the administrator is bound to arbitrator selections made by the debtor prior to the insolvency proceedings.²²⁵ By contrast, disputes regarding contestation claims under ss 129 et seq. InsO cannot be subjected to arbitration agreements by the debtor. The reason is that the claims of the insolvency estate result from a successful contestation, and not from the contested agreement which may contain the arbitration clause.²²⁶ Similarly, the state courts have jurisdiction over a dispute between the insolvency administrator and the counter-party to a contract concluded by the debtor on whether the insolvency administrator has properly exercised its rights under s 103 InsO (rejection of executory contracts), notwithstanding an arbitration clause in the contract rejected by the insolvency administrator. Again, German courts consider this to be a dispute on the specific rights of the insolvency administrator under the InsO, and not a dispute arising out of or in connection with the rejected contract.²²⁷ By contrast, s 166 para 2 InsO was held to provide only for the insolvency administrator’s right to collect the assigned amount but does not affect the underlying claim, which remains subject to an arbitration agreement.²²⁸

2.131  The subject-matter scope of an arbitration agreement is first an issue of general contract interpretation (see above paras 2.105 et seq.). Typical situations requiring special attention are pre-contractual claims (below para 2.132), claims based on enrichment and tort claims (below para 2.133), as well as set-off and counterclaim situations (below para 2.134).

2.132  Whether pre-contractual claims (such as under culpa in contrahendo principles pursuant to s 311 BGB) are covered by an arbitration agreement, is a matter of the (p. 73) content and thus possibly the interpretation of the arbitration agreement. As a rule of thumb, the formula “all disputes arising out of this agreement” is considered not to include pre-contractual claims or at least to pass the burden of proof to the opposing party.²²⁹ By contrast, the broader term “all disputes arising out of or in connection with this agreement” would generally cover pre-contractual claims.²³⁰

2.133  An arbitration agreement on disputes arising out of or in connection with a commercial contract usually extends to claims for unjust enrichment (ss 812 et seq. BGB) related to such contract, eg as a result of its invalidity.²³¹ Likewise, it typically covers tort claims to the extent tort claims result from the same facts that give rise to breach of contract.²³²

2.134  Where the respondent raises counterclaims or declares set-off with respect to claims that are governed by the same arbitration agreement, no problems arise. Where the counterclaims or claims subject to set-off are governed by no or another arbitration agreement, the arbitral tribunal generally lacks jurisdiction unless the claimant does not properly object.²³³ Upon proper objection, the arbitral tribunal will have to dismiss such counterclaims for lack of jurisdiction. The claims introduced by way of set-off need to be disregarded by the arbitral tribunal.²³⁴ By way of exception, the general view is that claims that are undisputed or have been established by final and binding judgment or award may be introduced by way of set-off into an arbitration.²³⁵ As a further exception, there is a strong view that set-off with claims resulting from an agreement that is commercially closely connected to the (p. 74) agreement giving rise to the main claim is to be accepted by the arbitral tribunal.²³⁶ For example, such a connection can be found between a purchase agreement and a loan agreement which is entered into to finance the purchase.

2.135  An arbitration agreement gives rise to a jurisdiction defense against state court proceedings (below paras 2.136 et seq.) and triggers cooperation and good faith obligations between the parties (below paras 2.145 et seq.). Whether or not an arbitration agreement creates a confidentiality obligation, and on whom, is a question which we address below in paras 2.150 et seq.

2.136  Where the parties have concluded an arbitration agreement, the state courts lack jurisdiction to the extent the dispute is covered by the scope of the arbitration agreement (s 1032 para 1 ZPO).²³⁷ The defendant needs to raise this defense (which for ease of reference we refer to as the jurisdiction defense)²³⁸ in time, ie prior to the oral hearing on the merits, otherwise the defense will be considered waived.²³⁹

2.137  The jurisdiction defense may also be raised by a party to the arbitration agreement who received third-party notice (Streitverkündung) in a state court proceeding.²⁴⁰ There is some disagreement regarding this view,²⁴¹ but it is supported by the better arguments. Where the parties conclude an arbitration agreement, they intend to resolve certain disputes solely before an arbitral tribunal. In our view, it should therefore be clear that the arbitration agreement needs to prevail where both the person giving and the person receiving the third-party notice are bound by the arbitration agreement. By contrast, the arbitration agreement does not give rise to a jurisdiction defense against third-party notice where the person giving the notice is not a party to the arbitration agreement. Such person has the procedural right to give third-party notice as a matter of law under s 72 ZPO. Others cannot limit such right by way of an arbitration agreement to which the person is not a party; agreements for the detriment of third parties are not recognized under German law.

(p. 75) 2.138  An arbitration agreement also bars accelerated documentary proceedings (ss 592 et seq. ZPO) before the German state courts²⁴² as well as so-called debt collection procedures (ss 688 et seq. ZPO).²⁴³ Likewise, the jurisdiction defense may be raised against the set-off with a claim that is subject to an arbitration agreement (see above para 2.134).²⁴⁴

2.139  By contrast, the jurisdiction defense does not apply to temporary freeze and injunction proceedings (ss 916 et seq., 935 et seq. ZPO) before state courts; German law expressly provides that an arbitration agreement does not limit the power of state courts to issue these types of preliminary measures (s 1033 ZPO). In parallel, the arbitral tribunal may take such measures (s 1041 ZPO; for details on interim relief by state courts and arbitral tribunals see below Chapter 5, including the availability of independent evidence proceedings under ss 485 et seq. ZPO).

2.140  The jurisdiction defense must be raised; a state court will not dismiss an action covered by an arbitration agreement ex officio. Pursuant to s 1032 para 1 ZPO, the defense must be raised prior to the oral hearing on the merits before the state court. Where the defendant raises the jurisdiction defense on time, the state court is bound to dismiss the action as inadmissible,²⁴⁵ unless the state court finds the arbitration agreement to be null and void, inoperative, or incapable of being performed (s 1032 para 1 ZPO; see para 2.158). Unlike art 8 para 1 Model Law, German civil procedure law does not provide the state court with the option to refer the case to arbitration. In exceptional cases, the jurisdiction defense may be contrary to good faith and therefore irrelevant. This applies, for instance, where the party raising the defense has first argued during arbitral proceedings that the arbitration agreement is invalid or unenforceable.²⁴⁶ Another example is where the defense is raised although it is clear that the party has insufficient financial resources for an arbitration proceeding.²⁴⁷

2.141  To the extent there is a dispute as to whether the arbitration agreement invoked by the defendant applies to the present dispute, the state court may decide thereon in advance by way of an interim judgment (Zwischenurteil, s 280 para 2 cl 1 ZPO), which is subject to immediate appeal.²⁴⁸ The state court may continue the (p. 76) proceedings on the merits while the appeal is pending (s 280 para 2 cl 2 ZPO). How a state court approaches such a dispute will depend on the specifics of the individual situation. As a general matter, in order to give effect to arbitration agreements and in view of the requirements of procedural economy, a state court should be reluctant to conduct proceedings on the merits as long as there is no final and binding decision as to whether an arbitration agreement applies. Obviously, where a party invokes an arbitration agreement frivolously and its position is clearly unfounded, the state court may find it more appropriate to continue the proceedings in order to enforce the plaintiff’s right to a speedy decision. In contrast, where the application of an arbitration agreement is subject to doubt, but the state court is of the view that it does not apply, the court should not continue with proceedings and a decision on the merits as long as the party invoking the arbitration agreement can appeal and is appealing this issue.

2.142  German law allows a petition to the competent state court to determine whether certain arbitral proceedings are admissible or inadmissible (s 1032 para 2 ZPO). Such petition must be made prior to the constitution of the arbitral tribunal; once the tribunal is constituted, it also has jurisdiction over the admissibility or inadmissibility of arbitral proceedings (s 1040 para 1 ZPO).²⁴⁹

2.143  The process provided for in s 1032 para 2 ZPO is a German particularity without a parallel in the Model Law (cf art 8 Model Law). Each party may make a petition pursuant to s 1032 para 2 ZPO. Thus, the (later) claimant of the arbitration may request the state court to declare that certain (contemplated) arbitral proceedings are or would be admissible or inadmissible with regard to a certain arbitration agreement; likewise, the (later) respondent may request a declaration that they would be admissible or inadmissible.²⁵⁰ These proceedings are unusual in that they allow the determination of a fairly abstract question of law. The idea behind s 1032 para 2 ZPO is to provide for a mechanism that allows the issue to be determined early on with legal certainty.²⁵¹ Parties should note, however, that a petition pursuant to s 1032 para 2 ZPO does not suspend the statute of limitations regarding the claim to be brought either in arbitration or before the state courts.²⁵²

2.144  The competent court is—as is normally the case for matters arising out of the Tenth Book of the ZPO—the higher regional court (OLG) of the district in which the place of arbitration is located (s 1062 para 1 no 2 ZPO). Its decision is subject to limited legal review by the BGH pursuant to s 1062 para 1 cl 1 ZPO.

2.145  As a substantive-law contract, the arbitration agreement generates substantive law obligations among the parties both to further the proceedings and to refrain from hindering the proceedings.²⁵³ Most notably, from a practical point of view, the arbitration agreement obliges the parties to pay their share of the arbitrators’ fees, including advance payments requested by the arbitral tribunal.²⁵⁴ This obligation arises as an implied obligation based on general principles of German law (for details see below para 3.177).

2.146  The arbitration agreement also creates an implied obligation on the parties to refrain from unduly influencing the arbitral tribunal or witnesses and experts, such as by threat, corruption, and the like. Grave violations of this obligation trigger the other party’s right to extraordinarily terminate the arbitration agreement for cause if it is unacceptable to continue the proceedings under the given circumstances.²⁵⁵

2.147  The arbitration agreement creates further obligations, such as the duty to plead truthfully and generally to cooperate in the conduct of the proceedings.²⁵⁶ These obligations are not enforceable by state court action and their violation usually does not give rise to a right to terminate the arbitration agreement.²⁵⁷ Instead, they may be sanctioned only by the arbitral tribunal pursuant to the rules applicable to the arbitral proceedings (Tenth Book of the ZPO and/or institutional rules).

2.148  In addition, to the extent the parties agree on certain rules of arbitration of an arbitral institution, the arbitration agreement creates the obligation to obey such rules. Again, however, sanctions for violation of this duty are governed primarily by the agreed arbitration rules.²⁵⁸

2.149  Finally, the arbitration agreement may be viewed to create an obligation to cooperate in the constitution of the arbitral tribunal.²⁵⁹ However, the other party cannot force a party, for instance, to nominate an arbitrator. Instead, in such case, the arbitrator will be determined in accordance with the default rules of the Tenth Book of the ZPO or of the arbitral institution (for details see paras 3.19 et seq.).

2.150  In general, under German law, an arbitration agreement does not per se trigger confidentiality obligations of the parties;²⁶⁰ there is no provision to this effect in the Tenth Book of the ZPO. This is contrary to the widely held belief among persons not familiar with German arbitration law that arbitration is somehow “confidential.” It is true that the arbitrators are obliged to keep the proceedings and the contents confidential (see below para 3.187). However, in the absence of a contractual confidentiality undertaking or confidentiality provisions in rules of arbitration agreed by the parties, this does not necessarily apply to the parties and other persons participating in the proceedings, such as witnesses and experts.

2.153  The most important grounds for terminating an arbitration agreement in German arbitration practice are termination by agreement of the parties (below paras 2.154 et seq.) and unilateral termination by one party (below paras 2.156 et seq.). Other, general grounds for termination are fairly rare (below paras 2.162 et seq.).

2.154  An arbitration agreement, as any agreement, is binding as long as it is not terminated. As an agreement, it can be terminated by consent of all parties.²⁶² For such (p. 79) consensual termination, the parties need not observe the form requirements of s 1031 ZPO.²⁶³ As with any agreement, termination can be express or implied. However, in the absence of an express termination, there need to be clear circumstances before an implied termination of the arbitration agreement can be found. It will generally not be sufficient that both parties fail to further pending arbitral proceedings for an extended period of time.²⁶⁴ Likewise, a settlement outside the arbitral proceedings does not necessarily terminate the arbitration agreement. Instead, the arbitration agreement may still apply to disputes resulting from the settlement (see above para 2.115).²⁶⁵ An implied termination may be found where the parties agree on a novation of their main contract and now provide for the jurisdiction of the state courts without expressly terminating the prior arbitration clause.

2.155  By contrast, mere silence will generally not be capable of terminating an arbitration agreement, because under German civil law, silence—in the absence of extraordinary circumstances—normally has no legal significance.²⁶⁶ A recognized exception is silence upon receipt of a commercial confirmation letter (see above paras 2.24 et seq.). Thus, a commercial confirmation letter could be used to terminate an arbitration agreement, and where the other side fails to object within a reasonable period, such termination would be effected by way of silence, unless the termination of the arbitration agreement would need to be qualified as so unusual that the recipient of the confirmation letter did not need to anticipate such contents, which is necessarily a question of a case-by-case analysis.

2.156  As a substantive-law agreement with continuing obligations, an arbitration agreement may be subject to termination by one party for cause (Kündigung aus wichtigem Grund, s 314 BGB).²⁶⁷ Thus, there must be an important reason for termination which makes it unacceptable (unzumutbar) for a party to continue to be bound; termination must be declared within an appropriate time frame once cause has arisen (s 314 para 3 BGB). Examples treated by the German courts are failure to nominate an arbitrator, failure to pay advances on costs, delays of the proceedings, and obstruction tactics.²⁶⁸

(p. 80) 2.157  It should be noted, however, that each case needs to be analyzed carefully on its facts. Termination for cause under s 314 BGB is a remedy of last resort (ultima ratio). Thus, as a general matter, any remedies existing within the arbitral process need to be exhausted first or their exhaustion must be found to be unacceptable for the party seeking termination.²⁶⁹ For instance, in most cases, there will be a process for appointing an arbitrator where one party does not cooperate. Likewise, failure to plead truthfully can and needs to be sanctioned by the arbitral tribunal and does not give rise to a right of termination.²⁷⁰ An arbitral tribunal has ample means to address delay tactics of a party. While this may sound unsatisfactory for a party trying to proceed in good faith against a rogue counterparty, care needs to be applied regarding termination for cause in order not to allow a party acting in bad faith to abuse the termination right in order to obstruct or sabotage the arbitral process.²⁷¹

2.158  At the other end of the spectrum, a clear case justifying termination for cause would be bribery of or threats against the arbitrators by the other side.²⁷² Also, war and political unrest may prevent the constitution of the arbitral tribunal and the conduct of proceedings, in which case termination may be proper.²⁷³ Furthermore, an accepted scenario is the failure to pay the advance on costs, including cases where the claimant is unable to pay.²⁷⁴ The BGH has considered such a situation to render the arbitration agreement “inoperative” under s 1032 para 1 ZPO and therefore barred the jurisdiction defense ipso iure even without explicit termination by a party.²⁷⁵ Where a party is not sure whether the arbitration agreement is inoperative ipso iure, as a matter of precaution, it certainly makes sense to declare termination of the arbitration agreement for cause. In any event, it would seem preferable to leave the proper course of action to party choice, which is the more flexible and thus more appropriate solution compared to an objective finding of inoperability. After all, one party may well decide to pay the other side’s share of the advance on costs and proceed with the arbitration. Where the claimant is unable to pay its share and the claimant does not formally declare termination of the arbitration agreement but simply commences state-court litigation, the commencement of such litigation may be viewed as implied termination of the arbitration agreement.²⁷⁶

(p. 81) 2.159  In German legal doctrine, there are different views as to whether—in addition to or instead of termination pursuant to s 314 BGB—there may be a right to withdraw pursuant to s 323 BGB. In particular, some authors argue that a right to withdraw may exist where the arbitral proceedings have not yet commenced and the other party is in default with its obligations under the arbitration agreement.²⁷⁷ We are skeptical of this view. An arbitration agreement is not necessarily a synallagmatic agreement in the sense of s 323 BGB (gegenseitiger Vertrag), like for instance a purchase agreement, where one party promises to deliver a certain good against payment of a certain price.²⁷⁸ With regard to an arbitration agreement, it would strike us as odd to say that one party is obliged to appoint an arbitrator in order to “obtain” the appointment of the second arbitrator from the other party. Also, from a practical point of view, it would be highly undesirable to have collateral disputes among the parties in the early stages of the main dispute as to whether one party (i) has defaulted on certain obligations resulting from the arbitration agreement, and (ii) whether such obligations were synallagmatic ones justifying the application of s 323 BGB. Instead, the cautious application of s 314 BGB as described above seems to us to be the more persuasive approach.

2.160  The termination of the main contract containing an arbitration clause does not necessarily terminate the arbitration agreement (separability principle, s 1040 para 1 cl 2 ZPO).²⁷⁹ Thus, where a party terminates the main contract, the arbitration clause would generally govern any dispute on the effectiveness of the termination and its consequences. By way of exception, the parties can of course agree not only to terminate the main contract, but also the arbitration agreement. The party invoking such exceptional situation bears the burden of proof.²⁸⁰

2.161  In rare situations, an arbitration agreement may be voidable by one party on the basis of error, deception, or duress. The error, deception, or duress must be specifically related to the arbitration agreement and its conclusion. Error, deception, or duress regarding the conclusion of the main contract will not necessarily suffice due to the separability principle (s 1040 para 1 cl 2 ZPO).²⁸¹

2.162  The parties may agree on conditions and time limits in an arbitration agreement.²⁸² In most cases, this is not advisable. Conditions subsequent and time limits leading to the termination of the arbitration agreement may seem to put welcome pressure on the arbitrators to conduct the proceedings swiftly. However, such strategy may (p. 82) easily backfire where the other party applies delay tactics or the case for whatever reason becomes much more complex and complicated than originally anticipated. Having the arbitration agreement terminate in such a scenario would seem highly unsatisfactory, because the parties would then be left with the choice of restarting the entire process before the state courts.

2.163  This analysis is in line with the rules of arbitral institutions which tend to avoid the consequence of ipso jure invalidity. For instance, the BGH denied an obligatory termination in a case where the arbitrator missed the six-month deadline for the award under the ICC Rules because such an extraordinary result would have required an explicit party agreement.²⁸³ Also, disputes may arise as to whether a condition has in fact happened or a deadline has in fact expired. This may trigger unnecessary and costly litigation parallel to the arbitral proceedings. In addition, it may give a disgruntled party leeway to attempt a challenge against an award that has turned out not to be what a party had hoped for.

2.164  The termination of arbitral proceedings does not necessarily terminate the arbitration agreement, unless the arbitration agreement was concluded for this specific dispute only.²⁸⁴ With regard to arbitration clauses contained in a main contract, this will usually not be the case. Where the arbitration agreement applied only to a specific dispute, termination of the arbitral proceedings, eg by rendering the award, is sufficient for termination of the arbitration agreement. A declaration of enforcement is not necessary, nor is it necessary to wait until the time period for set aside requests has expired. In case there are successful set aside proceedings, s 1059 para 5 ZPO provides that in case of doubt, the arbitration agreement shall be revived with respect to the matter in dispute.²⁸⁵

2.165  In rare situations, an arbitration agreement may terminate because it has become inoperable (s 1032 para 1 ZPO). This may be the case where the parties have agreed on a specific person as arbitrator and such person cannot serve or where the arbitral institution selected by the parties ceases to exist without successor.²⁸⁶ Prior to finding inoperability, all means of contract interpretation, including supplementary interpretation (ergänzende Vertragsauslegung), need to be exhausted.²⁸⁷

2.166  The termination of the office of one of the arbitrators does not terminate the arbitration agreement (unlike under the prior German arbitration law, s 1033 no 1 prior version ZPO). Instead, the arbitrator is to be replaced pursuant to the provisions contained in s 1039 ZPO (see below paras 3.155 et seq.). The replacement occurs in accordance with the same provisions that applied to the appointment of (p. 83) the original arbitrator (s 1039 para 1 cl 2 ZPO), unless the parties agree otherwise (s 1039 para 2 ZPO).

2.167  The opening of insolvency proceedings on the part of one of the parties does not terminate the arbitration agreement. Neither s 115 InsO nor s 113 InsO applies. Section 115 InsO applies only to agreements constituting a mandate (Auftrag), and the arbitration agreement as such is not a mandate, but an agreement sui generis on certain procedural-law relations (see above para 2.12). Likewise, as already stated above (para 2.162), an arbitration agreement is not a synallagmatic agreement in the sense of s 323 BGB and therefore also not in the sense of s 111 InsO. As a consequence, the insolvency administrator (Insolvenzverwalter) has no right to choose whether or not to continue an arbitration agreement, but is generally bound to do so.

2.168  Exceptions exist where the arbitration agreement purports to cover matters that are the exclusive prerogative of the insolvency administrator; regarding these matters, the parties cannot bind him or her (no agreement for the detriment of third parties); for more details see above para 2.130. This is, however, not a matter of termination, but a matter of the proper personal scope of the arbitration agreement.

2.169  Where a shareholder leaves a company, an arbitration agreement in the by-laws of the company will generally continue to govern disputes between the company and its former shareholder, to the extent such disputes arise out of the shareholder relationship (see above para 2.124).²⁸⁸

2.170  While generally with respect to the drafting of the arbitration agreement less is indeed more (paras 2.117 et seq.), we do recommend to include certain further content in any arbitration agreement, specifically the place of arbitration (below paras 2.174 et seq.), the language of the proceedings (below paras 2.178 et seq.), the applicable substantive law (below paras 2.183 et seq.), and the choice of an arbitral institution, or, alternatively, ad hoc arbitration (below paras 2.194 et seq.). Finally, the number of arbitrators should be indicated, an issue which we explore in more detail in paras 3.2 et seq. below.

2.171  Not much text is needed; an example—following the recommendation of the DIS—could be:

All disputes arising in connection with this contract or its validity shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration (DIS) without recourse to the ordinary courts of law. The place of arbitration is Munich, Germany. The number of arbitrators is three. The language (p. 84) of the arbitral proceedings is English. The applicable substantive law is German law (excluding the United Nations Convention on the International Sale of Goods—CISG).

2.172  By contrast, absent specific circumstances, we would be reluctant to recommend much additional content for an arbitration agreement that provides for arbitration seated in Germany. For instance, it is neither necessary nor even useful to provide for rights and obligations of the arbitrators. Instead, the arbitrator agreement is the right place for such provisions.²⁸⁹ Also, the parties cannot—and should not purport to—derogate mandatory principles of the German arbitration law, such as equal treatment and the right to be heard, and the mandatory provisions of the Tenth Book of the ZPO (see above paras 1.31 et seq.).²⁹⁰

2.173  Finally, it is not necessary to make reference to the Tenth Book of the ZPO, because it applies in any event as long as the seat is in Germany.

2.174  Drafters of arbitration agreements in commercial transactions often fail to understand the significance of the place of arbitration. More often than not, practitioners not familiar with the field of arbitration mistake the place of arbitration as the venue for hearings. The legal significance of the place of arbitration is different, though. By selecting the place of arbitration, the parties submit to the arbitration law of that place (lex arbitri), in Germany, for instance, the provisions of the Tenth Book of the ZPO (s 1025 para 1 ZPO). Ordinarily, the arbitration law at the place of arbitration governs such issues as (i) the role of the state courts with regard to arbitral proceedings and (ii) set aside proceedings (for details see below paras 6.156 et seq.). Also, the city designated as the place of arbitration regularly determines which state court has jurisdiction pursuant to s 1062 ZPO.

2.175  Parties may find that certain places of arbitration have arbitration laws with features that they would not necessarily like. For instance, there may be mandatory provisions on the nationality of arbitrators, far-reaching possibilities for state courts to interfere with arbitral proceedings, too broad or too narrow grounds for set aside etc.²⁹¹ Further, the choice may determine a specific time zone which will affect deadlines for acts of procedure.²⁹² Another—and potentially even more important—consequence is that the arbitral award will be deemed to have been rendered in the chosen country, which may raise questions of recognition and enforceability.²⁹³ Even if the national law does not provide any mandatory rules, the parties should consider whether by selecting a particular country as the seat, (p. 85) and thereby increasing the likelihood that one or more arbitrators to be selected in the future may be from that same country, they are thereby making it more or less likely that certain approaches to procedure including the taking of witness and documentary evidence (eg document discovery) may be applied. In practice, in international commercial transactions, the perceived neutrality of a place of arbitration is also often considered crucial,²⁹⁴ even though this aspect is frequently overestimated. From the above, it should be clear that selecting the place of arbitration based primarily on the basis of convenience or even touristic aspects is not advisable.

2.176  In general, and without prejudice to the necessary case-by-case analysis, selecting a German place of arbitration should not have any major drawbacks for the parties, including non-German parties. Germany follows the Model Law, the Tenth Book of the ZPO contains only a few mandatory provisions and gives a high degree of deference to party autonomy. German state courts have limited power to interfere with arbitral proceedings; at the same time, German courts provide necessary and valuable assistance to arbitral tribunals, for instance with respect to taking of evidence (for details see below paras 4.200 et seq.). German law provides for limited grounds for set aside in line with international practice (for details see below paras 6.156 et seq.). Practical considerations, such as travel logistics, the availability of proper venues, translators, and court reporters certainly do not weigh against a German place for arbitration.

2.177  Where the parties fail to agree on a place of arbitration, under the Tenth Book of the ZPO, it is upon the arbitral tribunal to determine the issue (s 1043 para 1 cl 2 ZPO).²⁹⁵ The arbitral tribunal has broad discretion but shall consider the suitability under the specific circumstances (s 1043 para 1 cl 3 ZPO). An even broader rule applies in DIS proceedings (s 21.1 DIS Rules) which leaves the decision to the discretion of the arbitral tribunal without any restriction. By contrast, under the ICC, the LCIA, and the Swiss Rules, the arbitral institution decides (art 18.1 ICC Rules, 16.1 LCIA Rules, 16.1 Swiss Rules). For instance, considerations taken into account by the ICC include the arbitration law and its quality at that place, neutrality (ie different from nationalities of the parties), geography (ease of access and convenience to the arbitrators, the parties, and their counsel), and the availability of suitable facilities to conduct hearings.²⁹⁶ Under art 16.2 LCIA Rules, the default seat is London, unless the LCIA Court decides otherwise. Under the Swiss Rules, the decision may also be conferred upon the arbitral tribunal.

2.178  In a purely national context, there may be little to no need to agree on the language of the proceedings. In an international context, ie where the parties come from (p. 86) different countries and/or speak different languages, the situation is different. In such a scenario, it is highly advisable to include in the arbitration clause a sentence that expressly stipulates the language of the proceedings, eg:

The arbitral proceedings shall be conducted in the English language.

2.179  When agreeing on the language—or languages (s 1045 para 1 ZPO)—of the proceedings, various considerations can be relevant. A major aspect may be the language of the documents that will likely serve as evidence in future arbitral proceedings. Where the language of documents is different from the language(s) of the proceedings, the arbitral tribunal may order the submission of translations into the language(s) of the proceedings (s 1045 para 2 ZPO), which may involve a significant amount of time and cost. In addition, parties may consider the native languages of possibly important witnesses. Furthermore, language is an important consideration for the selection of counsel and arbitrators. Also, a party may accede to a certain language in order to obtain some other advantage in the course of the negotiations of an arbitration clause or the overall agreement at issue.

2.180  Where the parties correspond in a certain language, it may often be sensible to conduct arbitral proceedings in the same language. In transnational commercial transactions, in many instances this may mean English. The parties may also consider to allow the introduction of documents in languages other than the language of the proceedings, in particular where the core documents, such as the major agreement, use a different language. The parties thereby avoid the risk of inaccuracies where the exact wording is crucial for the interpretation and witness statements regarding the drafting history may be easier to pin down. On the other hand, this option might do more harm than good where the arbitrators do not speak this language and the interpretation of documents thus becomes significantly harder.

2.181  Where the parties do not agree on a language for the proceedings, but speak different languages, it is upon the arbitral tribunal to determine the language of the proceedings in its discretion. In doing so, the arbitral tribunal may have due regard to the relevant circumstances, such as the language of the underlying contract and of the arbitration agreement.²⁹⁷ Additional considerations may be the language of the pre- and post-contractual communication of the parties as well as the convenience to those involved in the arbitration, including the arbitrators and parties’ counsels.²⁹⁸

2.182  A decision by the arbitral tribunal is of course quite impractical from a party perspective, in particular for the claimant who may be left guessing in which language (p. 87) it should draft its request for arbitration and may find itself in the situation of having to do substantial translation work at a later stage should the tribunal order the proceedings to be conducted in a different language.²⁹⁹