3.1  The constitution of the arbitral tribunal is arguably one of the most important strategic steps in any arbitration. In most cases, the parties and their counsel will tend to believe that picking the right panel is a pre-eminent precondition for achieving the desired outcome of the case. Whether there is an empirical basis for this commonly held belief is open to debate. Arbitrators often act in a way that can be vastly different from what a party may have expected when choosing the person to serve as arbitrator. Notwithstanding these limitations, energy and care should be put into the composition of the tribunal. In the present chapter, we discuss the number of arbitrators (below paras 3.2 et seq.), the procedure for appointing arbitrators (below 3.12 et seq.), the selection of arbitrators (below 3.56 et seq.), the challenge, termination of the office, and replacement of arbitrators (below 3.98 et seq.), as well as the arbitrator agreement, a topic that has more prominence in Germany than in many other jurisdictions (below 3.159 et seq.).

3.2  We first address the legal framework for determining the number of arbitrators before we set forth what we think are the most relevant practical considerations (p. 100) in this context. In ad hoc arbitration pursuant to the Tenth Book of the ZPO, a three-arbitrator panel is the statutory default (s 1034 para 1 ZPO). The German arbitration law thereby follows art 10 Model Law. The ZPO also allows for any other number of arbitrators to be agreed on by the parties, including, of course, a sole arbitrator. The same applies for arbitral proceedings under the DIS Rules (s 3 DIS Rules). By contrast, art 12.2 ICC Rules provides for the sole arbitrator as the default in the absence of a party agreement stipulating another number of arbitrators or a finding by the ICC Court “that the dispute is such as to warrant the appointment of three arbitrators.”¹ Thus, for practical purposes, most often the parties will face the choice between a panel of three arbitrators (below paras 3.3 et seq.) and a sole arbitrator (below paras 3.9 et seq.). While other options exist, they are rare in practice (below para 3.11).

3.3  In practice, in arbitral proceedings seated in Germany or having otherwise a significant German nexus, the parties frequently choose a panel of three arbitrators, except for situations that, from an ex ante perspective, do not appear to justify the expense associated with the remuneration of three arbitrators.² In the view of many parties, this has a number of advantages.

3.4  First, it allows for a balanced panel. Each side usually gets to appoint an arbitrator, and the two party-appointed arbitrators, in coordination with the parties, usually determine the chairman of the tribunal. Even though party-appointed arbitrators must be just as neutral as the chairman, from a psychological point of view, many parties still tend to gain comfort from the fact that a person that they have chosen sits on the tribunal and has an opportunity to make heard the arguments and positions put forward by the appointing party.

3.5  Second, the quality of the tribunal’s decisions tends to be increased by a three-person panel, as opposed to a situation with a sole arbitrator. This is particularly true where a dispute raises issues touching upon diverse factual and legal areas. For instance, a post-M&A dispute may require knowledge of M&A processes and market standards regarding specific types of contractual provisions on purchase price, closing mechanisms, representations and warranties, covenants etc. At the same time, it may raise complex issues of statutory remedies, fraud, and computation of damages. A construction case may require a specific understanding of certain types of construction defects. In such scenarios, the parties may find that a (p. 101) tribunal composed of arbitrators with a combination of skills is best positioned to solve their dispute.

3.6  Third, a three-person panel obviously avoids tied votes, as opposed to the (rare) instances where there are panels with an even number of arbitrators.

3.7  It goes without saying that the chairman of a three-person tribunal has to be impartial and independent. Under the German arbitration law, when it comes to decisions of the tribunal, his vote carries the same weight as the vote of the party-appointed arbitrators (s 1052 para 1 ZPO); unlike under some institutional rules, the Tenth Book of the ZPO does not give the chairman a casting vote, unless the parties agree otherwise. In terms of substance, the chairman can thus be described as primus inter pares.³

3.8  From a procedural point of view, however, his role has more weight than that of the party-appointed arbitrators. In practice, the chairman usually conducts the correspondence with the parties, administers advances, organizes meetings, leads hearings, and drafts the award.⁴ This also means that he or she usually has more administrative tasks than the party-appointed arbitrators and consequently a higher need for administrative support, eg from a secretary or an assistant. For the foregoing reasons, the chairman usually receives a higher remuneration than the party-appointed arbitrators. The fee scales of arbitral institutions take account of that.⁵ The parties or the other members of the tribunal can authorize the chairman to decide individual procedural issues alone (s 1052 para 3 ZPO), which is generally a good idea in practice in order to accelerate the proceedings.

3.9  A sole arbitrator may be the more appropriate option where the amount in dispute is limited and/or the issues to be addressed are less complex and diverse. In such situations, it may even be a close call whether to opt for arbitration at all or to go for state court proceedings where the other advantages of arbitration—such as enforcement abroad and confidentiality—are less important to the parties. A reported downside of sole arbitrator awards is the fact that some insurance companies do not always seem to accept them.⁶

(p. 102) 3.10  Some institutions and commentators have sought to provide rules of thumb as to when arbitration with a three-person panel (as opposed to a sole arbitrator) may be the preferred option, in particular with a view to amounts in dispute. For instance, the ICC tends to appoint a sole arbitrator in cases where the amount in dispute is lower than US$5 million.⁷ The Swiss Rules apply a roughly comparable threshold.⁸ While these may be useful rules of thumb for arbitral institutions who decide on the number of arbitrators after a specific dispute has arisen, caution should be applied with regard to such numeric thresholds where parties seek to agree on an arbitration agreement. Again, where a specific dispute has already arisen, this may be a useful approach. In situations, however, where parties negotiate a main agreement and seek to agree on an arbitration clause, these types of numbers may not be helpful guidance due to the simple fact that the parties at that point will most likely not know what will be the amount in dispute once a controversy arises. There may certainly be cases where it is highly unlikely that there will ever be a dispute under a given arbitration clause that exceeds the thresholds mentioned above. In such a case, a sole arbitrator may well be considered. Where the future amount in dispute is less clear, or there is a clear potential for counterclaims or set-off, more weight should be given to the complexity of the issues that are likely to arise. If in doubt, we would tend to favor a three-person panel, which seems to be in line with the thinking of the German legislator and the DIS, as both provide for the three-person panel as the default rule. Alternatively, it has been suggested that the parties can defer the decision by using a clause similar to the one recommended by the ICC which provides that all disputes should be decided “by one or more arbitrators.”⁹ In an ad hoc scenario, there needs to be a default rule in case the parties cannot agree once the arbitral tribunal needs to be constituted (such as the three-person panel default rule under s 1034 para 1 cl 2 ZPO).

3.11  Other options include any other conceivable number of arbitrators, eg two, four, five, and so on. Absent specific circumstances, we would recommend to be reluctant with these types of options.¹⁰ Any even number of arbitrators has the inherent risk of a tied vote. In order to come to a decision at all, there would need to be a chairman who has a casting vote. Panels of five arbitrators (or even more) seem quite unwieldy and expensive, and there should rarely be a compelling need for them.

3.12  We first address the legal framework for the appointment of arbitrators and the constitution of the arbitral tribunal under the Tenth Book of the ZPO (below paras 3.13 et seq.). Thereafter, we discuss the constitution process under both the DIS and the ICC Rules (below paras 3.37 et seq. and 3.48 et seq.).

3.13  In most cases, the arbitration agreement does not yet specify who the arbitrators should be. The law would allow naming the arbitrators already in the arbitration agreement.¹¹ Nevertheless, it is often not recommendable to do so.¹² This is particularly true with respect to arbitration clauses which are contained in a main contract and which are usually concluded a long time before a dispute arises. Thus, it is generally hard to anticipate what the precise characteristics of a dispute will be and consequently what the qualifications of an arbitrator should be. In addition, a person chosen in an arbitration clause may no longer be available once a dispute arises or may be barred from acting due to an intervening lack of neutrality. In such situations, difficult questions may arise as to how such a gap on the tribunal should be dealt with. Does it mean that the arbitration agreement is incapable of being performed and thus state court litigation is proper?¹³ Or can the arbitrator in question be replaced pursuant to the rules governing replacement in general (s 1039 ZPO; see below paras 3.155 et seq.)?¹⁴ The answer may turn on issues of interpretation and the specifics of the case, and the parties may have different views thereon. Thus, they may find themselves in costly and time-consuming litigation before the arbitral proceedings can even start. At a minimum, where the parties name arbitrators in an arbitration agreement, they should also agree on clear rules as to what happens if one of these persons is not available to serve as arbitrator when the dispute arises.

3.14  In the absence of a predetermined arbitral tribunal, the arbitrators need to be appointed in connection with the commencement of arbitral proceedings. Below, we describe the statutory mechanism of the Tenth Book of the ZPO and later compare it to the mechanisms provided for by the DIS and the ICC.

(p. 104) 3.15  For German ad hoc proceedings, s 1035 ZPO provides the statutory framework governing the appointment of arbitrators, which largely corresponds to art 11 Model Law. The starting point is party autonomy: the parties are free to agree on a procedure for the appointment of arbitrators (s 1035 para 1 ZPO). In the absence of an agreement of the parties, the provisions contained in s 1035 paras 2–5 ZPO apply. These provisions distinguish between a sole arbitrator scenario on the one hand and a panel of three arbitrators on the other.¹⁵ Regarding a sole arbitrator situation, it is first upon the parties to agree on the person of the sole arbitrator. If they fail to reach an agreement, each party can ask the competent higher regional court (s 1062 ZPO) to make the appointment (s 1035 para 3 cl 1 ZPO).

3.16  Where a three-person panel needs to be appointed, each party has the right to appoint one arbitrator (s 1035 para 3 cl 2 ZPO). A party is bound by its appointment as soon as the other party has received notice thereon (s 1035 para 2 ZPO). An appointee, and in fact a person that is approached in connection with his or her possible appointment, shall disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence (s 1036 para 1 cl 1 ZPO; for details see below paras 3.128 et seq.). Where a party fails to appoint an arbitrator within one month after being requested to do so, the other party can ask the competent higher regional court to make the appointment (s 1035 para 3 cl 3, s 1062 ZPO). The two party-appointed arbitrators have to appoint the chairman of the tribunal (s 1035 para 3 cl 2 ZPO). In case they cannot agree on a chairman within one month after their appointment, each party may again ask the competent higher regional court to make the appointment (s 1035 para 3 cl 3 ZPO).

3.17  Where the parties have agreed on certain procedures regarding the appointment of arbitrators and one party does not comply therewith, or the parties cannot find an agreement on the basis of the agreed procedure, each party may ask the competent higher regional court to order the necessary measures in order to achieve a constitution of the arbitral tribunal (s 1035 para 4 ZPO). The same applies where the parties have agreed that a third person shall have a role in the appointment of arbitrators, and such third person does not properly perform his or her task.

3.18  Finally, s 1035 para 5 ZPO contains guidelines for all of the above scenarios in which the competent higher regional court is called to make an arbitrator appointment. First, the court needs to take into account all prerequisites for the person of an arbitrator agreed by the parties (s 1035 para 5 cl 1 ZPO). Second, the court needs to make sure it appoints a person that is independent and impartial (s 1035 (p. 105) para 5 cl 1 ZPO). Third, as far as the appointment of a sole arbitrator or the chairman of a three-person tribunal is concerned, the court needs to consider whether it is appropriate to appoint a person that has a nationality different from the parties (s 1035 para 5 cl 2 ZPO). Where the court disregards agreed prerequisites or the need for independence and impartiality, a court-appointed arbitrator is subject to challenge and replacement; by contrast, considerations of nationality are within the discretion of the court and cannot be the basis for challenging a court-appointed arbitrator.¹⁶

3.19  Pursuant to s 1035 para 1 ZPO, the parties are free to regulate the appointment process via party agreement. Appointment generally means the determination of the person of the arbitrator and the notification of either the appointee or the other party thereof (s 1035 para 2 ZPO).¹⁷ As long as the other party has not been notified, and in the absence of a party agreement to the contrary, the appointing party is not yet bound to its appointment (s 1035 para 2 ZPO). Pursuant to a view expressed in German legal literature, technically the consent of the appointee would not be necessary to effect the appointment as such.¹⁸ This may sound surprising as a legal theory; anyway, in practice, it is of course highly advisable to ask a potential appointee in advance.¹⁹ If he or she declines to accept the appointment, there will be no arbitrator agreement and another person needs to be appointed. Caution is necessary where the candidate accepts under certain conditions like government approval pursuant to s 40 para 1 German Judiciary Act (DRiG, see paras 3.83 et seq.). Given that the appointment is a procedural act, only legal conditions are permitted.²⁰

3.20  An agreement of the parties on the process for appointing arbitrators does not need to follow the form requirements of s 1031 ZPO, unless the agreed appointment process is part and parcel of the arbitration agreement (see paras 2.70 et seq.).²¹ There are some limits as to what the parties can agree on, and such limits follow from concepts inherent to arbitration. For instance, the parties cannot waive the requirement that an arbitrator needs to be a natural person with full legal capacity (volle Geschäftsfähigkeit).²² In addition, under German law, and in fact as a matter (p. 106) of German constitutional law and the German ordre public, an arbitrator must be impartial and independent.²³ The concept of a partial arbitrator is thus not capable of being agreed by the parties in advance for arbitrations seated in Germany.²⁴ Likewise, the parties cannot agree that a party may appoint him- or herself as an arbitrator.²⁵

3.21  Examples of possible party-agreed procedures include lists of candidates where each party has a number of strikes or where a decision is taken by lot, or a combination thereof.²⁶ For instance, the AAA usually uses a list procedure that the parties can adopt or modify. Also, the parties can agree that a third person or institution shall make the appointment. If they do so, they need to make sure that they unequivocally designate the “appointing authority,” such as the president of a certain court, the president of a certain chamber of commerce or an arbitral institution (without choosing institutional arbitration).²⁷ Absent a specific agreement with the parties, such institution is of course not legally bound to effect appointments (kein Vertrag zulasten Dritter). Thus, the parties are well advised to check in advance whether the institution they wish to designate, eg in the arbitration agreement, is actually prepared to make appointments.

3.22  As mentioned above, where a party-agreed mechanism for some reason does not work, s 1035 para 4 ZPO allows each party to ask the competent higher regional court to “order the necessary measures,” in particular to make the appointment.²⁸ This may happen, for instance, where a third party tasked with making an arbitrator appointment for some reason fails to act (as opposed to instances of improper performance).²⁹ The same applies where a party fails to act or otherwise violates an agreed procedure.³⁰ Thus, the other party need not—and in fact cannot—sue the non-complying party (or third person) for performance of the party agreement. Instead, s 1035 para 4 ZPO provides for an easier solution, such that a court action asking for performance of the party agreement would be impermissible (unzulässig) for lack of a genuine need to involve the court (fehlendes Rechtsschutzbedürfnis).³¹

3.23  Under German law, the three-person panel is the statutory default (s 1034 para 1 cl 2 ZPO). Thus, the appointment process for a three-person panel contained in s 1035 para 3 cl 2-3 ZPO is of particular practical importance.³² As mentioned above, German law provides for a two-step approach. In the first step, each party needs to appoint one arbitrator within one month after being requested to do so by the other party.³³ German law contains no further details on such request. It may be made in any way, shape, or form. For evidence purposes, it is of course prudent to make the request in writing and to generate proof that the other side has received the request (eg by way of a letter with return receipt requested).³⁴ The period cannot be extended except by party agreement. In the second step, the two party-appointed arbitrators need to agree on the chairman. Again, a one-month period applies, and it is to be calculated in the same way as in step one.

3.24  In order for the court to be able to appoint an arbitrator, a party request to the court is necessary. Pursuant to the clear wording of s 1035 para 3 cl 3 ZPO, only a party has the right to make such request. The party-appointed arbitrators may not do so, nor are they allowed to transfer the appointing authority to a third party.³⁵

3.25  The court is entitled to do a prima facie analysis on the validity of the arbitration agreement. It may reject the appointment of an arbitrator where the arbitration agreement is evidently invalid.³⁶ In such a scenario, when viewed properly, the requesting party already lacks the need to bring court action (fehlendes Rechtsschutzbedürfnis).³⁷ By contrast, the court is obviously not entitled to reject an application for the appointment of an arbitrator because it considers the claim to be without merits.³⁸

3.26  Under German law, it is unclear what happens if a party misses the one-month deadline, the other party files an application with the competent higher regional (p. 108) court to make the appointment, and prior to the decision of the higher regional court, the defaulting party finally makes an appointment. The same question arises where the party-appointed arbitrators fail to reach an agreement within the one-month period, a party files for court appointment and prior to the court’s decision, the party-appointed arbitrators reach an agreement on the chairman. There are three main views on this topic. The first and strictest view is that the parties and the party-appointed arbitrators lose the appointment right once the one-month period has expired. In particular, this view has been expressed by a number of German higher regional courts.³⁹ A second view is that the appointment right terminates as soon as one party has filed an application with the court or such application has been served on the other side. This view is supported by the legislative materials to the Tenth Book, a number of German higher regional courts, and several commentators.⁴⁰ Finally, pursuant to the third view, the appointment right continues to exist. If an appointment is made while court proceedings are already pending, the court proceedings need to be terminated, and the appointment made by the respective party (or the appointment agreed by the party-appointed arbitrators) prevails. This view, too, is held by several higher regional courts and a number of commentators.⁴¹

3.27  In our opinion, the third view is the most persuasive. Arbitration is a creature of party autonomy. Party choice prevails. Assistance by the courts at the appointment stage should be limited to situations where without such assistance, the arbitral process would be stalled. Where court action ultimately is not necessary, the court should refrain from acting. The party who made a court request that later becomes unnecessary is sufficiently protected by the fact that it should be awarded its costs associated with instituting the court proceedings.⁴² In any event, the practical differences between the three opinions outlined above should be limited. Where an appointment occurs while court proceedings are already pending, the higher regional court may simply affirm such appointment (provided it meets the required criteria under s 1035 para 5 ZPO, ie in terms of party-agreed prerequisites, independence, impartiality, and discretionary considerations of nationality).

3.28  In the absence of a party agreement on appointment procedures, in case of a sole arbitrator, the parties first need to try and reach an agreement on the person to be appointed. If they fail to do so, each party can ask the competent higher regional court to make the appointment (s 1035 para 3 cl 1 ZPO). The law does not contain details as to what efforts the parties need to make to reach an agreement and what, if any, deadlines need to expire before an application to the court can be made. At a minimum, the party making an application to the court needs to be able to demonstrate that there has been some effort to agree on a candidate, and that such effort was without success. For instance, the requesting party can point to the fact that it has proposed a person to the other party, and the other party has either rejected the candidate or failed to react. There are different views as to whether the requesting party has to comply with a certain waiting period before it can resort to the state court; some commentators propose a one month-period in analogy to s 1035 para 3 cl 3 ZPO,⁴³ others are more generous and allow a more or less immediate application to the state court, provided that the applicant in such application proposes a candidate which the other side can still accept.⁴⁴ We find the first view more persuasive, as it is more in line with the fundamental statutory concept that support by state courts is a means of last resort. Also, for practical purposes, it would seem prudent to first allow some time for finding party consensus.

3.29  Again, the court can reject the application where it finds that the arbitration agreement is evidently invalid, but not for lack of merits of the case (see para 3.25).

3.30  German law does not expressly address the constitution of the arbitral tribunal in case of multi-party arbitration (for further issues raised by multi-party arbitration cases see paras 4.207 et seq.). Obviously, no issues arise in the sole arbitrator scenario, because in this case, all parties need to agree on the sole arbitrator, or, failing that, the sole arbitrator is appointed by the competent higher regional court upon request by a party.⁴⁵ By contrast, for the statutory default of a three-person panel, German law is silent as to how such a tribunal ought to be constituted where there are more than two parties. Possibly, and depending on the nature of the dispute at hand, the various parties can be and in fact are divided into two “camps.” Where each “camp” is able to agree on a party-appointed arbitrator, the further statutory appointment mechanism (appointment of the chairman by the party-appointed arbitrators) works.

(p. 110) 3.31  It is less clear what happens where one “camp” cannot agree on a party-appointed arbitrator. The Tenth Book of the ZPO does not specifically address this issue. Based on the Dutco decision of the French Cour de Cassation,⁴⁶ there is a strong view in arbitration practice—both domestically and internationally—that in such a case, the court (or an arbitral institution, where applicable) should appoint both arbitrators originally to be appointed by the parties, in order not to give one side an unfair advantage or disadvantage in the composition of the arbitral tribunal. The two arbitrators appointed by the court would then appoint the chairman. If they fail to do so, again the court can be asked to step in. Institutional rules usually contain specific provisions addressing multi-party situations which often reflect this or a similar approach (s 13.2 DIS Rules, art 12.8 ICC Rules; see below paras 3.45 and 3.53). In our view, for reasons of fairness and equality and in analogous application of s 1034 para 2 ZPO, this should also be the approach to be taken by the competent higher regional court in German ad hoc arbitration under the Tenth Book of the ZPO.⁴⁷ The alternative would be to declare the arbitration agreement incapable of being performed where the parties in multi-party situations cannot agree on the appointment of the arbitral tribunal,⁴⁸ which, however, strikes us to be much less in line with the parties’ fundamental will to submit to arbitration than the majority view expressed above that grants the state court the power to make the necessary appointments.

3.32  As already indicated above (para 3.22), where the parties or the party-appointed arbitrators cannot agree on an appointment, or where a party-agreed appointment procedure fails, s 1035 ZPO allows for an application to be made to the competent higher regional court to make the appointment or to otherwise take the necessary measures to effect a party-agreed mechanism. The proper venue lies with the higher regional court agreed by the parties, or, in the absence of party agreement, the higher regional court located in the district in which the arbitration is seated (s 1062 para 1 ZPO).

3.33  The higher regional court has significant discretion as to the conduct of the proceedings. It is not required to hold an oral hearing.⁴⁹ Also, it does not need to hear the person it considers to appoint. Sometimes, eg in arbitrations of very significant importance, courts do conduct oral hearings. It is even possible and occasionally happens in practice that the court invites several candidates to the hearing, (p. 111) questions them—possibly in the presence of the parties—and then makes its appointment decision. In making its decision, the court has wide discretion, too. It is merely bound by the parameters set forth in s 1035 para 5 ZPO, ie compliance with agreed prerequisites and appointment of a neutral person. Other than that, it is up to the court to determine who is a suitable person. German law does not impose strict nationality rules in international cases. Section 1035 para 5 ZPO merely suggests that the court takes nationality into account, without prescribing any particular outcome.

3.34  The court’s decision is made by way of an order (Beschluss). Once the competent higher regional court has made an appointment, its decision is final and binding, and not subject to any further appeal to the BGH (s 1065 para 1 cl 2, s 1062 para 1 no 1 ZPO).⁵⁰ This is in line with art 11 para 5 cl 1 Model Law and helps accelerate the appointment process.⁵¹

3.35  Where an arbitration agreement gives an unfair advantage to one party in connection with the composition of the arbitral tribunal, s 1034 para 2 cl 1 ZPO allows the prejudiced party to apply to the competent court to make a different and balanced appointment of arbitrator(s). This provision is without example in the Model Law and thus a true specialty of the German arbitration law. The higher regional court agreed by the parties or, in the absence of party agreement, of the district in which the seat of arbitration is located has jurisdiction (s 1062 para 1 no 1 ZPO). The petition must be made within two weeks after the requesting party has learned of the composition of the arbitral tribunal (s 1034 para 2 cl 2 ZPO). The arbitral proceedings may be continued (and concluded) pending the decision by the state court (s 1034 para 2 cl 3 ZPO).

3.36  An unfair advantage within the meaning of s 1034 para 2 ZPO means that one party has more influence on the constitution of the arbitral tribunal than the other. This is the case, for instance, where one party gets to appoint the entire tribunal or two out of three arbitrators, or where only one party is a member of a trade association which appoints the tribunal.⁵² German courts have held that s 1034 para 2 ZPO also applies where the parties have agreed that the right to appoint an arbitrator switches to the other party where one party fails to appoint an arbitrator on time.⁵³ Section 1034 para 2 ZPO does not require proof that the party to whose (p. 112) advantage the agreed mechanism works actually tried to use it in a way that would increase its chances of winning the case. Instead, the objective fact that an unfair imbalance exists is sufficient to trigger the right of the prejudiced party to request a balanced appointment by the competent state court.⁵⁴ As long as only the composition of the arbitral tribunal is concerned, s 1034 para 2 ZPO is lex specialis and ss 138, 307 et seq. BGB do not apply.⁵⁵ Thus, an arbitration agreement that prejudices one party as defined in s 1034 para 2 ZPO is not invalid. Instead, the state court has authority, upon request of the prejudiced party, to take corrective action and to let the arbitration proceed. Thereby, the arbitration agreement is corrected such that equal treatment of the parties is assured.⁵⁶ This legislative concept should be in line with the intentions of the parties, at least as far as most cases are concerned. The parties do want arbitration; thus, invalidity of the arbitration agreement would be an inappropriate remedy.

3.37  The appointment process under the DIS Rules is in some respects comparable, in other respects however somewhat different and more elaborate compared to the rules laid down in the Tenth Book of the ZPO. Whilst the Tenth Book of the ZPO uses a two-step process for determining an arbitrator, consisting of the appointment by a party (or the court) and the acceptance by the appointee, the DIS Rules follow a three-step approach: step one is the “nomination” of an arbitrator by the parties or the DIS Appointing Committee (ss 6.2 para 5, 6.3 para 3, 12–14 DIS Rules), step two is the acceptance by the nominee (s 16 DIS Rules) which is contingent on the third step and step three is the confirmation of the arbitrator by the DIS Secretary General or the DIS Appointing Committee (s 17 DIS Rules).

3.38  The default rule, unless otherwise agreed by the parties, is the three-person panel (s 3 DIS Rules; for details see below paras 3.41 et seq.). Pursuant to s 2.1 DIS Rules, “the parties are free in their selection and nomination of arbitrators.” A party is bound by its selection of an arbitrator once the nomination has been received by the DIS Secretariat (s 12.1 cl 5 DIS Rules), which is similar to s 1035 para 2 ZPO (binding effect once the other party has received the nomination), but takes into account that an arbitral institution exists.

3.39  The chairman or the sole arbitrator needs to be a lawyer, unless otherwise agreed by the parties (s 2.2 DIS Rules). “Lawyer” does not necessarily mean a (p. 113) German-qualified lawyer; thus, the qualification to take office as a judge (so-called Befähigung zum Richteramt) is not required. A foreign law degree is sufficient. It is not necessary that the person is admitted to practice as an attorney-at-law in a foreign jurisdiction.⁵⁷ “Lawyer” includes persons who have passed only the first state examination in Germany or who have obtained the degree of a diploma in law in Germany (Diplomjurist).⁵⁸ Whether it is practicable and wise to nominate someone as a chairman or sole arbitrator who does not have full qualification to practice law in at least one jurisdiction, is of course another question that is primarily left to the decision of the parties.

3.40  For a three-person panel, the appointment process is as follows. The claimant needs to nominate an arbitrator in its statement of claim (s 6.2 para 5 DIS Rules). Where the claimant fails to do so, its statement of claim is deemed incomplete, and the DIS Secretariat will request the claimant to supplement the statement of claim accordingly; the DIS Secretariat will also set a time limit for compliance (s 6.4 DIS Rules). Where the claimant fails to comply, the proceedings are terminated without prejudice, ie the claimant may reintroduce the same claim later on in new arbitral proceedings (s 6.4 DIS Rules). Apart from that, there is an ongoing discussion regarding the further consequences of this “termination.” While some commentators argue that only a proceeding which has commenced can be terminated,⁵⁹ others suggest that the expression is misleading and the claim is to be treated as never filed.⁶⁰ This difference is important for example in light of the statute of limitations and its suspension pursuant to s 204 para 1 no 11 BGB. In our view the second approach is more persuasive. Whilst it is true that under German law even an inadmissible claim is sufficient to suspend the statute of limitations,⁶¹ it is strictly required that the claim is at least served upon the defendant. The DIS Secretariat may make delivery of the statement of claim to the respondent contingent on having received the required documents and payment (s 8 DIS Rules). In addition, s 6.4 para 2 DIS Rules clearly provides that commencement of the arbitral proceedings is not affected as long as supplementation is made within the set time limit.

3.41  Upon delivery of the statement of claim to the respondent, the DIS Secretariat asks the respondent to nominate an arbitrator within 30 days after receipt of (p. 114) the statement of claim by the respondent (s 12.1 cl 1 and 2 DIS Rules). If the respondent fails to comply therewith, the claimant may ask the DIS Appointing Committee to make the nomination (s 12.1 cl 2 DIS Rules). This is similar to the process under s 1035 para 3 cl 3 ZPO, where the claimant can request appointment by the state court if the respondent fails to appoint “its” arbitrator. Upon request of the respondent and after hearing the claimant, the DIS Secretariat may moderately extend the 30-day time limit in its discretion (s 12.1 cl 3 DIS Rules). If the claimant agrees—which is typically the case during settlement negotiations—the extension will be granted.⁶² Otherwise, a party will have to put forward plausible reasons, such as the need to align with a foreign client, travel commitments or delay of the nomination itself due to an objection of the claimant pursuant to s 17 para 1 DIS Rules.⁶³ After the expiry of the 30-day period (or an extended period), the respondent can still make the nomination, as long as the claimant has not yet filed a request for nomination with the DIS Appointing Committee (s 12.1 cl 4 DIS Rules). Thus, the DIS Rules follow the second approach explained above (para 3.26).

3.42  Once the respondent has nominated its arbitrator, or the nomination has been effected by the DIS Appointing Committee pursuant to s 12.1 cl 2—4 DIS Rules, the DIS Secretariat calls upon the two arbitrators to nominate the chairman and to notify the DIS Secretariat thereof without undue delay (s 12.2 cl 1 DIS Rules). The DIS Rules expressly address and allow for communication between the arbitrators and the parties on the selection of the chairman; pursuant to s 12.2 cl 2 DIS Rules, the arbitrators “should take into account concurring proposals by the parties.” This means that on the one hand, each arbitrator may communicate on the person of the chairman with the party by which he or she has been appointed. In fact it is not uncommon for parties to address possible chairman candidates already in the selection process for the party-appointed arbitrator. On the other hand, the above provision of the DIS Rules makes clear that the party-appointed arbitrators are not bound by proposals from the parties even where the parties are in complete agreement on the person of the chairman. In practice, in such a situation, it would however be quite unusual for party-appointed arbitrators to select a different chairman. In any event, in such a situation the parties could agree—and could indeed be deemed to have agreed—to derogate the power of the party-appointed arbitrators to appoint the chairman and to substitute such power with a party-agreed appointment of the chairman.

3.43  The two arbitrators generally have 30 days to agree on a chairman and to inform the DIS Secretariat accordingly (s 12.2 cl 2 DIS Rules). Where the DIS Secretariat does not receive a nomination of the chairman in time, each party may request that (p. 115) the DIS Appointing Committee nominates the chairman (s 12.2 cl 2 DIS Rules). Contrary to s 12.1 cl 3 DIS Rules the provision does not foresee an extension of the period. To avoid any delay, the DIS informs the party-appointed arbitrators shortly after their nomination about the time limit and that afterwards a party will be able to request nomination by the DIS Appointing Committee. Where the two co-arbitrators are still not able to agree on a chairman within the 30 days, it is up to them to prevent the parties from submitting such a request.⁶⁴ Again, a belated nomination is still considered timely if it is received by the DIS Secretariat before one of the parties has filed a request to the DIS Appointing Committee (s 12.2 cl 4 DIS Rules). In order for the constitution of the arbitral tribunal to be completed, the acceptance and confirmation phase of the process need to be completed (ss 16, 17 DIS Rules, see paras 3.46 et seq.).

3.44  In case of a sole arbitrator, the claimant’s statement of claim should contain proposals for the nomination of the sole arbitrator (s 6.3 para 3 DIS Rules). If the claimant fails to do so, the DIS Secretariat may again request supplementation (s 6.4 DIS Rules). The DIS Secretariat delivers the statement of claim to the respondent (s 8 cl 1 DIS Rules), usually after payment of the DIS administration fee and a provisional advance on the arbitrator’s costs (ss 8 cl 2, 7 DIS Rules). Once the respondent has received the statement of claim, the parties have 30 days to agree on a sole arbitrator; if they fail to agree on time, each party may request nomination of the sole arbitrator by the DIS Appointing Committee (s 14 DIS Rules). Acceptance and confirmation again follow the provisions laid down in ss 16, 17 DIS Rules (see below paras 3.46 et seq.).

3.45  For multi-party situations, s 13.1 DIS Rules provides that multiple claimants need to jointly nominate one arbitrator in the statement of claim, unless the parties agree otherwise. Where there are multiple respondents named in the statement of claim, they, too, need to jointly nominate one arbitrator for their side within 30 days after receipt of the statement of claim (s 13.2 cl 1 DIS Rules). The 30-day period is calculated by reference to the time of receipt by the respondent who last received the statement of claim (s 13.2 cl 2 DIS Rules). The 30-day period can be extended by the DIS Secretariat (s 13.2 cl 3 DIS Rules), and this frequently happens due to the complexity involved with several parties on one side. If the respondents cannot agree on an arbitrator, the DIS Appointing Committee consults with the parties and then nominates both arbitrators originally appointed by the parties, thereby setting aside the nomination already made by the claimant(s) (s 13.2 para 2 cl 4 and 5 DIS Rules). The DIS appointees then need to agree on the chairman (p. 116) pursuant to the general rules (ss 13.2 cls 5 and 6, 12.2 DIS Rules). Acceptance and confirmation again follow the provisions of ss 16, 17 DIS Rules (see below paras 3.46 et seq.).

3.46  Once an arbitrator is nominated, the proceedings enter the acceptance stage (s 16 DIS Rules). Section 16 DIS Rules applies to three-person tribunals, sole arbitrator situations, and multi-party arbitration. Without undue delay after his or her nomination, an arbitrator needs to notify the DIS Secretariat whether he or she accepts the nomination, and if yes, whether he or she fulfills the necessary qualifications agreed upon by the parties (s 16.1 cl 2 DIS Rules). The nominee must “disclose all circumstances which are likely to give rise to doubts as to his impartiality or independence” (s 16.1 cl 2 DIS Rules; for details see paras 3.128 et seq.). The DIS Secretariat informs the parties of the declarations received from a nominee (s 16.1 cl 3 DIS Rules). Where a nominee’s declaration contains circumstances that “are likely to give rise to doubts” regarding impartiality, independence, or agreed qualifications, the DIS Secretariat gives the parties an opportunity to comment within a certain deadline (s 16.2 DIS Rules).

3.47  The final step in the appointment process and thus the constitution of the arbitral tribunal is the confirmation of the nominees by the DIS Secretary General (s 17 DIS Rules). The DIS Secretary General “may confirm” a nominee once the DIS Secretariat has received the nominee’s declaration of acceptance pursuant to s 16 DIS Rules, and there are no circumstances likely to raise doubts regarding impartiality, independence, or agreed qualifications (s 17.1 DIS Rules). “May” in a German legal context usually means discretion. Neither the parties nor a nominee thus have an explicit right to request or enforce his or her confirmation. On the other hand, s 17.2 DIS Rules provides for a special procedure where not all requirements of s 17.1 DIS Rules are fulfilled. Thus, it is the prevailing view and general practice, that there is no room for a refusal if all the prerequisites are met.⁶⁵ Once all arbitrators are confirmed, the arbitral tribunal is constituted (s 17.3 cl 1 DIS Rules), and the DIS Secretariat informs the parties accordingly (s 17.3 cl 2 DIS Rules).

3.48  Like the DIS Rules, the ICC Rules follow a three-step approach consisting of nomination, acceptance, and confirmation (arts 11–13 ICC Rules). As will be seen from the explanations provided below, generally speaking, the ICC Court has a stronger role in the constitution of the arbitral tribunal than the DIS. The ICC (p. 117) Rules, like the Tenth Book of the ZPO and the DIS Rules, only allow for impartial and independent arbitrators (art 11.1 ICC Rules).

3.49  The default provision under the ICC Rules is the sole arbitrator, unless the parties have agreed otherwise or it appears to the ICC Court that the dispute “is such as to warrant the appointment of three arbitrators” (art 12.2 cl 1 ICC Rules). This may be the case due to the factual and legal complexity and the economic value of the case, or its political sensitivity.⁶⁶ As mentioned above (para 3.10), the US$ 5 million threshold is a rule of thumb applied by the ICC.

3.50  In the case of a sole arbitrator, the parties have the opportunity to agree on the nomination within 30 days after receipt of claimant’s request for arbitration by the other party. The ICC Secretariat may extend the time limit. If the parties fail to agree, the sole arbitrator will be appointed by the ICC Court (art 12.3 ICC Rules).

3.51  Where the parties have agreed on a three-person panel, the claimant shall nominate an arbitrator in the request for arbitration, and the respondent shall nominate one in its answer (art 12.4 cl 1 ICC Rules). Where a party fails to make a nomination, the ICC Court will make the appointment instead (art 12.4 cl 2 ICC Rules). As a default rule, the ICC Court also appoints the chairman (which the ICC Rules call the “president” of the arbitral tribunal), art 12.5 cl 1 ICC Rules. The parties may, however, agree to a different procedure, such as a joint nomination by the two party-appointed arbitrators. In such case, the chairman will need to be confirmed by the ICC Court pursuant to art 13 ICC Rules. The chairman needs to be appointed within 30 days from the confirmation or appointment of the party-appointed arbitrators (art 12.5 cl 2 ICC Rules). The time limit may be modified by party agreement and extended by the ICC Court. If there is no appointment after the time limit expires, the ICC Court will appoint the chairman (art 12.5 cl 2 ICC Rules).

3.52  Where there is no party agreement on the number of arbitrators and the ICC Court decides that there shall be three arbitrators pursuant to art 12.2 cl 1 ICC Rules, an accelerated timeline applies. In this situation, the claimant will be notified of the ICC Court’s decision and then has 15 days to nominate an arbitrator. The respondent, too, has 15 days to make its nomination after receipt of the notification of the nomination made by the claimant (art 12.2 cl 2 ICC Rules). If a party fails to make a nomination, the ICC Court makes the appointment (art 12.2 cl 3 ICC Rules). Regarding the chairman, the regular provisions contained in art 12.5 ICC Rules apply.

3.53  In multi-party situations and a three-person tribunal, the claimants need to jointly nominate one arbitrator, and the respondents need to jointly nominate one arbitrator, too, both for confirmation (art 12.6 ICC Rules). Where one or both sides cannot agree on a nomination, the ICC Court appoints the entire tribunal and designates one arbitrator as the chairman (art 12.8 ICC Rules). That means that any prior nomination by one or more parties will be obsolete.⁶⁷

3.54  Under art 11.1 cl 1 ICC Rules, a prospective arbitrator nominated by a party for confirmation by the ICC Court or otherwise to be appointed by the ICC Court must sign a “statement of acceptance, availability, impartiality and independence.” He or she must disclose to the ICC Secretariat in writing “any facts or circumstances which might be of such a nature as to call into question the arbitrator’s independence in the eyes of the parties, as well as any circumstances that could give rise to reasonable doubts as to the arbitrator’s impartiality” (art 11.2 cl 2 ICC Rules).

3.55  The final step for the constitution of the arbitral tribunal is the confirmation of an arbitrator nominated by a party (or his or her appointment in the absence of a party nomination). Appointment and confirmation decisions are within the discretion of the ICC Court, or, as the case may be, the ICC Secretary General, taking into account such factors as nationality, residence, other relationships with the countries of origin of the parties and other arbitrators, as well as the arbitrator’s availability and ability to conduct the proceedings in accordance with the ICC Rules (arts 13.1 and 13.2 ICC Rules). In principle, the sole arbitrator or the chairman of a three-person arbitral tribunal shall be of a nationality that is different from the nationality of the parties (art 13.5 cl 1 ICC Rules). The ICC decides on the confirmation or appointment without communicating any reasons; the decision is final, as far as the ICC Rules are concerned (art 11.4 ICC Rules). Nevertheless, mandatory provisions of the Tenth Book of the ZPO still apply, such as, eg, the provisions on the correction of unfairly prejudicial appointments (s 1034 para 2 ZPO).

3.56  When it comes to selecting a specific arbitrator, the parties and their counsel will look at a series of typical selection criteria which we explore one by one (below paras 3.57 et seq.). In this section, we also address considerations regarding certain groups of legal professionals in Germany (below paras 3.79 et seq.). Finally, we turn to the selection process in practice (below paras 3.90 et seq.).

3.57  Below we set forth a series of selection criteria that usually play a significant role in German practice, starting with a prospective arbitrator’s professional background and qualifications (below paras 3.58 et seq.) and then turning to such factors as his or her experience in arbitration (below paras 3.67 et seq.), language skills (below paras 3.70 et seq.), soft skills and soft factors (below paras 3.72 et seq.), and last but not least availability (below paras 3.77 et seq.).

3.58  The professional background, and more broadly the professional and practical qualifications of a prospective arbitrator certainly play a key role in the selection process. After all, one of the main advantages of arbitration—as opposed to state court litigation—is the fact that the parties can compose a decision-making body with qualifications that are tailor-made for their dispute, including complicated and complex issues requiring specialized factual and legal knowledge and skills. Two important threshold issues are whether to choose a lawyer or a non-lawyer (below paras 3.59 et seq.), and, if a lawyer is to be chosen, whether to go for a lawyer admitted to practice in Germany or not (below paras 3.63 et seq.).

3.59  The natural choice for an arbitrator seems to be a lawyer. At the same time, it is a distinctive feature of arbitration that non-lawyers, too, can act as decision-makers. Under the Tenth Book of the ZPO, there are no restrictions whatsoever regarding the professional qualification of an arbitrator. The DIS Rules merely provide that a sole arbitrator and a chairman of a three-person tribunal need to be lawyers (s 2.2 DIS Rules).

3.60  A party may conclude that its interests are served best by appointing a person who has expertise with the factual and business background of the dispute, and may thus appoint a construction expert in a construction case, an accounting expert in a post-M&A dispute involving accounting issues regarding purchase prices adjustments or guarantees, or a patent attorney in an IP-related dispute. For the tribunal, it can be very helpful to have that type of expertise within the panel. This increases the understanding for the factual submissions of the parties, including possible expert-witness reports. Also, it reduces the dependency on tribunal-appointed experts.

3.61  At the same time, a party who appoints a non-lawyer needs to be aware of the fact that “its” arbitrator may have little to no understanding regarding procedural and substantive legal issues relevant for the decision of the case. Such expertise may then lie exclusively with the chairman (if the other side also appoints a non-lawyer) or with the chairman and the opponent’s party-appointed arbitrator. The non-lawyer may not be able to contribute much to debates within the tribunal on issues of procedural or substantive law, and may have to more or less accept at face (p. 120) value what the chairman and the other arbitrator tell him or her in this respect.⁶⁸ German substantive law, to the extent it applies, may certainly be just as much a “mystery” to a legal layman as any other legal system. Also, German legal thinking, eg when it comes to interpreting contracts and statutes, follows its own methodologies and standards with which non-lawyers are generally not familiar.

3.62  In addition, it is not always easy to predict what substantive questions will be decisive for the case. This may cause a time-consuming selection process with the result that in the end the parties still have to pay for an expert opinion.⁶⁹ Another risk arises where the losing party later may seek compensation from liability insurance. In particular, the German Insurance Association (GDV) provides a model clause whereupon arbitral awards are recognized only if at least one lawyer acted as arbitrator.⁷⁰ Thus, as a rule of thumb, we would advise to be cautious, or even reluctant, to appoint non-lawyers in arbitral proceedings seated in Germany.

3.63  When it comes to choosing among lawyers, persons from different nationalities and jurisdictions can be considered. It goes almost without saying that a lawyer to be appointed as arbitrator does not necessarily need to be admitted to practice in Germany, unless the parties have agreed otherwise. Even the chairman of a three-person panel or the sole arbitrator under the DIS Rules “merely” need to be lawyers, but not necessarily German-qualified or admitted in Germany.

3.64  For a German party to an arbitration seated in Germany and governed by German substantive law, it will often seem natural to appoint a German-qualified lawyer. Nevertheless, parties should not necessarily limit their choices in that way. There are many outstanding arbitrators active in the German arbitration market who may not be German citizens or German-trained. This applies, for instance, to a number of practitioners from Switzerland and Austria.⁷¹ Some are even dual-qualified and should be seriously considered, in particular where the other side may be a non-German party.

3.65  Where a non-German party finds itself in arbitration seated in Germany and subject to German substantive law, different considerations may apply. On the one hand, such a party may wish to have an arbitrator with a particularly strong German law background in order to properly counter-balance an appointment that the other side has made or will likely make. On the other hand, a foreign party may wish to purposefully give the case a more international “touch” by appointing a non-German lawyer, which in turn may increase the chances that the chairman, too, will not be from Germany.

(p. 121) 3.66  Against the background of these considerations, and in keeping with the “less is more” approach, in the case of three-person panels we would generally not see a compelling reason to include in the arbitration agreement or any other party agreement a provision absolutely requiring that an arbitrator be German-qualified, even where it is clear that the case will be seated in Germany and be governed by German substantive law. It would seem that such a restriction unnecessarily limits the parties’ strategic choices when they later need to constitute the arbitral tribunal.⁷²

3.67  For many parties, experience in arbitration is another key consideration when selecting an arbitrator. The advantages are obvious. Someone who has already acted as an arbitrator several, perhaps even many times, will be familiar with the procedural framework, the cross-cultural issues, and more broadly the dynamics of arbitration. Chances are also that he or she may know the chairman, the co-arbitrator, or the party representatives involved, which all in all may provide for a smoother and more efficient process. When it comes to appointing a chairman, parties may be especially reluctant to choose a person who has never even served as a party-appointed arbitrator.⁷³ Another important factor is that the parties naturally prefer to base this decision on a broad range of information, in particular regarding the organization and effectiveness of the respective candidate. This information is not available for inexperienced arbitrators and their nomination is much more risky.

3.68  At the same time, there may be cases where it is not that important that a person has already served repeatedly as arbitrator. This may apply specifically to party-appointed arbitrators. A case may raise specific issues of substantive law that requires special expertise. Also, some parties may have a reluctance towards the arbitrator “establishment” and prefer to have someone from outside of whatever may be perceived to be the “inner circle.”

3.69  It should be noted that experience in state court litigation, eg on the part of an active or retired judge or an attorney specializing in state court litigation, may be considered helpful by the parties, in particular where they wish the arbitral proceedings to be conducted in a way that is by and large similar to German state court litigation. The situation may look different when it comes to international arbitration. International cases seated in Germany are often approached and handled by both arbitrators and parties’ counsel in a way that significantly differs from state court litigation, eg regarding reduced substantiation requirements for written submissions, somewhat more generosity on document production, less inclination towards settlement, more party dominance in conducting the proceedings, (p. 122) including the taking of evidence and the like. An arbitrator with a strong background in German state court litigation may be more irritated than anything else by these types of international approaches, and his or her state court procedural experience may be of more limited assistance in the conduct of an international case.

3.70  Obviously, in a purely domestic context, language considerations are fairly simple. Where German parties conduct an arbitration seated in Germany with German substantive law applying, the language of the proceedings will in all likelihood be German, and it would be highly unusual to pick an arbitrator who does not speak German.

3.71  In an international context, more complex considerations apply. In most cases, the parties will want an arbitrator appointed by them to speak the language of the proceedings, at least as a second language.⁷⁴ This applies in particular to the chairman, who is responsible for much of the correspondence during the proceedings and for much of the “talking” during hearings. It is of course also helpful where an arbitrator has a sufficient command of the language in which most of the underlying documents are written and the language that the key witnesses speak. That need not necessarily be the language of the proceedings. On the other hand, it may not be possible to find otherwise sufficiently qualified and competent candidates who speak all the relevant languages. If need be, the parties and the tribunal may have to resort to translators and interpreters, which is not uncommon in international arbitration. Given the potential risk of losing a case due to the arbitrator’s lack of language skills, these costs generally prove to be a wise investment.⁷⁵

3.72  Besides the legal and non-legal qualifications of a candidate, the experience as an arbitrator, and sufficient language capabilities, there are a number of further, softer factors that may play an important role in selecting the “right” arbitrator, both when it comes to party-appointed arbitrators and chairmen.

3.73  In international cases, intercultural competence may be a key element for the smooth and efficient conduct of arbitral proceedings, both in terms of legal cultures and culture in general.⁷⁶ Where the parties come from different legal cultures, in particular where one comes from a continental European (civil law) and the other from an Anglo-Saxon or Anglo-American background (common law), it can help tremendously when the arbitrators understand both legal cultures. They can then do a much better job in managing each party’s expectations and tailor the proceedings in such a way that—hopefully—helps to bridge the gulfs (p. 123) between legal cultures, eg when it comes to issues such as document disclosure, cross-examination, party versus court-appointed experts, tribunal-assisted settlement, and the like.

3.74  Another important characteristic of arbitrators, especially party-appointed arbitrators is the ability to effectively function as a member of a team. Each arbitral tribunal develops its own inner dynamics. There is a need to cooperate, to come to consensus, and to efficiently further the proceedings. Generally, a party’s interests will be served better by appointing a team player to the tribunal as opposed to a loner who may be isolated quickly in cases where the chairman and the other party-appointed arbitrator get along very well. Where only a small circle of potential chairmen exists, a party should of course consider the existence and nature of any relationship to its candidate.⁷⁷

3.75  Finally, in the eyes of many parties, the perceived “practical neutrality” or “practical partiality” of an arbitrator candidate is of critical importance. As has been mentioned several times, it is a fundamental, constitutional requirement both under the Tenth Book of the ZPO and under most institutional rules (including the DIS and the ICC Rules) that party-appointed arbitrators are just as neutral as the chairman. Nevertheless, in practice, neutrality is not a concept that could be applied with mathematical precision. In particular, it is accepted that a party-appointed arbitrator may make sure that the arguments brought forward by the party that has appointed him or her are properly considered by the tribunal (see para 3.124). It is easy to imagine that different arbitrators may have different approaches to this type of task or option, and the specific approach taken by a certain person may well be known to the relevant arbitration community. Thus, it may be possible for parties to choose an arbitrator who has a reputation for being particularly “neutral” or one who takes a very active role in making the arguments of “his or her” party heard within the tribunal.

3.76  Parties often tend to think that the latter must be the better choice.⁷⁸ In many cases, this may be true, but it need not be. A party-appointed arbitrator who always emphasizes the arguments of the party appointing him, and who almost never does the same with the arguments brought by the other party may start to look suspect to the other arbitrators. In particular, the chairman may develop the impression that said arbitrator may in fact not be as neutral as he or she could be, and the chairman may thus be inclined to actually listen more to the other party-appointed arbitrator. Thus, one arbitrator may easily be isolated by the type of conduct described above, which is the exact opposite of what the party appointing him or her would have hoped for.

3.77  Availability of arbitrators has become an issue of increasing importance in international arbitration in general; Germany is no exception. A party (or in the case of the chairman: the parties) may have selected the most qualified arbitrator—if the person does not have the necessary time to work personally and diligently on the case, the parties will likely not be satisfied with the conduct of the arbitration. Thus, arbitrators should only accept appointments that they are sure they can properly handle in person.⁷⁹ This applies across professions. A professional arbitrator may be overburdened with the other cases he or she already has. A practicing lawyer may find that the demands of the “daytime job” representing clients leaves not enough time to study voluminous submissions and files in person. An active judge or law professor may face similar issues.

3.78  It is obviously difficult for parties to gain control over this issue. Parties need to rely on what a candidate for arbitrator tells them about his or her availability. The ICC meanwhile requires candidates to sign a statement of availability and to fill in a form disclosing the number of other cases they currently handle.⁸⁰

3.79  In the following section, we address considerations that apply more or less generally to certain groups of legal professionals in Germany, ie practicing lawyers (below paras 3.80 et seq.), German judges (below paras 3.83 et seq.), and law professors as well as other public officials (below paras 3.87 et seq.). These considerations are meant to provide a general overview and a starting point for a party’s thinking process on specific candidates. They cannot replace a diligent analysis of every single case.

3.80  Attorneys-at-law admitted to practice in Germany frequently act as arbitrators. The German rules governing their profession generally only apply to their role as party representatives, but not as arbitrators.⁸¹ Thus, they are generally free to accept arbitrator appointments. Practical restrictions may apply, however. In particular where attorneys are members of larger law firms, conflicts of interest play an increasingly important role, which may require a careful case-by-case analysis (see paras 3.119 and 3.121).

3.81  In addition to the ways in which the neutrality of an attorney sitting as an arbitrator can be impacted, so-called “business conflicts” often play an important role, too. A law firm may not be willing to accept that one of its members acts as (p. 125) arbitrator in a dispute for a comparatively moderate remuneration thereby “blocking” the law firm from accepting other, more lucrative matters from parties to the dispute as long as the dispute is ongoing.

3.82  To the extent an attorney-at-law is able and willing to act as an arbitrator, the parties may wish to make the following additional considerations. Practicing lawyers may have a particularly strong understanding of certain practical aspects underlying a case. For instance, an M&A lawyer will usually have a particularly quick grasp of an M&A agreement and the types of clauses typically associated with it. Also, practicing lawyers can easily access or organize support services for large and complex cases which is an advantage that should not be underestimated, especially for the chairman of an arbitral tribunal. At the same time, as is true with arbitrator candidates from any other professions, parties should carefully consider the workload of an attorney and enquire as to whether he or she has enough time to devote to the case.

3.83  Retired German judges frequently serve as arbitrators. Active judges need government approval, which may only be granted if the judge is appointed by both parties or by a neutral third party, s 40 para 1 cl 1 German Judiciary Act (DRiG). This is not merely a formal procedural provision but also a measure to ensure the confidence in the independence of a judge and his or her rulings. Accordingly, it is not sufficient that the parties make the common nomination just pro forma, but rather they have to reach an agreement with equal influence.⁸² In addition, a judge must not act as an arbitrator in a case in which he or she has already been involved as a judge (s 40 para 1 cl 2 DRiG). Against this background, in practical terms, active judges most often act as sole arbitrators or as chairmen of arbitral tribunals.

3.84  Where the necessary government approval is lacking or unlawful, the appointment is still valid, and a later arbitral award is not subject to set aside (s 1059 para 2 no 1 lit a ZPO);⁸³ however, the arbitrator agreement is considered invalid (s 134 BGB) by the majority of German scholars.⁸⁴ There is no precedent yet from the BGH⁸⁵ and German higher regional courts are split on this issue.⁸⁶ On closer inspection, however, the different approaches do not result in significant practical (p. 126) differences. The proponents of validity argue that the approval is part of the arbitrator’s sphere and it would be unfair to encumber the parties with the consequence of its absence.⁸⁷ Based on the same reasoning, the opposing view largely agrees that it would be unfair if an invalidity had any effect on the arbitral proceedings.⁸⁸

3.85  While this result is entirely convincing, it should be founded on a more profound legal reasoning than just the principle of fairness. In our view, the better arguments support the invalidity of the arbitrator agreement. The approval requirement for state court judges is not a mere formality but is geared towards preserving the public interest in an independent and effective judiciary. Given this significance for the legal system, it should be considered as a legal prohibition under s 134 BGB. However, this affects only the arbitrator agreement as substantive-law agreement, but not the appointment of the arbitrator as a procedural act.⁸⁹ Likewise there is no room for a set aside based on the invalidity of the arbitrator agreement, because s 1059 para 2 no 1 lit d ZPO encompasses only violations of provisions under the ZPO and therefore not the lack of approval pursuant to s 40 para 1 DRiG.

3.86  From a practical point of view, there are a number of considerations that parties may want to take into account when they contemplate the appointment of an active or retired judge as an arbitrator. Obviously, one strong advantage of judges is that they are familiar with conducting judicial proceedings and rendering decisions. Also, they may be perceived as particularly neutral. Where the language of the proceedings is a language other than German, parties should carefully consider whether a judge has sufficient command of that language. Similar considerations may apply where the dispute has an international or cross-cultural context. As far as the conduct of proceedings is concerned, parties should be aware that German judges often have a tendency to conduct arbitral proceedings similar to state court proceedings, not least because this is the way they exercise their profession every day. They may lean heavily on concepts of the ZPO which do not apply directly in arbitration, but which the tribunal can certainly draw on within the parameters of its discretion.⁹⁰ This may apply, for instance, regarding substantiation requirements, a strong focus on the written pleadings, a reluctance to allow document disclosure requests, and an active style of questioning witnesses. Also, state courts judges may be skeptical of party expert witnesses and put more trust in court-/tribunal-appointed experts. Finally, state court judges very often have a proactive attitude towards settlement which is in line with their mandate in state court litigation (s 278 ZPO), but may be surprising or even alienating to parties with a common law background.

3.87  German public officials need government approval in order to be able to act as arbitrator. This is provided for in ss 97 et seq. of the Federal Public Officials Act (BBG) for federal officials and in corresponding provisions of state legislation applying to state officials. Note that in Germany, law professors are usually state public officials (unless they work for one of the few private law schools in Germany), and thus need state government approval. Approval is to be denied where there are grounds to suspect that the activity as arbitrator will have a negative impact on the position as a government official, s 99 para 2 cl 1 BBG.⁹¹ This can be the case where the public official uses more than 20 per cent of his or her time for arbitration (s 99 para 3 BBG).⁹²

3.88  A German notary public is also a kind of public official; however, s 8 para 4 of the Federal Notary Code (BNotO) expressly allows notaries to act as arbitrators without imposing any express limitations. In practice they are often appointed in legal disputes on construction, corporate, family, and inheritance law.⁹³

3.89  In German practice, law professors frequently act as arbitrators, less so probably notaries and to an even lesser extent public officials from other areas of government. As far as law professors are concerned, the parties may wish to bear in mind a number of considerations. First and foremost, law professors are often superb experts in specific areas of the law. Thus, where a party believes that the dispute will likely turn on difficult or complex legal issues, it may well conclude that its interests are best served by appointing a law professor as sole arbitrator or as its party-appointed arbitrator. Naturally, law professors may be less familiar with trade practices and trade usages. Also, they may have less specialized knowledge regarding technical or factual details, eg in the technology or construction area. Whether or not language and cross-cultural capabilities are important and present is a matter for case-by-case analysis.

3.90  On the basis of the typical selection criteria set forth above, in this coming section we explore a number of practical considerations when it comes to nominating a specific person as arbitrator, be it a party-appointed arbitrator, a chairman or a sole arbitrator. We set forth some activities that have become common in German practice. We also try to give some useful guidance as to what parties and their counsel should not do.

3.91  As is probably self-evident, for commercial arbitration in Germany, there is not a single, ready-made, and comprehensive list of arbitrator candidates to choose from. Instead, the parties may rely on a number of other means and channels to find suitable candidates. One method—and probably still the most widely used one—is to ask someone who knows. Most often, this will be the counsel representing the party in the prospective arbitration. And for counsel, too, asking someone else who knows a good candidate is often the way to go. Also, the DIS is prepared to make suggestions for the selection of arbitrators, if a party so requests (s 2.3 DIS Rules). Furthermore, a number or arbitral institutions, such as the DIS or the German Maritime Arbitration Association (GMAA), publish lists of members who are prepared to act as arbitrators⁹⁴ or offer assistance in their selection like the Chambers of Industry and Commerce (IHK).

3.92  Once a specific person or a small group of candidates for the office of an arbitrator has been identified based on the general selection criteria outlined above, it is common practice to try and learn as much as reasonably possible about the person. Besides word of mouth, recommendations from colleagues and general knowledge about the person, it is worth checking online resources, such as the person’s website and CV, as well as a person’s publications and public speaking, in order to identify the candidate’s areas of expertise and to determine whether he or she has already taken certain positions on issues that are likely to be relevant in the arbitration. Of course, a certain rule of reason needs to govern these efforts. The more important the case, the deeper the research could run. Large or specialized law firms may have their own databases or other readily available sources on experience with specific arbitrators.

3.93  Making the initial contact with a candidate usually occurs via telephone, occasionally also by email, or a brief encounter in person. In most cases, the lawyer representing a party will make the call, possibly with the client present. In order to be able to make the required disclosure as to neutrality (s 1036 para 1 ZPO, see paras 3.128 et seq.), the candidate will need to know the parties involved in the dispute. Also, the candidate should be told in broad terms about the nature and potential complexity of the dispute as well as the applicable law. The contents of the arbitration agreement may be summarized, too. All this is useful for the candidate to make an honest self-assessment regarding his or her qualification, expertise, necessary time commitment, and availability. A more detailed discussion (p. 129) on the facts of the case and contested legal issues should be avoided as this might lead to doubts regarding the impartiality of the later arbitrator.⁹⁵ During such a call, the candidate should not take substantive positions on certain legal issues, and the persons calling should not attempt to press the candidate to do so, as this may jeopardize the candidate’s neutrality.⁹⁶

3.94  After the initial contact, the candidate will need to carefully determine whether he or she is indeed neutral, based on prior engagements, current cases, relationships with the parties and their counsel, and other relevant circumstances (for details see paras 3.113 et seq.). Once this check has been properly performed, the candidate will usually get back to the party or counsel interested in making the appointment and confirm his or her availability. Most often, this occurs either via phone or email.

3.95  Once an arbitrator has confirmed that he or she would be interested and able to act in a dispute, it is possible to have a short in-person meeting, where the circumstances, in particular the importance of the case, warrant such effort. It is good practice for the meeting to occur at the offices of the candidate. The number of participants should be kept small, eg a counsel, the arbitrator, and potentially a party representative. The purpose of the meeting is to get to know each other on a personal level and to become comfortable with each other as persons. The purpose is not to discuss the substance of the case. Again, the candidate should not express any specific views on the facts or legal issues raised by the case, nor should the other participants press the candidate to do so. Also, except for a copy of the arbitration agreement, there should not be any exchange of written materials on the case. The party interested in appointing a candidate should not submit a draft statement of claim, correspondence, or legal memoranda to the candidate for review. Overall, the meeting should be short; as a rule of thumb, it should not take longer than approximately half an hour to one hour, unless particular circumstances require otherwise.⁹⁷

3.96  Once a party has narrowed down the list of candidates to a small number, has conducted the appropriate research and in-person meetings, it comes down to selecting one specific person. As far as the party-appointed arbitrator is concerned, the party is of course under no restraints to agree with the opposing party and the (p. 130) corresponding need for compromise. It may need to align with co-parties, however. It may make sense for a party to map the general qualification requirements it has identified with the candidates it has spoken to and done research on. Thus, a party can come to a rational decision as to whom it considers the strongest and most qualified person. Once that person is identified, the party should notify him or her as to its decision and let him or her know that the party intends to make the nomination. With respect to potential other candidates that had been contacted, a courtesy call informing them that they will not be nominated is in order.

3.97  The selection decision may be more difficult when it comes to aligning on the chairman of a three-person panel or a sole arbitrator. Each side will of course have done its own diligence based on the criteria and processes outlined above. It is common for the party-appointed arbitrators to exchange views first with the respective party that has appointed them and then among each other. It is often useful to align on a list of candidates between the party and “its” appointee, for the appointees then to confer with each other and see whether there are common candidates on both sides’ lists, and then for each appointee to go back to the party that has appointed him or her.⁹⁸ It may be necessary for each side to amend and extend its list of candidates and to conduct several rounds of this exercise until a person is found that suits both sides. Often, there is a natural hesitation to accept a candidate for chairman or sole arbitrator that was originally suggested only by the other side. Parties should attempt to be rational about this and run such a proposal through their catalogue of selection criteria. Sometimes, a candidate proposed by the other side may be just as good or even better than the ideas that a party and their counsel had come up with themselves.

3.98  We first give an overview of applicable rules for challenging arbitrators (below paras 3.99 et seq.). As a next step, we lay out the requirements for arbitrator impartiality in more detail (below paras 3.112 et seq.). A further ground for challenge is the lack of agreed prerequisites (below para 3.133). We follow this section with a detailed analysis of the challenge procedure (below paras 3.134 et seq.). Separately, the office of an arbitrator may be terminated as a result of inability to perform or undue delay (below paras 3.144 et seq.). As a result of a successful challenge or termination of office, an arbitrator may need to be replaced by a substitute arbitrator (below paras 3.155 et seq.).

3.99  As regards the rules governing the challenge, termination, and replacement of arbitrators, we first take a look at the Tenth Book of the ZPO (below paras 3.100 et seq.), and then turn to the DIS and the ICC Rules as two prominent examples of institutional arbitration (below paras 3.104 et seq.). In a third step, we address some “soft law” relevant for these issues, namely the IBA Guidelines on Conflicts of Interest in International Arbitration (below paras 3.107 et seq.). Finally, we outline how impartiality and independence of arbitrators, as well as the fulfilment of party-agreed requirements for arbitrators play out at the enforcement and set aside stages of the arbitral process (below paras 3.109 et seq.).

3.100  In ss 1036–1039 ZPO, the German arbitration law addresses the challenge, the termination of office, and the replacement of arbitrators. Section 1036 para 2 cl 1 ZPO provides that an arbitrator may be challenged based on lack of impartiality, independence, or party-agreed prerequisites.⁹⁹ The German arbitration law thereby secures a fair trial, which is a prerequisite for arbitration to be equivalent to state court litigation. Accordingly, neutrality of arbitrators cannot be derogated or waived by party agreement in advance.¹⁰⁰ The German arbitration law does not contain any specific catalogues of examples to specify in more detail what impartiality and independence mean. Regarding the concept of independence, the set of examples applying to judges set forth in s 41 ZPO can serve as useful guidance.¹⁰¹ Nevertheless, in the light of the peculiarities of arbitral proceedings it would be inappropriate simply to apply these criteria without further reflection. For example, the nomination of an arbitrator by a party inevitably creates an association between them and the absence of the opportunity for appeal means that decisions suffering from bias can no longer be challenged.¹⁰²

3.101  Section 1036 para 1 ZPO contains a corresponding disclosure obligation of arbitrators and arbitrator candidates to ensure that the parties can make an informed decision when accepting or rejecting a candidate as arbitrator (for details see paras 3.128 et seq.). Section 1037 ZPO provides for a two-step procedure for challenging an arbitrator based on lack of neutrality or agreed prerequisites. The first step is a written challenge within a two-week deadline after a party becomes aware of the underlying facts and a decision by the arbitral tribunal (including (p. 132) the challenged arbitrator) thereon (s 1037 para 2 ZPO). The parties can agree on amendments to this procedure, eg by extending the deadline or by excluding the challenged arbitrator from the tribunal’s decision (s 1037 para 1 ZPO). In a second step, where the challenge in front of the arbitral tribunal is unsuccessful, the party bringing the challenge may submit the challenge to the competent higher regional court within one month (s 1037 para 3 cl 1 ZPO). The parties can amend the deadline, but they may not exclude access to the higher regional court.¹⁰³ Thus, the court procedure is also available in institutional cases seated in Germany. The arbitral tribunal has discretion to continue the arbitral proceedings while a challenge is pending before the higher regional court (s 1037 para 3 ZPO).

3.102  Section 1038 ZPO addresses the cases of inability (legal or factual) to act and inactivity of an arbitrator. In such cases, there are three options to terminate the office of an arbitrator: (i) he or she may withdraw; (ii) the parties may—as always and even without cause—agree on his or her termination; and (iii) in the absence of a withdrawal and a party agreement on termination, a party may apply to the competent higher regional court to order the termination of the office of an arbitrator (s 1038 para 1 cl 2 ZPO).

3.103  Where the office of an arbitrator ends, a substitute arbitrator needs to be appointed (s 1039 para 1 cl 2 ZPO). As a consequence, termination of the office of an arbitrator does not mean termination of the arbitral proceedings. Pursuant to s 1039 para 1 cl 2 ZPO, the rules governing the appointment of the arbitrator, whose office has been terminated, shall apply mutatis mutandis. Thus, in a case where the office of a party-appointed arbitrator is terminated, the party having made the original appointment gets to appoint the substitute arbitrator. Regarding the chairman of a three-person tribunal, the party-appointed arbitrators, in consultation with the parties, need to agree on a substitute. For a sole arbitrator, whose office has been terminated, the parties need to agree on his or her replacement. The parties are free to agree a different procedure (s 1039 para 2 ZPO). In each case, termination of the office of an arbitrator needs to be distinguished from the termination of the arbitrator agreement (see para 3.191).

3.104  The DIS Rules address the challenge, termination, and replacement of arbitrators in ss 18 and 19 which largely follow ss 1036–1039 ZPO. In addition, s 18.2 cl 2 DIS Rules provides that “the DIS Secretariat informs the arbitrators and the other party of the challenge and sets a reasonable time limit for comments from the challenged arbitrator and the other party.” Thereafter, the arbitral tribunal shall decide (s 18.2 cl 3 DIS Rules), including the challenged arbitrator. The DIS Rules do not address the recourse to the state courts, which exists as a matter of (p. 133) mandatory German law for arbitrations seated in Germany (s 1037 paras 1 and 3 ZPO). Section 19 DIS Rules mirrors s 1038 ZPO regarding inability to perform and failure to act. Interestingly, s 19.1 cl 2 DIS Rules also provides for an application to the competent higher regional court for termination; such termination may not be effected by the DIS. Where the office of an arbitrator is terminated, the DIS Rules, too, provide for the nomination and appointment of a substitute arbitrator (ss 18.3 and 19.2 DIS Rules), much like s 1039 ZPO does.

3.105  Articles 14 and 15 of the ICC Rules address the challenge, termination of office, and replacement of arbitrators. Under art 14.1 ICC Rules, a challenge for lack of impartiality or independence, or for other reasons, must be made in writing to the ICC Secretariat, specifying the underlying facts and circumstances. The submission must be made within 30 days (art 14.2 ICC Rules), as opposed to the two weeks provided for by the Tenth Book of the ZPO and the DIS Rules. Article 14.3 ICC Rules provides for an opportunity to comment by the arbitrator concerned and the other party or parties. Thereafter, the ICC Court shall decide (as opposed to the arbitral tribunal under the Tenth Book of the ZPO and the DIS Rules) (art 14.3 ICC Rules). For arbitrations seated in Germany, subsequent access to the competent higher regional court pursuant to s 1037 para 3 ZPO is always open and may not be derogated by the parties (s 1037 para 1 ZPO).

3.106  Grounds for replacement under arts 15.1 and 15.2 ICC Rules are not only death, resignation, or party agreement, but also a decision by the ICC Court on its own initiative finding inability or inactivity of an arbitrator. Before making such a decision, the arbitrator concerned and the parties shall be given an opportunity to comment (art 15.3 ICC Rules). Regarding replacement, the ICC Court has discretion as to whether or not to follow the original nomination process (art 15.4 cl 1 ICC Rules). Where the proceedings are already closed, the ICC Court may decide, instead of replacing an arbitrator, that the remaining arbitrators shall continue the arbitration and render the award (art 15.5 cl 1 ICC Rules). This is a useful means to counter obstruction tactics by arbitrators and parties who use termination of an arbitrator as a means to prevent or delay a decision which they consider unfavorable.

3.107  In October 2014, the International Bar Association (IBA) adopted revised “Guidelines on Conflicts of Interest in International Arbitration,” which replace a previous version of 2004.¹⁰⁴ These guidelines are the result of the efforts of a working group of numerous experts in international arbitration from more than a dozen countries, appointed by the Committee on Arbitration and ADR of the (p. 134) IBA. Thus, the guidelines are not the reflection of one specific set of applicable laws, much less German law alone, but “reflect the understanding of the IBA Arbitration committee as to the best current international practice.”¹⁰⁵ They “are not legal provisions and do not override applicable national law or arbitral rules chosen by the parties.”¹⁰⁶

3.108  The guidelines follow a two-tier approach: on the one hand, there are general standards contained in part I of the guidelines. On the other hand, part II of the guidelines contain provisions on the practical application of the general standards. In this respect, the guidelines are subdivided into a total of four lists: (i) the non-waivable red list, containing scenarios where a person must not act as an arbitrator, irrespective of whether the parties, after full disclosure, would agree or not; (ii) the waivable red list with circumstances that give rise to justifiable doubts as to a person’s neutrality and would thus generally exclude a person from being an arbitrator, unless the parties, after full disclosure, agree; (iii) the orange list, enumerating situations that in the eyes of the parties may give rise to justifiable doubts as to the arbitrator’s impartiality or independence and which an arbitrator therefore ought to disclose; and (iv) the green list, containing situations that frequently occur in practice but do not give rise to doubts as to a person’s impartiality or independence and thus do not even have to be disclosed by an arbitrator. The guidelines apply to both commercial and investment arbitration.¹⁰⁷ Even though the guidelines were published by a professional organization of practicing lawyers, their application is not limited to practicing lawyers acting as arbitrators. They may be applied just as well to arbitrators from other legal professions, such as active and retired judges or law professors, as well as arbitrators who are not lawyers at all.¹⁰⁸ We will include the guidelines in our analysis of grounds for challenge under German law as discussed below (see paras 3.118 et seq.).

3.109  An important issue associated with arbitrator neutrality and arbitrator challenges is the question what significance the lack of neutrality of an arbitrator (or the lack of agreed prerequisites) may have once the proceedings have reached the set aside or the enforcement stages. To the extent the competent higher regional court has rejected a challenge, its decision is final and binding (s 1065 para 1 cl 2 ZPO), and the neutrality of the challenged arbitrator is res judicata (Rechtskraft) as far as the underlying facts originally giving rise to the challenge are concerned.¹⁰⁹ Where the (p. 135) arbitral tribunal has rejected the challenge and the defeated party refrains from requesting the decision of the higher regional court, the party is precluded from raising the issue at the enforcement and set aside stages.¹¹⁰

3.110  Where a party refrained from bringing a challenge but could have done so because it was aware of the underlying facts, such challenge is generally again precluded at the enforcement and set aside stages. This is the result of the application of s 1037 para 2 cl 1 ZPO and the two-week deadline contained therein. In principle, a party who misses that deadline may no longer rely on the underlying facts, no matter whether during or after the arbitral proceedings.¹¹¹ An exception may exist based on public policy considerations: ordre public violations can never be precluded by missed deadlines, and they can always be brought forward in set aside and enforcement proceedings (ss 1059 para 2 no 2 lit b, 1060 para 2, 1061 para 2 ZPO). Thus, where the lack of neutrality amounts to an ordre public violation, it may still be relied on during enforcement or set aside proceedings, even though it may not have been raised at all or in time during the arbitral proceedings. This has been held to apply in particular with respect to grave and evident cases of partiality and lack of independence.¹¹²

3.111  Finally, challenges that were still pending and that the arbitral tribunal simply overlooked or failed to decide are not precluded. At least where the time limit of s 1037 para 3 ZPO has not expired, the underlying facts can still be raised in set aside and enforcement proceedings (ss 1059 para 2 no 1 lit d, 1060 para 2 cl 1, 1061 para 2 ZPO).¹¹³

3.112  Under German law, the principles of independence and impartiality are non-derogable cornerstones of any arbitral proceedings. At their core, they form part of the German procedural ordre public (s 1059 para 2 no 2 lit b ZPO) and are considered indispensable constitutional requirements in order for arbitral proceedings to be equivalent to state court litigation.¹¹⁴

3.113  Under German law, apart from the lack of agreed prerequisites (see para 3.133), an arbitrator can be challenged based on circumstances that give rise to justifiable doubts as to his or her impartiality or independence, s 1036 para 2 cl 1 ZPO. The German arbitration law does not further specify what is meant by “impartiality” and “independence.” The two requirements are sometimes difficult to distinguish and are often viewed as two sides of the same coin—arbitrator neutrality. Broadly speaking, impartiality is more a subjective characteristic regarding the mental attitude of the arbitrator to the parties and the dispute, whereas independence is more an objective criterion for this connection.¹¹⁵ German law requires “justifiable doubts” (s 1036 para 2 cl 1 ZPO). This means facts that are capable of triggering suspicions in the eyes of a reasonable person, not just in the subjective view of a party.¹¹⁶ The provisions on impartiality and independence are mandatory law; there is party autonomy only with respect to prerequisites that the party may agree regarding the qualifications of an arbitrator.¹¹⁷

3.114  A party may challenge an arbitrator that it has appointed itself only on the basis of facts that the party learns after the appointment (s 1036 para 2 cl 2 ZPO). This provision can be seen as an expression of the general good faith principle that a party should not be allowed to act contrary to its own prior behaviour (venire contra factum proprium, s 242 BGB).¹¹⁸

3.115  The principles governing the challenge of arbitrators take precedence over the provisions of German substantive law allowing to void a contract based on errors regarding a person’s qualifications (s 119 para 2 BGB). Thus, in case of a successful challenge, the arbitrator agreement is not considered void ab initio (s 142 para 1 BGB), but may be terminated with prospective effect (ex nunc) as the arbitrator is no longer able to perform his or her obligations (see para 3.203).¹¹⁹

3.116  In order to secure the parties’ right to a neutral arbitrator, s 1036 para 1 cl 1 ZPO requires a prospective arbitrator to disclose all circumstances that may trigger doubts as to his or her impartiality or independence. Thus, the duty to disclose goes further than the grounds for challenge: in order for the disclosure duty to be triggered, “doubts” (p. 137) suffice (see para 3.129), whereas for a successful challenge, “justifiable doubts” are necessary. The German arbitration law thereby largely follows art 12 Model Law.¹²⁰

3.117  The situations typically giving rise to arbitrator challenges can be grouped broadly into three categories: (a) personal relations between an arbitrator and a party or their counsel; (b) prior involvement of an arbitrator or persons close to the arbitrator in the subject matter of the dispute; and (c) an arbitrator’s behaviour during the arbitral proceedings.

3.118  Self-evidently, a person cannot act as an arbitrator with respect to a dispute in which the person him- or herself is involved. The same applies where the person is the legal representative of a party to the dispute. For instance, an active director (Geschäftsführer), management board member (Vorstandsmitglied), or supervisory board member (Aufsichtsratsmitglied) of a corporation is disqualified from acting as an arbitrator in a dispute in which the corporation is involved.¹²¹ With regard to former directors, management, and supervisory board members, the circumstances of the individual case need to be taken into account. After a certain “cooling off” period, there may no longer be justifiable doubts as to a person’s neutrality. What the appropriate period should be is again a question of the individual situation. The IBA Guidelines on Conflicts of Interest in International Arbitration generally take three years as a distinguishing factor. While this may be a proper rule of thumb, still each case needs to be analyzed based on its particular circumstances. For instance, where a person has served only very briefly on a corporation’s supervisory board, the situation may be different from the case of a person who has been the corporation’s CEO for many years.

3.119  Likewise, contractual and business relationships between the arbitrator and one of the parties or its counsel can be grounds for challenge. An arbitrator should not hold shares in a party (except perhaps for very insignificant amounts), nor should an arbitrator be a tenant of a party.¹²² Of high practical relevance are situations of prior or parallel legal advice in unrelated matters. A lawyer who regularly represents a party to the dispute in unrelated matters will likely not be considered sufficiently neutral to be able to act as an arbitrator.¹²³ By contrast, where an arbitrator (p. 138) or his or her law firm have advised a party on unrelated matters in the past, but have no ongoing relationship, an arbitrator may still be neutral, depending on the circumstances of the case, including, for instance, the financial volume of the prior engagement and the time that has passed since it has terminated.¹²⁴ An arbitrator may start to lack neutrality where he or she is appointed frequently by one party. Again, the circumstances of the individual case need to be considered. In highly specialized areas, there may only be a few very qualified arbitrators, such that repeated appointments are a practical necessity and thus may seem less suspicious than in other cases.¹²⁵ On the other hand, the fact that an arbitrator has acted together as an arbitrator with one of the co-arbitrators on several prior occasions should not impact neutrality.¹²⁶

3.120  Finally, close personal relationships can raise “justifiable doubts” as to an arbitrator’s neutrality. Besides the obvious cases of marriage, common-law spouses, engagement, and the like, in practice, social contacts and personal friendships are a frequently discussed topic. As a general matter, ordinary social contact, occasional invitations, occasional common leisure activities, or being on a first-name basis with someone does not suffice to challenge an arbitrator.¹²⁷ “Close” personal friendship—as well as grave hostility—is considered different. In the abstract, it is of course difficult to give a precise definition of who is a “close” friend and who is a “not so close” friend. From the perspective of the (prospective) arbitrator, the answer in a specific case may still be fairly straightforward: Can I imagine ruling against that person (or the party represented by that person) without being influenced by the fact that we know each other so well? The same applies the other way round in case of hostilities between an arbitrator and a party or its counsel. For the parties and their counsel, it is much more difficult to make these types of distinctions. They will need to rely on anecdotal evidence as to who is a “close” friend or a “special enemy” of an arbitrator and then make an informed judgment as to whether from the perspective of a reasonable party these circumstances give rise to justifiable doubts as to the neutrality of an arbitrator.

3.121  It goes without saying that neither the arbitrator nor any lawyer associated with him or her in the same law firm can advise on the matter in dispute. Prior legal advice of the arbitrator or his or her law firm on the dispute will also disqualify in most cases.¹²⁸ Exceptions may be considered where the advice was limited to a defined and limited set of issues that are clearly not or no longer relevant to the dispute. Similarly, a person who has publicly taken a view on the merits of the case is subject to justifiable doubts as to his or her neutrality.¹²⁹ Prior discussions of the merits of the case as part of the communications with a party during the appointment process are likely to disqualify a candidate, whereas listening to a general description of the nature of the case and what a party views as important issues should not present a problem.¹³⁰ Similarly, prior publications on abstract questions of law that may be relevant to the outcome of the case generally do not impact neutrality.¹³¹

3.122  Where a person has been involved in prior attempts to resolve the dispute by means of ADR, such as mediation or conciliation, caution is necessary. A former mediator or conciliator will generally lack neutrality.¹³² Thus, where such person is asked nevertheless to act as an arbitrator on the same dispute (med/arb), it is prudent to ask for both sides’ express consent to do so. The same applies where the parties agree to attempt to mediate a dispute that is already in arbitration (arb/med), and want one of the arbitrators, eg the chairman, to act as mediator.

3.123  It is in an arbitrator’s best interest to make sure that his or her behavior during arbitral proceedings does not give rise to doubts as to neutrality. The parties are likely to “watch” the arbitrators closely in this respect, and in some cases, they may be particularly “nervous” about the neutrality of the arbitrator appointed by the other side. Arbitrators should not accept gifts or invitations from the parties.¹³³ It is good practice not to engage in (p. 140) ex parte communications with only one party.¹³⁴ Where it occurs, the arbitrator should inform the co-arbitrators, and the tribunal should decide as to whether the other party needs to be informed. If necessary, each party ought to be admonished to communicate to the entire tribunal with notice to the other party or parties. Whether an arbitrator is indeed subject to challenge when one of the above occurs, is a different question which depends very much on the facts of the case. For instance, where an arbitrator merely listens, politely ends the communication at an early stage, reports to the other arbitrators, and the arbitral tribunal discloses to the other party, there should not be any ground for challenge. By contrast, where an arbitrator not only listens but also gives answers on topics regarding the substance of the case and does not disclose the incident to the remainder of the arbitral tribunal and the other party, a different analysis may be in place.

3.124  The conduct of the proceedings as such may also give rise to justifiable doubts as to neutrality, albeit only in particularly grave situations. It does not come as a surprise that this situation is the subject of ongoing debate, especially regarding the conduct of party-appointed arbitrators.¹³⁵ Despite the peculiarities of arbitration as a creation of party autonomy and the necessity for a case-by-case analysis, it is widely agreed that justifiable doubts arise where an arbitrator acts like a party representative for one side. However, this threshold is not exceeded where a party-appointed arbitrator merely makes sure that the tribunal duly takes into account the arguments brought forward by “his” or “her” party.¹³⁶ Likewise, the fact that an arbitrator asks tough questions only in the direction of one party, but not the other, may not be particularly good practice and will certainly be seen by the parties as an example of lacking diplomacy; nevertheless, often it will not rise to the level of justifiable doubts required for a successful challenge. The same applies where the chairman is particularly strict in conducting the proceedings, or where an arbitrator appears to be sloppy and unprepared.¹³⁷ Likewise, in German practice, it is not a ground for challenge where the arbitral tribunal offers preliminary views on the case, even if unsolicited by the parties. On the contrary, German parties and German practitioners often are very desirous of such views in order to be able to better focus their case, submissions, and arguments, as well as to explore possible ranges for a settlement.¹³⁸

(p. 141) 3.125  A gray area exists with respect to settlement proposals. German state courts are at liberty to make unsolicited settlement proposals; in recent years, state court proceedings have become even more “pro-settlement” (s 278 ZPO as amended). Arbitral tribunals should be more reluctant. There is no provision equivalent to s 278 ZPO in the German arbitration law. Thus, even though an unsolicited settlement proposal as such may not necessarily be a ground for challenge per se,¹³⁹ it is still good practice in Germany that the tribunal asks for all parties’ consent before doing so.¹⁴⁰

3.126  Individual mistakes in the conduct of the proceedings as such are generally not sufficient to justify the challenge of an arbitrator, neither with respect to procedural issues nor regarding the application of substantive law.¹⁴¹ The situation may be different where there are additional circumstances clearly pointing towards bias, such as a series of “mistakes” that actually all or almost all favor one party over the other. At the other end of the spectrum, there are of course also clear grounds for challenge as a result of behavior during the proceedings, such as insults of a party or its counsel.

3.127  Finally, it should be noted that an analysis of whether there are grounds for challenge always requires a look at the totality of the circumstances. Thus, where there are several individual circumstances questioning the neutrality of an arbitrator, it may well be the case that none of them, when viewed in pure isolation, would be sufficient to carry a challenge, but when viewed in combination, the totality of the circumstances may well alter the analysis.¹⁴²

3.128  The obligation to disclose circumstances that may give rise to doubts as to a prospective arbitrator’s neutrality (s 1036 para 1 cl 1 ZPO) safeguards the parties’ right to impartial and independent decision-makers. The obligation is a continuing duty throughout the arbitral proceedings (s 1036 para 1 cl 2 ZPO). As is common in other arbitration laws and the rules of arbitral institutions, German law expresses the disclosure obligation as a procedural duty. At the same time, under German law, the disclosure obligation could also be derived from substantive law. Despite the fact that in general parties are responsible for gathering themselves (p. 142) whatever information they deem relevant for a contract, the obligation of good faith and fair dealing (s 242 BGB) can trigger an unwritten obligation to disclose facts and circumstances that are of outstanding importance to the other parties as they may have the potential to frustrate the very purpose of the agreement.¹⁴³ As far as the appointment of an arbitrator is concerned, it is indeed the very purpose of an arbitrator agreement that would be frustrated if the appointee were lacking impartiality or independence.

3.129  The disclosure obligation differs from the ground for challenge in two respects. First, the disclosure obligation does not cover agreed prerequisites; in this respect, as a matter of German arbitration law, the parties need to do their own diligence.¹⁴⁴ Second, the disclosure obligation is already triggered by “doubts,” not only “justifiable doubts” as to an arbitrator’s neutrality. Thus, pursuant to the pure wording of s 1036 para 1 cl 1 ZPO, “any” doubts would suffice. Still, doubts must be plausible from an objective point of view; otherwise, the disclosure obligation would be without limits.¹⁴⁵

3.130  In this context, it is important to strike the right balance. On the one hand, it is of course prudent to disclose more rather than less. On the other hand, disclosure should not be excessive. In recent years, there has been a trend to ever increasing disclosure “as a matter of precaution.” At the same time, arbitral institutions sometimes refuse to appoint candidates that have made statements of impartiality and independence that contain these types of qualifications. It is difficult to give abstract guidance on this issue, as each case is likely to be different. As a very general rule of thumb, however, it would strike us as being useful to somewhat curtail disclosure back to its roots. The orange list contained in the IBA Guidelines on Conflicts of Interest in International Arbitration can serve as a good point of departure for an analysis of a specific situation. Note that these guidelines generally include not only relations and prior activities with one of the parties, but also with affiliates of a party, ie entities belonging to one group of companies (including the parent company).¹⁴⁶

3.131  The disclosure obligation needs to be fulfilled without undue delay.¹⁴⁷ At a minimum, it needs to be addressed to the party suggesting the appointment of a person as arbitrator. Where the appointment is made notwithstanding a prior disclosure, (p. 143) the other party also needs to be informed.¹⁴⁸ Even though the law is silent as to the form of a disclosure, it is of course prudent to do it in writing.¹⁴⁹ The obligation is not limited to circumstances that form the present knowledge of a (prospective) arbitrator. Instead, the statutory wording is objective; the existence of circumstances giving rise to doubts is sufficient to trigger the disclosure obligation. Thus, a (prospective) arbitrator is well advised to do proper research,¹⁵⁰ eg by way of a conflict check that is customary in larger law firms. A (prospective) arbitrator who overlooks circumstances acts at his or her own peril.¹⁵¹

3.132  The sanctions for violations of the disclosure obligation can be twofold. First, it constitutes a breach of contract with respect to the arbitrator agreement (or a corresponding pre-contractual duty) and may thus trigger a claim for damages (unless the arbitrator can demonstrate that he or she acted without fault, s 280 para 1 cl 2 BGB), even though the amount of damages may be limited (eg useless expenses, and—to the extent it has already been paid—arbitrator compensation).¹⁵² Second, a breach of the disclosure obligation may, in exceptional circumstances, be indicative of a lack of neutrality and thus support the challenge of an arbitrator. However, this is certainly not an automatic consequence. In general, the mere breach of the disclosure obligation does not equal a lack of neutrality; only clear and severe violations of the disclosure obligation may potentially trigger a right to challenge an arbitrator.¹⁵³

3.133  An arbitrator may be challenged for lack of agreed prerequisites (s 1036 para 2 cl 1 ZPO). Examples for agreed prerequisites include a certain formal legal qualification, eg a lawyer admitted to practice in Germany. The parties may also agree on certain nationality requirements. Likewise, the parties may agree on a certain age, number of years of practice, religion, or sex. In the arbitration context, these criteria are not considered to constitute impermissible discrimination.¹⁵⁴ Whilst challenges based on lack of neutrality can be brought on the basis of “justifiable doubts,” a successful challenge for lack of agreed prerequisites requires a showing that an agreed prerequisite is missing, and not merely justifiable doubts as to such (p. 144) prerequisite.¹⁵⁵ Self-evidently, there can be grey areas, in particular where the parties have agreed on somewhat unspecific requirements, such as “knowledge of tax law” or “familiarity with M&A practice” and the like (which is one of the reasons why parties should be discouraged from agreeing on such unclear requirements in the first place).

3.134  Where a party declares he or she is going to challenge an arbitrator, the challenge procedure set forth in s 1037 ZPO is triggered. In other words, the declaration of a challenge as such does not terminate the office of an arbitrator.¹⁵⁶ The statutory challenge procedure is geared towards achieving a compromise between safeguarding the fundamental, constitutional requirement that the members of the arbitral tribunal are neutral, and limiting the parties’ ability to abuse arbitrator challenges as a means to unduly delay or obstruct the arbitral proceedings.¹⁵⁷

3.135  The provisions in s 1037 ZPO closely follow art 13 Model Law. As set out above (para 3.101), the parties are free to agree on the details of the challenge procedure, except for the fact that there must always be an opportunity for the party launching the challenge to bring the challenge in front of the competent higher regional court (s 1037 paras 1 and 3 ZPO).

3.136  A party bringing a challenge must declare which arbitrator(s) it rejects for which reasons, and that declaration, addressed to the arbitral tribunal, must be made in writing within the statutory two-week deadline.¹⁵⁸ A challenge declared during a hearing, even if recorded verbatim, does not suffice, but must be repeated in writing in order to be effective.¹⁵⁹ Only parties can challenge arbitrators; arbitrators cannot challenge each other.¹⁶⁰ Where one arbitrator feels that another gives ground for a challenge, the only option would be to inform the parties accordingly to enable them to decide on a challenge. From a practical perspective, arbitrators doing that obviously walk a fine line between safeguarding the tribunal’s neutrality, their (p. 145) confidentiality obligations, and exposing themselves to a challenge for lack of neutrality.¹⁶¹ Thus, in most cases, such action by an arbitrator geared against another arbitrator will only be a means of last resort.

3.137  The calculation of the two-week period follows general principles of German law (s 222 ZPO, ss 187 et seq. BGB). The two-week period starts to run once the party has knowledge of the underlying facts, at the earliest, however, once the party has become aware that the arbitral tribunal has been constituted (s 1037 para 2 cl 1 ZPO).¹⁶² The party bringing the challenge bears the burden of proof that the challenge has been brought on time. Thus, in practice, there is a tension between complying with the deadline on the one hand and not launching premature or ill-founded challenges on the other. Knowledge of the facts means knowledge of such facts that give rise to justifiable doubts as to an arbitrator’s neutrality (s 1036 para 2 ZPO). Thus, in our view it should be considered—similar to the accepted principles governing the termination of service or other long-term agreements for cause¹⁶³—to allow a party to investigate the facts thoroughly before it is compelled to bring a challenge. We think this should include asking an arbitrator to comment on certain circumstances that have raised a party’s suspicions. The advantage of this approach would be not to force parties to “ shoot before they ask” with the obvious collateral detrimental effects on the arbitral proceedings. Parties should be aware, however, that such an approach is not yet accepted by German courts.¹⁶⁴ For the time being, it is prudent to declare a challenge sooner rather than later.¹⁶⁵

3.138  In reaction to a challenge by a party, an arbitrator may decide to withdraw voluntarily in order not to be forced to go through the challenge procedure with the arbitral tribunal, a third party called to decide upon the challenge, or even the—public—state court proceedings mandatorily provided for in s 1037 para 3 ZPO. An arbitrator may prefer the discreet withdrawal over the potentially negative publicity associated with a time-consuming and nerve-racking fight over his or her neutrality. Likewise, the other party may concur that the challenge is well-founded and thus agree with the challenge, such that the office of the arbitrator (as well as the arbitrator agreement) are terminated consensually. More often than not, however, there will be no such consensual solution, in which case the arbitral (p. 146) tribunal is called to decide, as described below (para 3.139). In case of withdrawal or party agreement, the former arbitrator will not be deemed to have acknowledged that there were proper grounds for the challenge (s 1038 para 2 ZPO). This may be important for the former arbitrator’s compensation claims under the—then also terminated—arbitrator agreement (see para 3.197); the former arbitrator continues to be free to argue that he or she was actually neutral.

3.139  Where the arbitral tribunal is called to decide upon the challenge of an arbitrator pursuant to s 1037 para 2 cl 2 ZPO, it does so including the person subject to the challenge. Whilst this may be counter-intuitive to persons less familiar with the arbitral process, it is fully in line with art 13 Model Law and international practice, which the German legislature—after some discussion—adopted.¹⁶⁶ Given that there is always the option to bring the challenge in front of the competent higher regional court if the arbitral tribunal does not agree with the challenge, the parties’ right to a neutral decision is guaranteed (s 1037 paras 1 and 3 ZPO). Thus, a sole arbitrator decides him- or herself upon the challenge, a three-person panel decides with all three arbitrators.

3.140  The parties are free to agree that instead of the arbitral tribunal, a third party or institution ought to decide on an arbitrator challenge (s 1037 para 1 ZPO), such as the ICC Court in ICC proceedings (art 14.3 ICC Rules).¹⁶⁷ By contrast, it is unclear whether the parties could agree to completely dispense with the decision of the arbitral tribunal provided for in s 1037 para 2 ZPO and thus immediately go to the higher regional court pursuant to s 1037 para 3 ZPO. The German higher regional courts that have addressed this issue appear to be split by and large equally on this issue, and so is German legal doctrine.¹⁶⁸ In our view, party autonomy should prevail on this issue. The wording of s 1037 para 1 ZPO is not entirely clear. It could be understood such that only s 1037 para 3 ZPO is absolutely mandatory, which would support our position that s 1037 para 2 ZPO can be completely dispensed with. Admittedly, the wording states that the parties may agree “on a procedure for the challenge of an arbitrator.” This could be read to mean that there must at least be some “procedure” before the case goes to the higher regional court. (p. 147) The legislative materials can be read to support this latter position,¹⁶⁹ but when read properly, they do not really address the issue at hand here. Thus, the correct interpretation of the limits of party autonomy in the present context really turns on the purpose of the provisions at issue. The main purpose of s 1037 ZPO is to strike a balance between ensuring neutrality and safeguarding speed and efficiency. We are not convinced that s 1037 para 2 cl 2 ZPO has as a main purpose to keep the caseload of the higher regional court low. Thus, a party agreement that dispenses with a decision of the arbitral tribunal is fully in line with the purposes of the statute.

3.141  Where the arbitral tribunal (or a third party called upon to decide) rejects the challenge, a party may request the decision of the competent higher regional court (s 1037 para 3 ZPO). The request must be made within one month after the petitioner becomes aware that the challenge was unsuccessful. In order for the request to be on time, filing with the higher regional court is sufficient, provided it is served upon the other party in due course (s 167 ZPO). This applies even where a higher regional court at the wrong venue received the request.¹⁷⁰

3.142  In general, the higher regional court will make a full review of the challenge on the merits.¹⁷¹ The party requesting the decision of the court may submit new facts, provided that they fall within the same ground for challenge; otherwise, new facts are precluded as a result of the two-week deadline for bringing the challenge (s 1037 para 2 cl 1 ZPO).¹⁷² The court will give the other party and possibly the challenged arbitrator an opportunity to comment (s 1063 para 1 cl 2 ZPO). Usually, it will not schedule an oral hearing. The higher regional court may reject the request where it finds that the arbitral tribunal evidently does not have jurisdiction for the entire case.¹⁷³ The decision of the higher regional court, whether on the merits or on procedural grounds, is final and binding and not subject to any further appeal or review (s 1065 para 1 cl 2 ZPO).

3.143  Section 1037 para 3 cl 2 ZPO allows the arbitral tribunal, in its discretion, to continue the arbitral proceedings (including the challenged arbitrator) while the challenge procedure is ongoing. This provision allows the preservation of efficiency and speed in the arbitral process. Nevertheless, it is commonly understood that it (p. 148) should be used with caution. When exercising its discretion, the arbitral tribunal also needs to bear in mind the inefficiency and cost involved in case the challenge is ultimately successful. In such a case, the tribunal will have forced the parties to incur potentially useless expenses for the continuation of the proceedings with a biased arbitrator, eg an extensive evidentiary hearing, and that portion of the proceedings may need to be repeated with a substitute arbitrator. Thus, it is good practice to suspend the arbitral proceedings while a challenge is pending. A tribunal should make use of the continuation option only where it concludes that the challenge is clearly unfounded and merely brought as a means of delay tactics or for other improper reasons.¹⁷⁴

3.144  Where an arbitrator is—for legal or factual reasons—unable to perform his or her obligations, or where an arbitrator does not perform such obligations within a reasonable time, the office may end in one of three ways: (i) voluntary withdrawal by the arbitrator; (ii) party agreement; or (iii) decision by the competent higher regional court upon motion by either party (s 1038 para 1 ZPO). In scenarios (i) and (ii), an arbitrator is not deemed to have acknowledged that there were actually legally valid grounds for terminating the office (s 1038 para 2 ZPO). In all scenarios, the arbitral proceedings may be continued with a substitute arbitrator (s 1039 ZPO). Section 1038 ZPO closely mirrors art 14 Model Law.

3.145  The termination of the office of an arbitrator needs to be clearly distinguished from the termination of the arbitrator agreement (see para 3.191). In addition, termination pursuant to s 1038 ZPO needs to be distinguished from the challenge procedure contained in s 1037 ZPO. An arbitrator can be challenged pursuant to ss 1036, 1037 ZPO for lack of neutrality or agreed prerequisites; the law provides for strict deadlines and allows for the arbitral proceedings to continue while the challenge is pending. By contrast, termination of the office of an arbitrator based on inability to perform or undue delay is not bound to statutory deadlines (see para 3.152). Finally, there may be instances of arbitrator misconduct that are neither sanctionable by challenge nor under s 1038 ZPO, such as mere violations of an arbitrator’s disclosure obligations (s 1036 para 1 ZPO), breaches of confidentiality, or the involvement of assistants beyond what is allowed under the law or an agreement with the parties. Unless these violations rise to a level that give grounds for termination of the arbitrator agreement for cause (see para 3.196) or grounds for set aside of an award under s 1059 ZPO, the only sanctions are a potential claim for damages under s 280 para 1 BGB, plus the potential reputational damage to the arbitrator that may reduce his or her prospects of being appointed again in the future.

3.146  Inability to perform may be based on legal or factual grounds that usually arise after the appointment of an arbitrator. Legal grounds leading to inability may be the loss of legal capacity or the lack of a necessary governmental approval, such as in the case of active judges and public officials (including law professors at state-owned universities, see paras 3.83 et seq.).¹⁷⁵ Where an arbitrator later becomes a party or a legal representative thereof, some courts and scholars have concluded inability,¹⁷⁶ even though technically, this is also a ground for challenge. Nevertheless, it is probably correct that in such a scenario an arbitrator cannot continue to serve even though the parties may have missed the two-week deadline for challenge provided for in s 1037 para 2 cl 1 ZPO. Termination of the arbitrator agreement is also sometimes seen as a scenario triggering inability to perform for legal grounds,¹⁷⁷ even though this appears as a construct that is not very persuasive. Instead, it should be possible to come to appropriate practical solutions by other means: where the arbitrator terminates the arbitrator agreement, his or her withdrawal (in the sense of s 1038 para 1 cl 2 alt. 1 ZPO) is implied. Where the parties jointly terminate the arbitrator agreement, they impliedly agree on the termination of the arbitrator’s office (s 1038 para 1 cl 2 alt 2 ZPO). Unilateral termination of the arbitrator agreement by one of the parties is generally not possible (see para 3.198). Where an arbitrator dies, his office terminates ex lege without the need for any further action by the parties or the court. The reason is that the office of an arbitrator is a personal office that cannot be transferred to the heirs or successors.¹⁷⁸ As can be seen, in all of these scenarios, there is no need to resort to the provisions on inability to perform.

3.147  Factual reasons triggering inability to perform may be serious permanent illness with no reasonable prospect of recovery or imprisonment of an arbitrator for a substantial period of time.¹⁷⁹ Traditionally, examples such as a long trip abroad or moving to a far-away country have been considered in this context, too.¹⁸⁰ It should (p. 150) be noted, however, that given modern means of transportation and communication, these examples should be much less relevant today.

3.148  Legal and factual inability must relate to circumstances that are, viewed from the present point in time, more or less permanent. Where it is foreseeable that the circumstances presently inhibiting an arbitrator will go away in the future, the case is probably not one of inability, but potentially one of undue delay.¹⁸¹ Importantly, in all of the above scenarios (except death of an arbitrator), inability to perform does not automatically excuse the arbitrator or terminate his or her office. For reasons of legal certainty, the potentially applicable general civil law provisions (s 275 BGB) are superseded by s 1038 para 1 cl 2 ZPO, requiring a clearly communicated decision by the arbitrator, the parties, or the court.¹⁸²

3.149  Undue delay covers scenarios where the arbitrator is, in principle, able to act (as opposed to the cases of inability, see paras 3.146 et seq.), but does not act or acts only at a “speed” that is unacceptably slow. Whether and when delay is unacceptable is a matter of the individual case and all its circumstances. What is acceptable under the circumstances not only depends on the factual and legal complexities of the case, but also the behavior of the other constituents, namely the parties, and the overall duration of the proceedings thus far.¹⁸³ Termination of the office of an arbitrator for undue delay is clearly intended to be an exceptional remedy of last resort. It must not be (ab)used by a party to try and micro-manage how an arbitrator, or for that matter the entire arbitral tribunal, handles the case.¹⁸⁴ Against this background, in a complex and long-running case, a delay of a further few months may be entirely acceptable, whereas in a small-scale, simple matter it may not.¹⁸⁵

3.150  Where a ground for termination within the meaning of s 1038 para 1 cl 1 ZPO exists—and in fact irrespective of the existence of such a ground¹⁸⁶—the arbitrator concerned may voluntarily and unilaterally withdraw from office by declaration towards all parties; none of the parties can veto such withdrawal.¹⁸⁷ Generally, (p. 151) withdrawal from office will also need to be viewed to be an implied termination of the arbitrator agreement (see paras 3.199 et seq.).¹⁸⁸ Pursuant to s 1038 para 2 ZPO, the withdrawing arbitrator will not be deemed to have formally acknowledged that there was in fact inability to perform or undue delay. To the extent there arises a dispute over this issue, eg in connection with the termination of the arbitrator agreement and the question what remuneration the withdrawing arbitrator receives, the issue can therefore be litigated de novo.

3.151  The parties can jointly terminate the office of an arbitrator at any time; this is an expression of their fundamental right to party autonomy. Thus, the right to jointly terminate exists irrespective of whether an arbitrator is actually unable to perform or has been unduly late in performing his or her obligations.¹⁸⁹ At the same time, inability or undue delay are certainly scenarios where termination by party agreement is particularly appropriate in case the arbitrator concerned does not withdraw voluntarily. The parties may do so informally by declaring termination towards the arbitrator concerned.¹⁹⁰ For reasons of legal certainty and proof, it is of course advisable to act in writing. Termination of office by joint party action will in all likelihood also imply a termination of the arbitrator agreement (see para 3.198).¹⁹¹ In this scenario, again s 1038 para 2 ZPO applies.

3.152  As a means of last resort (ultima ratio), a party may request the competent higher regional court to terminate the office of an arbitrator where he or she is unable to perform or acts with undue delay. Such party must first try and ask the arbitrator to withdraw voluntarily or the other party to agree to terminate; where a party fails to try that, the request to court is not (yet) permissible.¹⁹² Only parties may ask the court for termination, not co-arbitrators.¹⁹³ There is no statutory deadline for the request (unlike for challenges, where a strict two-week period applies, s 1037 para 2 cl 1 ZPO). However, in exceptional cases, where a party waits for an extended (p. 152) period of time and has actually given the other party reason to believe that it would not seek termination, the request may be time-barred based on general principles of good faith (estoppel-Verwirkung).¹⁹⁴

3.153  The court’s decision is final and binding without further remedy to the BGH (s 1065 para 1 cl 2 ZPO). By its plain wording, s 1038 para 2 ZPO does not apply. Thus, in a subsequent litigation on his or her remuneration, an arbitrator would be free to argue that there was actually no ground for termination; he or she would, however, face a high factual burden of persuasion given the previous decision of the higher regional court.

3.154  It is unclear whether the parties may agree to exclude the resort to the court to terminate the office of an arbitrator.¹⁹⁵ The wording of s 1038 ZPO is neutral. Compared to s 1037 para 1 ZPO, there is no express provision prohibiting such a party agreement. The legislative materials appear to allow party autonomy.¹⁹⁶ In our view, in principle this is in line with the purpose of s 1038 ZPO, at least as long as the parties agree on a substitute neutral mechanism to terminate an arbitrator, such as by way of decision by the arbitral institution (see, eg, art 15.2 ICC Rules).¹⁹⁷ Whereas s 1037 ZPO is concerned primarily with the fundamental, constitutional requirement of arbitrator neutrality and therefore provides for court control as a must (s 1037 paras 1 and 3 ZPO), s 1038 ZPO deals with mostly external reasons that prevent an arbitrator from performing in the way he or she should. There is thus less need for mandatory court control. Nevertheless, the law clearly shows that there must be some mechanism to terminate an arbitrator where an arbitrator does not withdraw and the parties cannot agree. In the latter case, termination of the arbitrator agreement for cause is not an option, because the parties can only terminate the arbitrator agreement jointly (see para 3.198). However, we do not see a compelling need for state court action; thus, where the parties provided for termination by an arbitral institution, this fulfills the statutory purpose just as well.

3.155  Where the office of an arbitrator ends pursuant to a successful challenge for lack of neutrality or agreed prerequisites (ss 1036, 1037 ZPO), or where the office ends as a result of inability or undue delay (s 1038 ZPO), the arbitral proceedings may continue nevertheless, and a substitute arbitrator may be appointed (s 1039 para 1 cl 1 ZPO). Such appointment follows the same rules that applied to the appointment (p. 153) of the arbitrator whose office has been terminated (s 1039 para 1 cl 2 ZPO). The German arbitration law thereby follows art 15 Model Law.

3.156  Once the substitute arbitrator is validly appointed and has acquired the relevant information, the arbitral proceedings may continue. Given that the purpose of s 1039 ZPO is to avoid unnecessary delay and costly repetitions, the new tribunal is generally not required to repeat the proceedings or parts of it de novo.¹⁹⁸ In particular, the right to be heard does not mandate a repetition as long as it is ensured that the substitute arbitrator receives all relevant information and the legal arguments of the parties. A different situation may arise where witnesses have already been heard. Still, it may not be mandatory for the substitute arbitrator to get a personal impression of a witness where there are other means to assess his or her credibility, eg by a verbatim transcript of the witness examination or by a consistent assessment of a witness by the other arbitrators. Where the new arbitrator nevertheless prefers to obtain a personal impression of the credibility of witnesses, the evidence taking will need to be repeated.¹⁹⁹

3.157  Special situations may arise where the rules applying to the appointment of the arbitrator being replaced are no longer operable. This may be the case where the original arbitrator was appointed by a third party or institution that no longer exists. Similarly, the arbitrator being replaced may have already been named in the arbitration agreement.²⁰⁰ In these situations, the parties ought to try and resolve the situation by interpretation of the arbitration agreement. If they cannot agree, as a last resort, appointment by the competent higher regional court should be the solution (s 1035 paras 4 and 5 ZPO).²⁰¹

3.158  The parties are free to agree different rules in case an arbitrator needs to be replaced (s 1039 para 2 ZPO). Hence, they could agree that the arbitral proceedings shall terminate where the office of an arbitrator terminates,²⁰² even though this would generally appear to be an impractical solution. The parties may also agree to continue the proceedings with the remaining arbitrators only.²⁰³ Alternatively, it would be possible to name a substitute from the very beginning, and to allow the (p. 154) substitute to participate in the proceedings from the beginning.²⁰⁴ This would obviate the need to repeat parts of the proceedings once the substitution actually kicks in, but is of course a costly alternative which German practice does not make use of.

3.159  We start our analysis with the legal nature of the arbitrator agreement (below paras 3.160 et seq.). We then address applicable law (below para 3.165) and conclusion of the arbitrator agreement (below paras 3.166 et seq.), before we look in detail at the rights and obligations of the parties to the agreement (below paras 3.170 et seq.). Term and termination are a further focus of our analysis (below paras 3.191 et seq.).

3.160  Under German law and practice, the arbitrator agreement is understood to be an agreement between the parties of the arbitration on the one hand and the arbitrator(s) on the other regarding the conduct of the arbitral proceedings. It is to be distinguished from (i) the arbitration agreement; (ii) the appointment of an arbitrator; and (iii) the agreement with an arbitral institution (Schiedsorganisationsvertrag):²⁰⁵

• •  The arbitration agreement is an agreement solely between the parties to submit certain disputes to the final and binding decision of an arbitral tribunal, without usually knowing at the time of the arbitration agreement who the arbitrators will be.

• •  The appointment of an arbitrator is an act by a party, a co-arbitrator, an arbitral institution, a state court, or another third party vesting the office of an arbitrator with the appointee (see paras 3.19 and 3.33 et seq.).

• •  The agreement with an arbitral institution is an agreement that the parties—in most instances impliedly—conclude with the arbitral institution administering the proceedings. Its main effect is the obligation of the parties to pay the institution’s administrative fees, if any, and the institution’s obligation to assist the parties in the conduct of the proceedings as per the rules of the institution.²⁰⁶

3.161  The arbitrator agreement, by contrast, is a multi-party agreement including the parties to the arbitral proceedings and the arbitrator or arbitrators. The Tenth Book (p. 155) of the ZPO does not contain any provisions thereon. It is thus no surprise that there are different views as to its legal nature, which range from an agreement under substantive law, to a procedural law agreement, to a hybrid agreement.²⁰⁷ Similar to the arbitration agreement (see para 2.12), we think the legal nature is captured best by qualifying the arbitrator agreement as a substantive law agreement on the conduct of arbitral proceedings.²⁰⁸ Arbitration is a creature of party autonomy and freedom of contract. In a first step, the parties, by private agreement, opt out of the state court system, and in a second step, they agree with their privately chosen decision-makers on the mutual rights and obligations in order to conduct the arbitration within the framework of the German arbitration law and any further agreements of the parties.

3.162  As a consequence, as with the arbitration agreement and assuming German law to govern, the BGB rules on the formation, validity, interpretation, and termination of contracts apply (ss 104 et seq. BGB), see below paras 3.166 et seq.²⁰⁹ As with the ZPO, the arbitrator agreement is not addressed specifically in the BGB, either. The further qualification of the contents of an arbitrator agreement is thus subject to some uncertainty and controversy. Given that the main content of an arbitrator agreement is the conduct of arbitral proceedings by the arbitrator(s) chosen by the parties, it could be argued to qualify the arbitrator agreement as a type of service agreement (Dienstvertrag, ss 611 et seq. BGB), mandate (Auftrag, ss 662 et seq. BGB), or agency (Geschäftsbesorgung, s 675 BGB).²¹⁰ However, none of these contract types properly and fully captures the essence of an arbitrator agreement: first and foremost, the main obligation is to conduct the arbitral proceedings and to render a decision by way of an award or to otherwise terminate the proceedings.²¹¹ However, unlike in cases of services agreement, mandates, or agency relationships, as far as the decision of the dispute is concerned, arbitrators are completely independent in performing their activities and not subject to any instructions from the (p. 156) parties. They may have ancillary obligations outside the key area of conducting the proceedings and making a decision, such as properly administering and accounting for advances on costs, and it may be that these obligations can be captured appropriately with legal concepts known from agency or mandate agreements. However, it would not seem appropriate to qualify an entire agreement on the basis of such ancillary items.

3.163  Thus, we are of the view that an arbitrator agreement should be qualified as an agreement sui generis, and its contents and its application are primarily a matter of interpretation of the individual agreement.²¹² With regard to some additional and ancillary obligations, the BGB provisions on service, mandate, or agency agreements may be used by analogy.²¹³ This applies for instance to issues of compensation (ss 612 et seq. BGB), personal service (s 613 BGB), termination (ss 626 et seq. BGB), and reimbursement for costs (ss 669, 670 BGB).

3.164  In ad hoc proceedings, the arbitrator agreement is particularly important. It is the place to address a number of issues that would otherwise be addressed by the rules of an arbitral institution, most notably the compensation of the arbitrators, their liability, the right to request advances on arbitrator compensation, and confidentiality.

3.165  Given that the arbitrator agreement is a substantive law agreement, the Rome I Regulation provides for the applicable conflict of law rules.²¹⁴ The exclusion contained in Art 1 para 2 lit e of the Rome I Regulation does not apply, because the arbitrator agreement needs to be distinguished from the arbitration agreement. Pursuant to Art 3 para 1 Rome I Regulation, the parties are free to choose the law applicable to the arbitrator agreement. The parties are well advised to do so where there is an international nexus, ie where the parties and the arbitrators do not all reside in the country of the seat of the arbitration. In case the parties fail to make an explicit choice, Art 4 Rome I Regulation applies. It is questionable whether an arbitrator agreement falls under one of the specific contract categories enumerated in Art 4 para 1 Rome I Regulation. Even if one were to qualify an arbitrator agreement as a service agreement, the designation of the law of the arbitrator’s residence (Art 4 para 1 lit e Rome I Regulation) does not seem particularly appropriate, especially where there are several arbitrators from different countries or where the (p. 157) seat of the arbitration is different from the residence of the arbitrator(s). The same applies to Art 4 para 2 Rome I Regulation (place of residence of the party whose obligations are characteristic of the contract). Thus, it is most appropriate to look to Art 4 para 3 Rome I Regulation and thereby to the country which has the closest connection to the arbitrator agreement. In most cases, this should be the country in which the arbitration is seated.²¹⁵ Thus, unless the parties agree otherwise, usually German substantive law should govern arbitrator agreements related to arbitrations seated in Germany.

3.166  The conclusion of the arbitrator agreement follows the provisions of the BGB for the conclusion of contracts (ss 145 et seq. BGB), because the arbitrator agreement is a substantive law agreement. In practice, the arbitrator agreements for a three-person panel are often collapsed into one document signed by all parties to the arbitration and all arbitrators. The text of the arbitration agreement is often repeated in the arbitrator agreement. In such case, there are no issues regarding contract formation. Likewise, it would be possible to conclude three separate arbitrator agreements, with all parties to the arbitration signing each arbitrator agreement.

3.167  The law does not require any specific form for an arbitrator agreement. Thus, it can be concluded orally and it can even be implied by conduct.²¹⁶ In this case, the construction of the arbitrator agreement is more complex. In German practice, in the absence of a written arbitrator agreement, the party appointing an arbitrator is deemed, by virtue of the arbitration agreement, to have an implied power of attorney from the opposing party to conclude the arbitrator agreement with the appointee. The appointee only needs to accept towards the appointing party, who is deemed to have power of attorney to receive such acceptance also for the opposing party. Regarding the chairman, the party-appointees are deemed to have implied power of attorney to conclude the arbitrator agreement and to receive the chairman’s acceptance also for the other persons involved.²¹⁷ The content of the arbitration agreement is deemed to be part of the arbitrator agreement.²¹⁸ This construct may sound artificial, and to some extent it certainly is. This may be one of the reasons why other jurisdictions place much less emphasis on the arbitrator agreement.

(p. 158) 3.168  In principle, an arbitrator agreement may be invalid for the same reasons that can render any agreement invalid. For instance, an agreement concluded under the influence of fraudulent misrepresentation or duress may be voidable under ss 123, 142 BGB. The same applies in case of certain types of errors (s 119 para 1 BGB). Errors related to personal characteristics of an arbitrator (s 119 para 2 BGB) can, however, not justify the voidance of an arbitrator agreement. Instead, the German arbitration law contains special provisions addressing these issues (ss 1036 et seq. ZPO), derogating the general provision of s 119 para 2 BGB (see also above para 3.115).²¹⁹

3.169  When it comes to grounds for invalidity, the arbitrator agreement and the arbitration agreement need to be analyzed separately. Even where an arbitration agreement is null and void or incapable of being performed, the arbitrator agreement may still be valid.²²⁰ For instance, the case may concern the contestation of a shareholder resolution, one party then brings arbitration, the parties conclude an arbitration agreement, and the arbitral tribunal then finds the arbitration agreement to be invalid because it does not satisfy the Schiedsfähigkeit II requirements of the BGH (see para 1.78). In such a scenario, despite the invalidity of the arbitration agreement, the arbitrator agreement is and remains valid and binding, at least where the parties and the arbitrator(s) concluded an express written arbitrator agreement (or arbitrator agreements).²²¹ Importantly, it continues to serve as the legal basis for remuneration of the arbitrators. There may of course be cases where both agreements are invalid for the same reason. For instance, one party may lack legal capacity when concluding both the arbitration agreement and the arbitrator agreement.

3.170  Below we address some of the typical rights and obligations of the arbitrators and the parties arising from an arbitrator agreement.

3.171  The main obligation for an arbitrator resulting from the arbitrator agreement is the obligation to conduct the arbitral proceedings and to render a decision by (p. 159) way of an award or to otherwise terminate the proceedings (see para 3.162). This obligation is similar to the duties of a state court judge. An arbitrator is therefore obliged to read the file, to analyze the applicable law, to participate in deliberations of the tribunal and oral hearings, to participate in the drafting of an award and its reasoning, and to sign the award.²²² In addition, arbitrators are obliged to take all reasonable steps such as to ensure that an award is enforceable and not subject to set aside.²²³

3.172  These obligations are both important and—at times—cumbersome. The parties have, however, only limited means to enforce these obligations. They are not entitled to bring a court action or arbitral proceedings seeking to compel fulfillment of the above-mentioned duties; otherwise, such court action could be (ab)used easily to fundamentally derail the arbitral process.²²⁴ The parties have only indirect means to “enforce” the above obligations. In case all parties to the arbitration are in agreement, they can terminate the office of an arbitrator and the corresponding arbitrator agreement at any time. Where only one party is dissatisfied with the way an arbitrator performs, the party is limited to the grounds for challenging or terminating an arbitrator under ss 1036 et seq. ZPO (in particular for a lack of neutrality, lack of required characteristics, inability to perform, persistent non-performance, see paras 3.112 et seq., 3.133 and 3.144 et seq.). In theory, damage claims may arise, too (within the parameters of possible limitations of liability, see paras 3.189 et seq.). However, from a practical point of view, such claims will usually be fairly illusory.²²⁵ This may seem unsatisfactory, for instance where a claimant is faced with an arbitrator appointed by the respondent who clearly “drags his feet.” On the other hand, giving a party readily available remedies against allegedly “non-performing” arbitrators would be a dangerous tool in the hands of rogue parties to derail the arbitral process.

3.173  Arbitrators have to perform their obligations in person. Frequently, this result is derived from ss 613 cl 1, 664 para 1 cl 1 BGB, two provisions that require “in case of doubt” that services and mandates be performed in person.²²⁶ However, for arbitrators, this does not only apply “in case of doubt” but generally. This obligation already follows from the nature of their mandate as appointees of the parties (p. 160) entrusted with the private adjudication of a dispute that would otherwise have to be decided by state court judges. The provisions of the Tenth Book regarding appointment and replacement of arbitrators are geared towards personal service, eg as regards neutrality, qualifications, and ability to perform.

3.174  Arbitrators may receive support from assistants, but their activities must not be substituted by assistants. Obviously, it is difficult to state a bright-line test as to what is support and what is substitution. Clearly, research regarding abstract questions of law raised by the case in front of an arbitrator would be a support activity. Similarly, summarizing the facts of the case in preparation of a hearing qualifies as pure support, as long as the arbitrator has also read the complete file him- or herself. By contrast, applying the facts of the case to the applicable law is clearly the core prerogative of the arbitrator. Assistants may be asked to make suggestions in this regard or to prepare drafts.²²⁷ However, the arbitrator still must do the work him- or herself and therefore review any drafts from assistants very carefully.²²⁸

3.175  As a general matter, arbitrators should be very reluctant regarding the use of assistants beyond mere research and preparatory work. Not only may they endanger the enforceability of an award if they take too much of a “hands-off” approach. They also harm their own reputation and may do a disservice to arbitration as such. Where an arbitrator does not have the time to work on the case more or less in person, he or she should decline the appointment.

3.176  As far as the core duty of an arbitrator to further and terminate the proceedings is concerned, an arbitrator is not subject to any instructions by the parties.²²⁹ This is one of the main reasons why an arbitrator agreement cannot be qualified as a service agreement, an agency relationship, or a civil law mandate, but needs to be regarded as an agreement sui generis (see paras 3.160 et seq.). Outside the judge-like duties to apply the law to the case, decide the case, and terminate the proceedings, to a certain limited extent, party instructions are permissible. For instance, the parties may agree on procedural issues pursuant to s 1042 para 3 ZPO, and the arbitrators will, in principle, be bound to follow such agreement.²³⁰

3.177  Arbitrators have the right to be compensated for their services; their activities are not pro bono.²³¹ The remuneration of arbitrators is a key item for any arbitrator agreement, in particular in ad hoc arbitrations. In institutional arbitration, the rules of the institution usually regulate arbitrator compensation (see, eg, the fee scales of the DIS and the ICC, paras 2.206 and 2.214). Thus, there is little room and indeed little need for additional party agreement. Institutional fee scales may also serve as a useful guideline for parties and arbitrators negotiating on arbitrator compensation in ad hoc cases. Otherwise, under German law, there is no directly applicable fee scale for ad hoc cases. Similar to services agreements, in the absence of a party agreement, the arbitrator has the right to request the “usual compensation” (übliche Vergütung, cf s 612 para 2 BGB). Where there is no “usual compensation” or it is not possible to determine it, under general principles of German law, the person rendering the services—in our case the arbitrator—is empowered to determine the compensation in his or her discretion, subject to the limitations of equity (Leistungsbestimmung nach billigem Ermessen, ss 315, 316 BGB).²³²

3.178  Traditionally, there has been a strong view in Germany looking towards the statutory fee scales for attorneys-at-law in order to determine the compensation of arbitrators.²³³ Originally, these fee scales were regulated in the Federal Code on Attorneys’ Fees (BRAGO) which was later replaced by the Attorney Compensation Act (RVG). On this basis, the German Attorneys’ Association (DAV) and the German Association of Judges (DRB) have published recommendations for arbitrator compensation.²³⁴ We are skeptical of this approach. The above-mentioned statutory fee scales are geared towards the professional services of attorneys-at-law representing clients in all sorts of situations, both in and out of state court. The scales applicable to state court litigation distinguish between the various levels of appeal. Thus, they are not readily transferrable to arbitration. Arbitration is “private justice,” and the activities of an arbitrator may be comparable to those of a state court judge, but certainly not a party representative. In arbitration, there is only one instance and no appeal. Many arbitrators are not German attorneys-at-law, but active or retired judges, law professors, foreign lawyers, or not even lawyers at all. Also, it is our observation that in practice, there are many cases where the parties do not seek inspiration from the RVG. Thus, we do not think that an RVG-based (p. 162) arbitrator compensation can still be regarded as the “usual compensation” in the sense of s 612 para 2 BGB.²³⁵

3.179  Therefore, unless there is some other form of “usual compensation,” where the parties and the arbitrators cannot agree on arbitrator compensation in ad hoc cases seated in Germany, arbitrators will usually be empowered to fix their compensation in their “equitable discretion” (ss 315, 316 BGB). In general, in our view arbitrators will not act against the principles of equity if they base their compensation on the DIS fee scales. In fact, for arbitrations seated in Germany, we would recommend that arbitrators actively look to the fee scales of the DIS (Appendix to s 40.5 DIS Rules) as far as their compensation is concerned (obviously, the DIS administrative fee does not apply in ad hoc arbitration). The parties, when considering what fees to agree with an arbitrator, may still find that the DIS fee scales do not entirely fit their purpose, eg in cases with very large amounts in dispute, because the DIS scales do not contain any cap. Nevertheless, we believe they are a better starting point generally than the RVG.

3.180  While it is true that arbitrators must not be judges in their own affairs (nemo iudex in causa propria), fixing their own fees is not a violation of this principle, as the BGH has recently held.²³⁶ What would not be possible for arbitrators is to render an award against a party demanding payment of arbitrator fees; in order to obtain an enforceable title on fees, arbitrators would need to bring action against a party in state court (or—to the extent the arbitrator agreement contains an arbitration agreement—before another arbitral tribunal). Obviously, arbitrators may still fix and award costs among the parties (s 1057 ZPO).

3.181  As between the parties and the arbitrators, the parties are jointly and severally liable for arbitrator compensation.²³⁷ Usually, in the arbitral award, the tribunal will make a specific determination as to who bears how much of the costs (s 1057 ZPO). The compensation claims of arbitrators exist irrespective of the validity of the arbitration agreement (as opposed to the arbitrator agreement) and, in principle, irrespective of defects of the arbitral proceedings or a later set aside or lack of enforceability; an exception may exist where the arbitrator acted with fault (usually limited to intentional misconduct, see below paras 3.189 et seq.).²³⁸ Outside such exceptional cases, there is no basis—neither under German contract law nor under the Tenth Book of the ZPO—to reduce arbitrator fees or to hold back on (p. 163) them on the basis of “improper performance” by the arbitrators. Any such dispute would almost certainly derail the arbitral process and would lend itself to manipulation and abuse. Instead, the remedies against arbitrators who violate their duties are governed exclusively by ss 1036 et seq. ZPO, the right of the parties to (jointly) terminate the arbitrator agreement (see paras 3.196 et seq.), and potentially damages claims (as far as those are not excluded by applicable limitations of liability, see paras 3.189 et seq.). In practice, to avoid any such tactics (and for other reasons), arbitrators are well advised to request a full advance on costs and expenses, as they are entitled to (see paras 3.184 et seq.).