4.1  In this chapter, we first address the legal framework applicable to proceedings before arbitral tribunals seated in Germany (below paras 4.2 et seq.). On this basis, we address the typical structure and frequent steps of arbitral proceedings (below paras 4.37 et seq.). Finally, we discuss a wide range of special situations, such as multi-party arbitration, parallel litigation and arbitration, arbitrations involving sovereigns, fast-track arbitration, as well as issues of fraud, money laundering, and corruption (below paras 4.206 et seq.).

4.2  We first address the hierarchy of applicable procedural rules (below paras 4.3 et seq.) before we turn to important general legal principles for the conduct of arbitral proceedings (below paras 4.18 et seq.).

4.3  The legal framework governing arbitral proceedings before tribunals seated in Germany can be derived from s 1042 ZPO:¹

• (p. 172) •  First, mandatory rules of German arbitration law always prevail, such as the right to be heard, the right to equal treatment, and the right to be represented by counsel (s 1042 paras 1 and 2 ZPO, below paras 4.4 et seq.).

• •  Second, apart from such mandatory rules, the parties are free to regulate the arbitral proceedings by party agreement or by joint reference to the rules of an arbitral institution (s 1042 para 3 ZPO, below para 4.6).

• •  Third, next in the hierarchy of applicable rules are the non-mandatory provisions of German arbitration law (s 1042 para 4 cl 1 ZPO, below para 4.7).

• •  Fourth and finally, the arbitral proceedings are determined by the arbitral tribunal in its “free discretion” (freies Ermessen), s 1042 para 4 cl 1 ZPO (below paras 4.8 et seq.).

4.4  Whether a provision of the German arbitration law is mandatory can be derived in many cases from the wording of the provision. German arbitration law often contains expressions such as “unless otherwise agreed by the parties” or the like. Where such a phrase is absent, this may be taken as an indication for a mandatory rule. Nevertheless, the wording as such is not the only criterion for the analysis, and other criteria, such as the legislative history and, most importantly, the purpose of the provision, must be analyzed.²

4.5  Against this background, the provisions on equal treatment, the right to be heard, and the right to be represented by counsel (s 1042 paras 1 and 2 ZPO) are certainly mandatory. The same applies to provisions governing certain procedural principles like the preliminary Kompetenz-Kompetenz of the arbitral tribunal (s 1040 paras 1 and 2 ZPO), the final Kompetenz-Kompetenz of the state courts (s 1040 para 3 cl 2 ZPO), the requirement of independent and impartial arbitrators (ss 1036 et seq. ZPO), the various options for terminating arbitral proceedings (s 1056 ZPO), the final and binding character of arbitral awards (s 1055 ZPO), and the provisions on set aside and enforcement of arbitral awards (ss 1059 et seq. ZPO).³ In addition, there are certain mandatory unwritten rules governing the conduct of arbitrations that follow from the fact that arbitration is a substitute for state court litigation, such as the requirement for arbitrators to act and decide in person.⁴

4.6  An agreement of the parties regarding the conduct of arbitral proceedings may be found in the arbitration agreement, in procedural agreements, including by reference to the rules of an arbitral institution or on an ad-hoc basis. Party agreement, (p. 173) as long as not in violation of public policy or other mandatory norms, takes precedence over the discretion of the tribunal. Despite the parties’ far-reaching autonomy, limited only by mandatory law, an arbitration agreement or a procedural agreement—at least in German practice—is typically not the place to rewrite or otherwise seek to improve upon the arbitration law (“less is more”). We have already addressed the typical optional components of an arbitration agreement, such as the place of arbitration, the language of the proceedings or the reference to the rules of an arbitral institution (see paras 2.177, 2.181, and 2.200 et seq.). Practical examples of potentially useful further items for party agreement include reference to certain provisions for state court litigation,⁵ as well as provisions on document disclosure and the taking of evidence more generally (eg by reference to the IBA Rules on the Taking of Evidence in International Arbitration).

4.7  In the absence of mandatory law and party agreement on an issue, the derogable rules of German arbitration law apply. Where the law uses expressions like “unless otherwise agreed by the parties” or the like, it is easy to conclude that the corresponding provision of the German arbitration law is not mandatory, but derogable by party agreement. It is important to remember that it is solely the Tenth Book of the ZPO that contains the German arbitration law. The provisions of the ZPO outside the Tenth Book, in particular those governing state court litigation, do not apply in arbitration. Where parties wish provisions of the ZPO outside the Tenth Book to apply, they should explicitly so provide.

4.8  In a first step, we discuss general principles governing the discretion of the arbitral tribunal pursuant to s 1042 para 4 ZPO (below paras 4.9 et seq.). Thereafter, we specifically address an issue that has become a highly debated one in recent German practice: the relationship and potential tension between party agreement on the one hand and the discretion of the arbitral tribunal on the other (below paras 4.14 et seq.).

4.9  Where there is neither law—be it mandatory or non-mandatory—nor party agreement on a certain issue, the arbitral tribunal has “free discretion” to determine the conduct of the proceedings (s 1042 para 4 cl 1 ZPO). “Free” obviously does not mean that a tribunal would be allowed to act in an arbitrary or impermissible manner. The discretion of the tribunal exists only within the parameters of the fundamental principles of arbitral proceedings, such as equal treatment and the right to be heard.⁶ Whilst the parties can further limit (p. 174) the tribunal’s discretion by party agreement on certain issues, the parties cannot flatly eliminate the tribunal’s discretion as such.⁷ The tribunal has discretion only with respect to the conduct of the proceedings; regarding the merits of the case, it is bound by the applicable substantive law (unless it is expressly authorized to decide ex aequo et bono, s 1051 para 3 ZPO, or to the extent the parties have otherwise granted discretion to the arbitral tribunal, eg by providing for application of the conflict of law rules deemed most appropriate by the arbitral tribunal).⁸

4.10  Thus, an arbitral tribunal acting under the German arbitration law is free to adopt a procedural style that is akin to or “borrows from” German state court litigation, and many German arbitrators (especially active or retired judges) do exactly that.⁹ This is one of the reasons why a certain knowledge of German legal traditions and state court litigation (see paras 1.13 et seq.) can be highly useful to an international practitioner involved in arbitral proceedings seated in Germany. At the other end of the spectrum, an arbitral tribunal acting under the German arbitration law would be just as free to conduct the proceedings in the style of Anglo-American litigation, where the tribunal often adopts a more passive and “receiving” role, often lets the parties conduct extensive document disclosure, permits the parties to drive the taking of evidence, and may allow elaborate and even contentious cross-examination of fact and expert witnesses. This happens much less frequently in Germany. Nevertheless, a number of German arbitrators take the different nationalities and legal traditions of the parties into account in shaping the proceedings. The German law is flexible enough to accommodate such endeavors.

4.11  In our view, at least in international cases, unless there is a clear desire on the part of both sides to have the proceedings conducted in a state court litigation type manner, arbitral tribunals should generally be reluctant to do so. It is the express intent of the drafters of the German arbitration law to strengthen Germany as a seat for international arbitration (without distinction between domestic and international arbitration cases).¹⁰ At least as far as international cases are concerned, this legislative intent is better served by choosing a procedural style that is akin to the emerging international practice, which can be described as a merger of the civil and common law traditions (best of both worlds approach).

4.12  Examples of individual measures within the discretion of the tribunal include the bifurcation or trifurcation of the proceedings (eg in a jurisdiction, liability, and quantum phase),¹¹ the setting of deadlines for submissions and document requests, (p. 175) details for drafting of submissions and the production of exhibits, the sequence and the style for questioning witnesses, the exclusion of a person from a hearing due to unacceptable behavior,¹² or—as far as permitted by s 1042 para 2 ZPO (see below paras 4.33 et seq.)—the exclusion of a party representative who is incapable of performing his or her obligations.¹³

4.13  In practice, arbitral tribunals will often lay down such decisions in one or more procedural orders. In particular, the first order of such kind is an important tool for the initial overall structuring of the proceedings and the framing of party and tribunal expectations of the procedure.¹⁴

4.14  Given that party autonomy is such an important cornerstone of arbitration, arbitral tribunals will usually seek agreement of the parties on procedural issues and prior to the rendering of procedural decisions. This has considerable advantages both from a legal and a psychological point of view. From the legal standpoint, where a party has consented to an act of the arbitral tribunal, there is no room for later complaints, neither within the arbitral proceedings nor at the set aside or enforcement stages. In addition, from a psychological point of view, reaching consensus on procedural issues can considerably facilitate and pacify the overall proceedings and may even contribute to paving the way to settlement or achieving a higher degree of “buy-in” for later decisions that are seen as adverse to one of the parties.

4.15  This raises the issue, however, whether the arbitral tribunal is still free to unilaterally change procedural decisions that it has previously reached with the consensus of the parties. In other words, does party consensus mean that the issue is now one of a binding agreement of the parties which the arbitral tribunal cannot supersede unilaterally? This is precisely the issue that the Higher Regional Court of Frankfurt/Main had to address recently, and it did so in a manner that stirred considerable debate in the German arbitration community.

4.16  In this case, an arbitral tribunal had issued a procedural order regarding the form of expert reports which stated that in the order “the arbitral tribunal documents the parties’ agreement” on such form issues. An expert report submitted later on in the proceedings failed to comply with these form requirements, but the arbitral tribunal accepted it nevertheless over the respondent’s objection. Additionally, and independent from the procedural order, the tribunal had issued terms of reference for a tribunal-appointed expert based on a draft produced by the tribunal and written comments by the parties. Again, the tribunal stated that it thereby “documents the parties’ agreement,” including a requirement that the expert effectively conduct his or her own investigation of facts and documents instead of simply relying (p. 176) on the reports of the party-appointed experts. The subsequent expert report did not meet this requirement, but nevertheless the arbitral tribunal accepted it over the respondent’s objection. The respondent, who lost the case before the arbitral tribunal, successfully applied for set aside of the award. The Higher Regional Court of Frankfurt/Main found the arbitral tribunal had violated a party agreement pursuant to s 1059 para 2 no 1 lit d ZPO both with respect to the procedural order and the terms of reference.¹⁵ The German Federal Supreme Court (BGH) did not accept the complaint on a point of law against the decision, effectively affirming the set aside of the award.¹⁶

4.17  The Frankfurt court decision has been the object of considerable and even sharp criticism.¹⁷ In any event, in future it is quite possible that other higher regional courts will take similar positions when hearing set aside petitions. Against this background, arbitral tribunals seated in Germany should be careful to retain control over their procedural decisions and should avoid slipping inadvertently into negotiations with the parties and memorializing them as such. It may be useful to use cautionary language in procedural orders to underline this approach. One commentator has proposed the following wording:

The parties were accorded the chance to comment on the draft of this procedural order and to propose changes and additions. In a procedural hearing held on the draft was discussed with the parties together with their proposals. The following sections of this order have been modified upon the suggestion of either or both parties:

As discussed with the parties at the beginning of the procedural hearing, the arbitral tribunal reserves the right to modify or supplement the present procedural order in due course and after hearing the parties, if it resolves that such changes are warranted in light of the development of the proceedings. The arbitral tribunal has also made it clear that it expects any agreement which purports to restrain this right to be in writing and signed by both parties.¹⁸

4.18  In this section, we discuss a number of general principles for the conduct of arbitral proceedings seated in Germany. The two most fundamental principles are the parties’ right to equal treatment (s 1042 para 1 cl 1 ZPO, below paras 4.19 et seq.) and each party’s right to be heard (s 1042 para 1 cl 2 ZPO, below paras 4.22 et seq.). In addition, the German arbitration law contains important further guideposts that (p. 177) merit to be discussed in advance before we go into the details of what the typical structure and frequent steps in German-seated arbitrations are. Namely, regarding fact-finding by the arbitral tribunal, German law follows the principle of limited investigation by the arbitral tribunal (beschränkter Untersuchungsgrundsatz, below paras 4.27 et seq.). Furthermore, German law recognizes the duty both on the part of the arbitrators and the parties to further the proceedings (below paras 4.30 et seq.), and more generally the principle of procedural good faith (below paras 4.31 et seq.). Finally, as s 1042 para 2 ZPO explicitly provides, the parties have a non-derogable right to be represented by counsel (below paras 4.33 et seq.).

4.19  German law mentions equal treatment of the parties first, even before the parties’ right to be heard (s 1042 para 1 cl 1 v. cl 2 ZPO). It thereby follows art 18 Model Law. Even though this is not meant to express any form of priority, equal treatment is a cardinal principle for arbitral proceedings. Unequal treatment is most likely going to trigger a massive loss of trust on the part of the disadvantaged party towards the arbitral tribunal and the arbitral proceedings. An arbitrator who does not observe equal treatment will almost inevitably be viewed as biased. Equal treatment in arbitration is thus part of the German ordre public, and its violation subjects an arbitral award to possible set aside (s 1059 para 2 no 2 lit b ZPO).¹⁹

4.20  Equal treatment means equality of the parties in the conduct of the proceedings (Waffengleichheit).²⁰ This requires comparable situations to be treated the same; different situations need to be treated differently pursuant to their specific circumstances.²¹ Besides being inspired by the Model Law, equal treatment in arbitral proceedings is a statutory implementation of the constitutional equal treatment requirement contained in art 3 para 1 of the German Constitution (GG).²²

4.21  As an example, the arbitral tribunal must not conduct hearings without all parties being present, unless there are specific circumstances justifying unequal treatment (such as a party having deliberately left the hearing or not having appeared in the first place despite being duly notified).²³ Furthermore, the parties are entitled to have the same level of information; communications from a party to the arbitral tribunal must be forwarded to all other parties.²⁴ Equal treatment requires (p. 178) comparable deadlines for both sides.²⁵ A special case of equal treatment is regulated in s 1034 para 2 ZPO: where an arbitration agreement unfairly prejudices one party regarding the constitution of the arbitral tribunal, the prejudiced party may ask the competent higher regional court to reconstitute the arbitral tribunal.

4.22  The right to be heard, guaranteed for arbitral proceedings in s 1042 para 1 cl 2 ZPO, is a further fundamental right of the parties. Here, too, the German arbitration law is in conformity with the Model Law (art 18) as well as foreign arbitration legislation.²⁶ The right to be heard is a necessary requirement in order for arbitral proceedings to be considered principally equal to state court proceedings, as can be seen from art 103 para 1 GG.²⁷ Violations of the right to be heard make an arbitral award based on such violations subject to set aside (s 1059 para 1 nos 1 lit b, 1 lit d and 2 lit b ZPO; for details see paras 6.207 et seq.).²⁸

4.23  The right to be heard applies at all stages of the arbitral proceedings.²⁹ There are a number of provisions in the German arbitration law that are an expression of the right to be heard, such as s 1046 ZPO (statement of claim and statement of defense), s 1047 ZPO (right to oral hearing, equal information of all parties), and s 1049 ZPO (right to ask questions to a tribunal-appointed expert). At the same time, the law contains limitations that are necessary to preserve the efficiency of arbitral proceedings, for instance provisions on the waiver of rights for failure to properly object (ss 1027, 1040 para 2 ZPO) and default (s 1048 ZPO).³⁰ Whether or not to make use of the right to be heard is of course up to the parties.³¹

(p. 179) 4.24  As a result of the right to be heard, each party has the right to present the case and to respond to the submissions of the opposing side before the arbitral tribunal ultimately decides.³² The tribunal must not base its decision on factual submissions of a party of which the opposing party has not been made aware; the same applies mutatis mutandis to facts researched and developed by the tribunal itself. Procedural decisions must be notified to all parties.³³ Deadlines for submissions or comments by the parties must be commensurate to the individual circumstances; the deadlines governing state court litigation (eg ss 132, 274, 276, 277 ZPO) do not apply in arbitration.³⁴ Parties have a right to request an oral hearing (s 1047 para 1 ZPO). Where a party and its counsel are not able to attend a hearing, the tribunal is generally required to postpone it,³⁵ unless the tribunal has clear indications that the request to postpone is actually unfounded and a mere means to delay the proceedings.³⁶ All parties must be given an opportunity to participate in the taking of evidence and to comment on its outcome.³⁷ Generally, the tribunal is not required to allow post-hearing briefs, but can request that the parties immediately comment on the taking of evidence (closing statements), unless the evidentiary hearing has brought to light new facts which a party cannot be expected to comment on immediately.³⁸

4.25  The tribunal needs to take note of the parties’ submissions, review them, and consider them in rendering its decision.³⁹ This does not mean that the tribunal is required to address each and every factual and legal argument of each party in the reasoning of the award.⁴⁰ Thus, in order to demonstrate a violation of the right to be heard, there must be clear evidence that the tribunal did not consider certain arguments at all that would have been capable of resulting in a different outcome.⁴¹

(p. 180) 4.26  By contrast, the parties do not have a right to learn the arbitral tribunal’s (preliminary) views prior to a decision.⁴² Likewise, the arbitral tribunal—unlike a German state court (s 139 ZPO)—is not required to point to specific factual or legal issues that the tribunal finds relevant and that a party may have overlooked or on which it has a different view, as long as the party was on sufficient notice of the issue, eg as a result of the pleadings submitted by the other party.⁴³ Where a tribunal disregards an offer of evidence, this may be regarded as a mistake in the conduct of the proceedings, but this mistake as such may not necessarily rise to the level of a violation of the right to be heard (for details see paras 6.207 et seq.).⁴⁴

4.27  Even though the mandate of arbitral tribunals to investigate the facts to some extent on its own motion applies only to the fact-finding stage of the proceedings, it is of sufficient fundamental importance to be discussed here in advance, as it can have significant impacts on the overall strategy and tactics to be considered and applied by the parties and their representatives in structuring the case and making their written and oral submissions. Section 1042 para 4 cl 2 ZPO authorizes the arbitral tribunal “to determine the admissibility of taking evidence, take evidence and assess freely such evidence.” This provision follows art 19 para 2 cl 2 Model Law, and together with other provisions of the Tenth Book of the ZPO, it is understood by a majority of scholars in Germany to enshrine what is called the “principle of limited investigation.”⁴⁵ This would mean that the arbitral tribunal is not only authorized but also obliged to establish the facts of the case on its own motion, similar to what German law provided for prior to the reform of the Tenth Book (s 1034 para 1 cl 1 ZPO prior version). Obviously, an arbitral tribunal does not have an inquisitorial mandate like a criminal court or even a prosecutor. Thus, it would not need to go beyond the four corners of the case as presented by the parties. However, within this framework, the tribunal would be tasked with establishing the facts to a certain extent separate and apart from the efforts of the party bearing the burden of proof.⁴⁶

4.28  In our view, this position should be handled with some circumspection. In the absence of a party agreement to the contrary, the tribunal is certainly authorized (p. 181) to act according to the principle of limited investigation; this follows already from s 1042 para 4 cl 1 ZPO (see paras 4.9 et seq.). We do not think, however, that it is strictly required to do so. The wording of the Tenth Book does not mandate an inquisitorial approach. The provisions on default contained in s 1048 ZPO underline the discretion of the arbitral tribunal.⁴⁷ Section 1042 para 4 cl 2 ZPO expressly provides for an empowerment of the tribunal and not a duty. The legislative materials are silent on this issue.⁴⁸ The parties are free to limit the power of the tribunal or to establish it as a duty by agreement even during the proceedings; there is no need and no purpose to protect them by an implied duty contrary to the wording of the statute. The fact that inexperienced persons may appear before an arbitral tribunal⁴⁹ is not unique to arbitration; it can occur just as well in state court litigation, where there is no obligation of limited investigation.⁵⁰ Thus, in light of the principal equivalence of state court litigation and arbitration, there is no need to oblige an arbitral tribunal to conduct limited investigation.

4.29  The parties are of course free to agree to limited investigation, and certain institutional rules take a similar approach. For instance, under s 27.1 cl 1 DIS Rules, “the arbitral tribunal shall establish the facts underlying the dispute.” Similarly, under art 25.1 ICC Rules, “The arbitral tribunal shall proceed within as short a time as possible to establish the facts of the case by all appropriate means.” These standards are similar to the previous version of s 1034 para 1 cl 1 ZPO, which indeed contained a mandate for limited investigation.

4.30  The tribunal’s duty to conduct the proceedings efficiently follows, among other things, from the arbitrator agreement (see para 3.172). It is also a general principle inherent in arbitration.⁵¹ The same obligation lies with the parties as a result of the substantive law character of the arbitration agreement (see para 2.148). As stated earlier (paras 3.171 et seq.), the principal sanctions for violations of these duties are to be found within the procedural framework governing arbitral proceedings. Parties cannot sue arbitrators in state court to oblige them to act more efficiently or quickly. Rather, arbitrators who do not perform their obligations without undue delay are subject to termination and replacement (ss 1038, 1039 ZPO). Likewise, (p. 182) one party cannot sue the other for efficient and speedy conduct, nor can it enjoin a party from dilatory actions. Instead, it needs to turn to the arbitral tribunal and ask for sanctions against unduly inefficient or dilatory conduct by a party. This may include the application of provisions on preclusion (see below paras 4.64 et seq.) and default (see below paras 4.67 et seq.).

4.31  The duty of good faith and fair dealing (s 242 BGB) is an overarching principle of German law applying to all areas of the law. Thus, despite the lack of an express provision on procedural good faith, as a result of both the arbitration agreement and the arbitrator agreement, the principle also applies to arbitral proceedings and the way the parties have to conduct themselves in arbitration.⁵² As an example, as a result of the principle of good faith, it is broadly recognized that in arbitral proceedings the parties are required to plead truthfully;⁵³ for state court litigation, this is expressly stipulated in s 138 ZPO. At the same time, it is to be recognized that arbitral proceedings are adversarial proceedings. Thus, a party is generally not required to lend its hand to help the other party win.⁵⁴ For instance, where one party makes a mistake in its submissions, or overlooks an issue, the other party is not required to point that out.

4.32  In addition, in Germany the traditional view is that a party is generally not required to divulge information or documents that are harmful to its case unless the law contained a specific provision allowing the court to order production of a document (ss 421 et seq. ZPO).⁵⁵ However, even in state court litigation this has changed over recent years, in particular with the amendment of s 142 ZPO (para 1.25). In arbitration, the issue does not arise in the first place, since the tribunal is entitled—pursuant to a strong view in legal literature even obligated—to conduct limited investigation of the facts anyway (see above paras 4.27 et seq.) and thus has broad discretion to order the production of documents.

4.33  A party is not required to be represented by a lawyer in arbitral proceedings. At the same time, pursuant to s 1042 para 2 ZPO each party has a non-derogable right to be represented by counsel, a right which does not have a corresponding provision in the Model Law. This includes both German attorneys-at-law and persons admitted as attorney-at-law in a foreign jurisdiction.⁵⁶ A party is bound by the acts of its (p. 183) counsel, including mistakes or omissions (eg missed deadline).⁵⁷ A counsel may be served with legal papers on behalf of the party that he or she represents.⁵⁸ Besides attorneys-at-law, a party can use other persons as its representatives or for assistance. Unlike the right to be represented by counsel, other representatives or assistants can be excluded by party agreement. The arbitral tribunal may exclude party representatives who are not legal counsel where such representative is incapable of properly representing the party, including grossly inappropriate behavior.⁵⁹ By contrast, improper exclusion of counsel may subject an award to challenge based on s 1059 para 2 nos 1 lit b, 1 lit d, and 2 lit b ZPO.⁶⁰

4.34  As a matter of German law, there are no specific qualification requirements for counsel representing a party in arbitral proceedings. Nevertheless, at least as far as disputes with a certain significance are concerned, parties are of course well advised to select counsel with experience in arbitration. Clearly, arbitral proceedings differ significantly from regular state court litigation, especially by virtue of the tribunal’s wide discretion regarding the conduct of the proceedings.

4.35  The compensation of German attorneys-at-law is regulated by the Attorney Compensation Act (RVG). Unless the parties otherwise agree, the RVG provides for a statutory fee scale which is based on the amount in dispute and which also applies to party representation in arbitral proceedings.⁶¹ A party and its counsel are free to agree on a different fee structure, such as hourly rates, fixed fees, or budgets for different phases of an arbitration. In practice, this occurs frequently. As far as cost awards are concerned (s 1057 ZPO), those are not limited to attorney fees based on the RVG scale; instead, tribunals frequently award costs on the basis of hourly rates (see paras 6.80 et seq.).⁶²

4.36  Unlike in German state court proceedings, there is no statutory legal aid (ss 114 et seq. ZPO) for arbitral proceedings. A party that cannot afford arbitral (p. 184) proceedings may be allowed to terminate the arbitration agreement for cause (see para 2.161) and bring action in state court, thereby gaining access to legal aid.⁶³

4.37  In this section, we address the typical structure of arbitral proceedings conducted in Germany, as well as frequently encountered steps in such proceedings. It goes without saying that our description cannot be exhaustive but can merely address what we consider particularly relevant in German practice. We start with the initiation of the proceedings (below paras 4.38 et seq.), then turn to initial submissions, and possible counterclaims (below paras 4.55 et seq.) before we address the initial structuring of the proceedings (below paras 4.87 et seq.) and initial determinations by the arbitral tribunal (below paras 4.93 et seq.). We also address further written submissions (below paras 4.110 et seq.), document disclosure (below paras 4.113 et seq.), the oral hearing (below paras 4.126 et seq.), the taking of evidence (below paras 4.146 et seq.), and post-hearing steps (below paras 4.203 et seq.). In Chapter 6, we explain how arbitral proceedings may be terminated by final award or other than by final award (below paras 6.126 et seq.).

4.38  We first describe the means and methods of initiation both under the German arbitration law and in institutional arbitration (below paras 4.39 et seq.), before we address the legal effects thereof (below paras 4.52 et seq.).

4.39  Regarding the initiation of arbitral proceedings, the German arbitration law follows a three-step model consisting of (i) request for arbitration s 1044 cl 1 ZPO), (ii) constitution of the arbitral tribunal (ss 1034 et seq. ZPO, see Chapter 3); and (ii) initial pleadings by claimant (statement of claim) and respondent (statement of defense), s 1046 ZPO. German law thereby closely follows arts 21, 23 Model Law. In this present section, we discuss step one, the request for arbitration in more detail. German law contains few mandatory formalities for the request for arbitration; pursuant to s 1044 cl 2 ZPO its minimum contents⁶⁴ are (i) designation of the parties; (ii) designation of the subject matter of the dispute; and (iii) reference to the applicable (p. 185) arbitration agreement. Unless otherwise agreed by the parties, arbitral proceedings on a certain dispute commence on the day on which the respondent receives the request for arbitration (s 1044 cl 1 ZPO).

4.40  As regards the minimum content for a proper request for arbitration, the claimant first needs to designate the parties. The most practical way is to set forth the names and addresses of the claimant(s) and the respondent(s). In the absence thereof, a designation may still be proper where it is clear and unequivocal from the circumstances who the parties are.⁶⁵

4.41  Second, the claimant must designate the subject matter of the dispute. In German civil procedure law, as far as state court litigation is concerned, much has been written on the notion of the subject matter of the dispute, and there are a number of theories how to properly define it. The prevailing view in Germany today is that the subject matter of the dispute is defined by two elements: (i) the relief sought; and (ii) the facts supporting such claim.⁶⁶ This definition is also implied by s 1046 para 1 cl 1 ZPO. For purposes of the request for arbitration, s 1044 cl 2 ZPO merely requires a “designation” of the subject matter, whereas in the statement of claim (s 1046 para 1 cl 1 ZPO) the claimant is required to substantiate claim and underlying facts. Thus, for purposes of s 1044 ZPO, in the request for arbitration a fairly minimal description of the claim and the underlying facts suffices. It must be sufficient to put the respondent on notice as to which claim and which set of facts will now be the subject matter of arbitral proceedings with the claimant.⁶⁷ Additional requirements may follow from other legal grounds. For instance, in disputes regarding the validity of corporate resolutions, typically the challenge procedure needs to be commenced within a certain deadline, which is one month in case of stock corporations (s 246 para 1 AktG).⁶⁸ The deadline is a substantive-law deadline and it is complied with only where the claimant, within the deadline, specifies “the core facts” that give rise to grounds for contestation.⁶⁹

4.42  The third minimum requirement is a reference to the applicable arbitration agreement. The arbitration agreement needs to be designated with clarity. Where there (p. 186) is only one arbitration agreement between the claimant and the respondent, there should be no doubts. Otherwise, a more specific reference may be necessary, eg by reference to a certain date or contract.⁷⁰ It is not necessary to include a copy of the arbitration agreement in the request for arbitration, but it is good practice to do so.

4.43  A request for arbitration that does not satisfy the above-described minimum requirements is invalid.⁷¹ It is incapable of suspending the statute of limitations.⁷² An arbitral award based thereon would be subject to set aside (s 1059 para 2 no 1 lit b ZPO),⁷³ unless the parties have reduced the minimum requirements by valid and binding party agreement. The parties are of course free to agree on additional necessary contents for the request for arbitration (eg nomination of an arbitrator, more particularized pleadings, etc).⁷⁴

4.44  The minimum contents of the request for arbitration are designed to put the respondent on notice as to the subject matter of the dispute.⁷⁵ This type of notice is necessary to preserve the respondent’s right to fair proceedings (s 1059 para 2 no 1 lit b ZPO). The claimant must express clearly and unequivocally that it requests a certain dispute to be presented to an arbitral tribunal. The wording chosen by the claimant is relevant but not exclusively material; in practice, it is of course advisable to use the wording of s 1044 ZPO or the words “request for arbitration.” Where these terms are not used, the matter becomes one of interpretation. Mere threats or non-binding announcements to take a case to arbitration will not suffice.⁷⁶ In case of doubt, an important element of interpretation may be how the recipient understood it and reacted to it. Where the recipient clearly understood it to be a request for arbitration and acted accordingly, eg by nominating its arbitrator or otherwise participating in the constitution of the arbitral tribunal, a communication that may seem unclear on its face may be interpreted nevertheless as a request for arbitration.⁷⁷

4.45  The respondent needs to receive the request. Any form of receipt is sufficient; formal service of process is not necessary.⁷⁸ In case the whereabouts of a party are unknown, s 1028 para 1 ZPO permits the use of the addressee’s last-known (p. 187) mailing address, place of business, or habitual residence in order to effect service by way of registered mail/return receipt requested or any other means which provides a record of the attempt to deliver it there. Apart from this special situation, since the law does not prescribe any form for the request for arbitration, even an oral communication could be sufficient; for obvious reasons of legal certainty and proof, parties should be strongly discouraged from initiating arbitral proceedings orally.⁷⁹ By contrast, in today’s world, initiation by email could be proper.⁸⁰ Nevertheless, from a practical perspective, a claimant is well advised to choose a means of communication that enables clear proof of receipt. Thus, in many cases, a traditional letter with return receipt requested will still be the method of choice, unless the statute of limitations is about to expire, in which case a telefax with transmission report should be considered.⁸¹

4.46  The claimant can combine the request for arbitration and the statement of claim into one document.⁸² This frequently happens in German practice, as it is in line with the approach taken in state court litigation, where the complaint needs to contain all reasonable particulars and offers of evidence (ss 253, 130 ZPO, para 1.18). A combined approach is less common for international parties coming from other legal traditions. Which approach is preferable is a matter for case-by-case analysis. Incorporating a full-blown statement of claim in the request for arbitration may demonstrate the preparedness and seriousness of a claimant in pursuing its case. It requires, on the other hand, that the claimant be reasonably certain about the full case strategy, a large part of the facts of the case and the relief to be sought. Where a claimant’s analysis and strategy are less advanced, eg due to lack of access to information on the case, the two-step approach underlying the German arbitration law may be more appropriate.

4.47  For the initiation of arbitral proceedings, the DIS Rules follow approaches that slightly differ from the Tenth Book of the ZPO. The DIS Rules do not provide for a separation or distinction between the request for arbitration and the statement of claim. Instead, under s 6.1 DIS Rules:

[t]‌he claimant shall file the statement of claim with a DIS Secretariat. Arbitral proceedings commence upon receipt of the statement of claim by a DIS Secretariat.

4.48  The mandatory minimum requirements for a statement of claim under s 6.2 DIS Rules are (i) identification of the parties; (ii) specification of the relief sought; (p. 188) (iii) particulars regarding the facts and circumstances which give rise to the claim(s); (iv) reproduction of the arbitration agreement; and (v) nomination of an arbitrator, unless the parties have agreed on a decision by sole arbitrator. Thus, in several respects, the DIS Rules are somewhat stricter than s 1044 ZPO. Whereas the latter requires only a “designation” of the subject matter of the dispute, under the DIS Rules particulars on the facts giving rise to the claim are necessary already at the commencement stage. Likewise, a mere reference to the arbitration agreement is not enough; it needs to be reproduced. Section 6.3 DIS Rules recommends as additional content for the statement of claim (i) particulars regarding the amount in dispute; (ii) proposals for the nomination of an arbitrator, where the parties have agreed on a decision by sole arbitrator; and (iii) particulars regarding the place of arbitration, the language of the proceedings, and the rules applicable to the substance of the dispute. Notably, under the DIS Rules, the next step is the constitution of the arbitral tribunal, and only thereafter will the respondent be required to file its statement of defense (s 9 DIS Rules). Accordingly, the claimant party will be obligated to participate in the constitution of the arbitral tribunal without the benefit of receipt of respondent’s initial defense.

4.49  The ICC Rules again take a somewhat modified approach. As with s 1044 ZPO, arbitral proceedings commence with a request for arbitration, which shall however be sent to the ICC Secretariat, and the ICC Secretariat then notifies the claimant and the respondent of the receipt of the request and the date of such receipt (art 4.1 ICC Rules). This date is the date of commencement of arbitration (art 4.2 ICC Rules).

4.50  The minimum content for the request is set forth in art 4.3 ICC Rules: (a) the name in full, description, address, and other contact details of each of the parties; (b) the name in full, address, and other contact details of any person(s) representing the claimant in the arbitration; (c) a description of the nature and circumstances of the dispute giving rise to the claims and of the basis upon which the claims are made; (d) a statement of the relief sought, together with the amounts of any quantified claims and, to the extent possible, an estimate of the monetary value of any other claims; (e) any relevant agreements and, in particular, the arbitration agreement(s); (f) where claims are made under more than one arbitration agreement, an indication of the arbitration agreement under which each claim is made; (g) all relevant particulars and any observations or proposals concerning the number of arbitrators and their choice in accordance with the provisions of arts 12 and 13 ICC Rules, and any nomination of an arbitrator required thereby; and (h) all relevant particulars and any observations or proposals as to the place of the arbitration, the applicable rules of law, and the language of the arbitration. It goes without saying that this is again more detailed than the minimum requirements under s 1044 ZPO.

4.51  Once the claimant has initiated the proceedings, under art 5 ICC Rules, the next step is the answer by the respondent, containing similar particulars, and to be (p. 189) submitted to the ICC Secretariat, which then transmits it to the claimant. With its answer, the respondent is to nominate an arbitrator, and the constitution of the tribunal shall then be completed (art 12 ICC Rules). Once constituted, the arbitral tribunal takes over the proceedings and establishes the terms of reference (arts 16, 23 ICC Rules).

4.52  In state court proceedings, commencing an action triggers the pendency of the case (Rechtshängigkeit). The German arbitration law does not formally mirror this concept for arbitral proceedings. Nevertheless, commencing arbitral proceedings has similar effects, and some refer to this situation as pendency of the arbitration (Schiedshängigkeit).⁸³ The main substantive-law effect (under German law) of commencing arbitration is the interruption of the statute of limitations on the claim subject to the dispute, s 204 para 1 no 11 BGB. Commencing arbitration thus has the same effect as bringing an action in state court (s 204 para 1 no 1 BGB).⁸⁴ Generally, suspension is effective even if the arbitral tribunal later finds that it does not have jurisdiction, for instance because it determines that the arbitration agreement is invalid, does not cover the subject matter of the dispute or does not bind one of the parties; only where the reference to an arbitration agreement is entirely frivolous does s 204 para 1 no 11 BGB not apply.⁸⁵

4.53  The suspension is effective for “six months after the final and binding decision or other termination of the instituted proceedings” (s 204 para 2 cl 1 BGB). Even though technically the arbitral proceedings are usually terminated by final award or order of the tribunal pursuant to s 1056 ZPO, a different reading encompassing potential set aside proceedings has been suggested for purposes of s 204 para 2 cl 1 BGB.⁸⁶ Otherwise, where the arbitral tribunal rejects a claim, a claimant may be successful in achieving the setting aside of the award; nevertheless, the claimant would be barred from continuing the proceedings or bringing a new arbitration because the statute of limitations would no longer be suspended, and would have expired in the meantime. Alternatively, and probably more persuasively, the set aside proceedings should be considered to suspend the statute of limitations.⁸⁷—Where the proceedings come to a standstill due to lack of activity on the part of the parties, the six-month period starts with the last procedural action of the parties or the arbitral tribunal, and the suspension starts again once one of the parties resumes conducting the proceedings (s 204 para 2 cl 2 and 3 BGB).

(p. 190) 4.54  A further substantive-law effect (under German law) of commencing arbitration is to trigger the respondent’s obligation to pay interest in analogous application of ss 291, 288 BGB in an amount of five (or nine) percentage points above the base interest rate per annum.⁸⁸

4.55  In this section, we address some ground rules for initial submissions under the Tenth Book of the ZPO. Specifically, once arbitral proceedings have been commenced and the arbitral tribunal has been constituted as described in Chapter 3, the claimant will be required, within the deadline agreed by the parties or set by the arbitral tribunal, to file its statement of claim, substantiating its claim and the underlying facts (s 1046 para 1 cl 1 ZPO, see below paras 4.57 et seq.). As a next step, the respondent has to file its statement of defense, again within the agreed or tribunal-ordered deadline; in its statement of defense the respondent needs to “comment” on the statement of claim, s 1046 para 1 cl 1 ZPO (see below para 4.59). Legal issues frequently playing an important role at this stage of the proceedings are burden of substantiation and proof (see below paras 4.60 et seq.), preclusion (see below paras 4.64 et seq.), as well as deadlines and default (see below paras 4.67 et seq.).

4.56  Also in this section, we deal with a number of procedural issues frequently relevant at this stage of the proceedings, namely amendments to the initial submissions (below paras 4.73 et seq.), issues raised by counterclaims, set-off, and the exercise of retention rights (below paras 4.78 et seq.). We conclude this section with some drafting considerations (see below paras 4.84 et seq.).

4.57  The statement of claim does not require any specific form; in theory, it could be rendered orally,⁸⁹ which is, however, entirely impractical. In practice, some way of written documentation is the norm, which includes such means as telefax and email. In order to substantiate its claim, the claimant needs to make plausible factual allegations which, under the applicable law, would be capable of justifying the relief sought.⁹⁰ A legal analysis is not required; the arbitral tribunal is deemed to know the law (iura novit curia),⁹¹ which is an interesting concept, given that the (p. 191) arbitrators neither need to be lawyers nor do they need to have any other form of legal training (see para 3.59).

4.58  The concept of conclusiveness known from German state court litigation is usually not applied strictly in arbitration, indeed sometimes not at all.⁹² As explained (para 1.19), this concept means that particularized fact-pleading and detailed offers of evidence are necessary to substantiate a claim. The court then needs to conduct a detailed legal analysis as to whether these facts, if proven, would support the claim sought. Only if the answer is yes would the court proceed to the taking of evidence with regard to those facts only that are relevant for the decision and disputed (Relationstechnik, see para 1.21). Whilst German practitioners often view this concept as a compelling tool to further procedural economy, it is within the arbitral tribunal’s discretion whether to follow it.⁹³ Furthermore, it should be noted that in practice, the concept of conclusiveness is not always followed strictly in German state court litigation, either.

4.59  The statement of defense contains the respondent’s “comments” to the statement of claim, which may be denials of facts, additional factual allegations, defenses, and pieces of evidence that the respondent intends to use, as well as, of course, respondent’s legal arguments.⁹⁴ German law expressly provides that with their initial submissions, the parties may—but are not required to—submit relevant documents; they may also designate further pieces of evidence that they intend to use (s 1046 para 1 cl 2 ZPO). Section 1046 ZPO is inspired by art 23 Model Law.

4.60  From a German perspective, burden of substantiation and burden of proof need to be distinguished. Burden of substantiation addresses the level of specificity with which facts need to be pleaded.⁹⁵ It is a procedural issue that is left to the discretion of the arbitral tribunal, unless the parties have made specific agreements thereon (which is rare).⁹⁶ As stated in paras 1.17 et seq., from state court litigation, German practitioners are accustomed to fairly stringent substantiation requirements. In German state court litigation, a party is required, in its written submissions, to make its factual allegations as precise and detailed as reasonably possible (who did (p. 192) what, when, and why?). In addition, for each allegation for which the party bears the burden of proof and which is likely to be denied by the other party, an offer of evidence is required. Substantiation of factual allegations may not be left to an oral hearing or the taking of evidence. Instead, where factual allegations are not pleaded with sufficient specificity and substantiation, a German state court may dismiss the claim as inconclusive and unsubstantiated (see paras 1.18 et seq.).

4.61  Arbitral tribunals are not bound by these standards, but they are free to use them. The stronger the nexus of arbitral proceedings to Germany and German legal traditions, the more likely it is that an arbitral tribunal may seek inspiration from this approach, and the more likely it is that a party will urge the arbitral tribunal to do so if it benefits therefrom (typically the respondent).

4.62  By contrast, burden of proof under German law is understood to be an issue determined by substantive law.⁹⁷ The basic principle is that each party bears the burden of proof for those issues from which it would benefit in the arbitration or litigation (Günstigkeitsprinzip).⁹⁸ In order to determine which issues are beneficial to which party, the arbitral tribunal needs to look at the cause(s) of action brought in the proceedings and the elements constituting the cause of action as well as the elements constituting the defenses raised by the respondent. German substantive law is very artful in formulating the elements of a cause of action and possible defenses. Thus, a close look at the statute book is necessary to find out who has the burden of proof for which element. For instance, regarding contractual damage claims the claimant creditor bears the burden of proof for the breach of duty, causation, and damages (s 280 para 1 cl 1 BGB), whereas the respondent debtor bears the burden of proof that it acted without fault (s 280 para 1 cl 2 BGB). This can be derived from the wording: “This does not apply where the debtor is not responsible for the breach.”

4.63  Against this background, we address these issues already here, in the context of the parties’ written submissions. Depending on the approach taken by an arbitral tribunal sitting in Germany, they may be relevant a long time before an oral hearing or an evidentiary hearing. In many proceedings, they are eminently important already at the stage of written submissions.

4.64  The rules governing preclusion are examples of provisions implementing the principle of procedural efficiency (see above para 4.30). Where a non-mandatory procedural provision of the German arbitration law or a requirement agreed upon by the parties has not been complied with, a party must object within the deadline (p. 193) provided for by law or party agreement, or otherwise without undue delay; if it fails to do so, the right to object will be precluded, unless the party was not aware of the non-compliance (s 1027 ZPO). German law thereby follows art 4 Model Law, which serves the interests of procedural economy and legal certainty.⁹⁹

4.65  Section 1027 ZPO does not apply where it is superseded by special provisions. For instance, regarding the form required for an arbitration agreement, s 1031 para 6 ZPO contains a special provision which takes precedence over s 1027 ZPO.¹⁰⁰ Pursuant to s 1031 para 6 ZPO, form defects of an arbitration agreement are cured where a party participates in the merits phase of the arbitration without objecting as to form. Similarly, objections to the tribunal’s jurisdiction are regulated separately in s 1040 para 2 ZPO, requiring such objection to be made at the latest with the response to the request for arbitration. For state court proceedings, s 295 ZPO contains a similar but somewhat different provision. On the one hand, s 295 ZPO is stricter in the sense that even the party that is negligently ignorant of the non-compliance is precluded. On the other hand, s 295 ZPO does not require action without undue delay, but only an objection in the next oral hearing.

4.66  Apart from such special provisions, s 1027 ZPO applies to all non-mandatory procedural or party-agreed requirements. For practical purposes, objection without undue delay means the next oral hearing or, where no hearing is scheduled, by way of a brief to be filed immediately.¹⁰¹ The only excuse that s 1027 ZPO recognizes is lack of knowledge, for which the person making the late objection bears the burden of proof.¹⁰²

4.67  Section 1048 ZPO addresses four scenarios of party default:

• •  First, failure by the claimant to submit its statement of claim within the deadline ordered by the arbitral tribunal (s 1046 para 1 ZPO, see below para 4.68).

• •  Second, failure by the respondent to submit its statement of defense within the deadline ordered by the arbitral tribunal (s 1046 para 1 ZPO, see below para 4.68).

• •  Third, failure of a party to appear at an oral hearing without proper excuse (s 1048 para 3 alt 1 ZPO: arbitral tribunal may continue the proceedings and render an award based on the available evidence).

• •  Fourth, failure of a party to produce a document within a defined deadline without proper excuse (s 1048 para 3 alt 2 ZPO; arbitral tribunal may continue the proceedings and render an award based on the available evidence).

(p. 194) 4.68  Deadlines ordered by the tribunal for the statement of claim and the statement of defense need to be reasonable and appropriate, so as to preserve the party’s rights to equal treatment and to be heard. In case the claimant misses the deadline without satisfactory excuse, the tribunal orders the termination of the proceedings (ss 1048 para 1, 1056 para 2 no 1 lit a ZPO; likewise s 6.4 DIS Rules and art 4.4 ICC Rules), whereas if the respondent misses the deadline without proper excuse the tribunal continues the proceedings without considering the respondent to have admitted the claimant’s factual allegations (which would be the regular consequence in German state court litigation) (s 1048 para 2 ZPO).¹⁰³ Thus, the view has been expressed that missing the deadline is largely without sanction for the respondent.¹⁰⁴

4.69  Apart from these specific examples of default, a party may be in default with other deadlines set by the arbitral tribunal, and unless the party properly excuses its default, the arbitral tribunal has discretion to disregard submissions of a party that occur thereafter, where it has clearly communicated that such will be the consequences of default.¹⁰⁵ This applies both to factual allegations and offers of evidence.¹⁰⁶ By contrast, legal arguments are generally not precluded as a result of missing a deadline, as the applicable law is a matter to be known by the arbitral tribunal (iura novit curia).¹⁰⁷

4.70  In all of the above scenarios, the party that has missed the deadline may attempt to excuse its failure, and it has the burden of proof for any excuse on which it wishes to rely.¹⁰⁸ A recognized example may be a sudden change of legal counsel.¹⁰⁹

4.72  By contrast, where no specific deadlines or closing dates have been specified, arbitral tribunals should be careful when precluding submissions on the mere basis that they are made in violation of the obligation to conduct proceedings efficiently and without proper excuse. While in theory arbitral tribunals have the power to do so (s 1046 para 2 ZPO),¹¹¹ in practice it is often a matter of considerable uncertainty whether a party has actually committed such a violation, or whether it is able to furnish a sufficient excuse for such failure. Thus, arbitral tribunals are often reluctant to preclude factual allegations or offers of evidence by applying s 1046 para 2 ZPO.¹¹² If the arbitral tribunal errs on the wrong side of this issue, it risks set aside of the award on the grounds of a violation of the party’s right to be heard.¹¹³ This makes it even more important to structure the proceedings efficiently, including by clearly defined deadlines, clearly communicated consequences of missing such deadlines without proper excuse, and possibly a closing date for the proceedings.

4.73  Unless otherwise agreed by the parties, each party may amend or supplement its case, except where the arbitral tribunal rejects such amendment or supplement due to unexcused delay (s 1046 para 2 ZPO). The claimant may adduce additional facts and legal arguments to support its claim; likewise, the respondent may do so to support its defense. In addition, the claimant can bring an additional claim provided that it is arbitrable and encompassed by the arbitration agreement.¹¹⁴ Contrary to the prevailing view under the previous law, ss 263, 264 ZPO governing amendments in state court litigation do not apply;¹¹⁵ instead, s 1046 para 2 ZPO provides for its own limitation in the form of unexcused delay. Thus, unless otherwise agreed by the parties, there is no need for an appropriateness test (Sachdienlichkeit) or consent by respondent or the arbitral tribunal.¹¹⁶ On the other hand, where the opposing party agrees to the amendment, the principle of party autonomy prevails (p. 196) and there is no basis for rejection by the tribunal based on delay.¹¹⁷ The same applies if the amended part exceeds the arbitration agreement but the other party at least impliedly agrees to this extension of the arbitration agreement.¹¹⁸

4.74  The only way for the arbitral tribunal to limit an ever-increasing scope of the case is to exercise its discretion and impose a time limit beyond which, in the absence of a valid excuse, such supplements are no longer admissible, in particular new facts and offers of evidence.¹¹⁹ In the absence of such a deadline, the arbitral tribunal would be entitled to reject amendments and supplements only if it finds that they are delayed without proper excuse when measured against the general obligation of the parties to promote the proceedings, which may be a high-risk option for the arbitral tribunal (see above para 4.72).

4.75  An amendment can also take the form of a partial or complete withdrawal of a claim.¹²⁰ Where the entire claim is (or all claims are) withdrawn, the arbitral tribunal may order the termination of the proceedings, unless the respondent objects and the arbitral tribunal finds that the respondent has a legitimate interest in a decision on the merits (s 1056 para 2 no 1 lit b ZPO). Where there is such objection and a legitimate interest, the tribunal will render an arbitral award on the merits (s 1056 para 1 ZPO).¹²¹

4.77  Article 27 ICC Rules not only allows for a closing of the proceedings, but expressly instructs the arbitral tribunal (“shall”) to order the closing of the proceedings (see para 4.71).

4.78  Section 1046 para 3 ZPO broadly allows counterclaims. Obviously, a counterclaim must be arbitrable and encompassed by the arbitration agreement. Where (p. 197) it is not encompassed by the arbitration agreement, but the claimant does not object in its statement of defense, the claimant may be precluded from objecting later (s 1040 para 2 cl 1 ZPO).¹²² The counterclaim must be substantiated in the same way as the main claim (s 1046 paras 3, 1 ZPO); the original claimant then has an opportunity to comment. The arbitrator fees may be increased, depending on any agreement in or amending the arbitrator contract, and as a consequence advances ordered by the arbitral tribunal may also increase.¹²³

4.79  A special situation arises where the counterclaim is brought against a third party, either in addition to the claimant or independently. While some institutional rules provide for a specific regulation (eg art 7 ICC Rules), the Tenth Book of the ZPO remains silent on this issue. Given the personal scope and limitations of arbitration agreements (see paras 2.121 et seq.), the consent of all parties is required to include a third party into the arbitral proceedings (including such third party’s consent), which can be achieved on the basis of a previously concluded arbitration agreement or after the counterclaim was filed (for details on multi-party arbitration see paras 4.207 et seq.).¹²⁴

4.80  German arbitration law does not expressly address the issue of set-off. Under the prevailing view, set-off is similar to a counterclaim. Thus, set-off is permissible only if the claim that is to be set off is arbitrable and encompassed by the arbitration agreement.¹²⁵

4.81  The same applies to retention rights; there, however, the issue should have less practical relevance because retention rights will often arise from the same main agreement and should thus often be encompassed by the same arbitration agreement.¹²⁶

4.82  The DIS Rules are somewhat more restrictive regarding counterclaims. Section 10.2 DIS Rules gives the arbitral tribunal discretion to decide on the admissibility of counterclaims. Any counterclaim must be filed with the DIS Secretariat and comply with the same minimum content requirements that apply to the statement of claim (ss 10.1, 6.1–4 DIS Rules). As the DIS Rules do not expressly address set-off and retention rights, the above principles apply.

4.83  The ICC Rules may be seen as taking an even more restrictive approach. Pursuant to art 5.5 ICC Rules, any counterclaims made by the respondent shall be submitted (p. 198) with the answer and shall provide details comparable to the minimum required contents of the request for arbitration.

4.84  Not surprisingly, the German arbitration law does not contain any specific provisions on the structure, style, or contents of written submissions. The provisions governing briefs in state court litigation (s 130 ZPO) do not apply in arbitration. Specifically, the designation of pieces of evidence provided for in s 1046 para 1 cl 2 ZPO allows for more flexibility than in state court proceedings. The provision allows—but does not require—reference to pieces of evidence; and where such reference is included, it need not be related specifically to individual factual allegations. A list summarizing documents and witnesses on which a party intends to rely would suffice.

4.85  Nevertheless, parties from outside Germany should not be surprised to find that written submissions in German arbitrations often follow the style of briefs in German state court litigation. Some typical features of this German “style” are the following:

• •  requests for relief are placed at the beginning of the submission, not at the end (as is more typical in an Anglo-American and international context);

• •  facts and legal analysis are usually contained in separate sections; and

• •  facts are pleaded with specificity. For each factual allegation that is likely to be denied by the opponent, offers of evidence are included.

4.86  Historically, it was not the norm to include copies of legal source materials. This is still true in purely domestic cases. By contrast, in international cases, it is often prudent to provide such copies to the arbitrators, especially where non-lawyers or non-German lawyers are members of the tribunal.

4.87  The German arbitration law does not provide specific guidance regarding how to structure the arbitral proceedings. Thus, in the absence of an agreement by the parties, the matter is up to the discretion of the arbitral tribunal.

4.88  As a first step, organizational hearings have proven to be a very useful tool in arbitration, irrespective of whether the case is an international or domestic one. The main reason is that the conduct of arbitral proceedings is generally much less predetermined and predictable than state court litigation. This applies both from the parties’ and the tribunal’s perspective. Thus, it is highly recommendable for arbitral tribunals to consider holding such a hearing at an early stage. Often, an appropriate point in time may be soon after the constitution of the arbitral tribunal. Such a hearing can be held by telephone conference or video conference, and thus does not require a physical meeting of the parties. It can be an appropriate platform to agree on deadlines for the statement of claim and the statement of defense, as well (p. 199) as further deadlines. Also, to the extent the arbitral tribunal wishes to establish certain procedural ground rules (Procedural Order no 1), the initial organizational hearing is an appropriate opportunity to do so. Often, the arbitral tribunal will circulate a draft of Procedural Order no 1 prior to the organizational hearing, consult with the parties and then issue the order after the hearing. In doing so, the arbitral tribunal should be mindful to maintain control over the order and not to slip inadvertently into negotiations with the parties, which may have the unintended consequence of resulting in what could be deemed to be a party agreement and not a disposition of the tribunal (see paras 4.16 et seq. on the “Frankfurt surprise”).

4.89  In addition, as regards the further structuring of the proceedings an arbitral tribunal may look to the structure of state court litigation cases. In this context, German civil procedure offers two basic approaches: (i) the early merits hearing (früher erster Termin); and (ii) preliminary written proceedings (schriftliches Vorverfahren), ss 275, 276 ZPO. Early merits hearing typically means that a hearing on the merits occurs after the parties have exchanged the statement of claim and the statement of defense. It may or may not involve the taking of evidence. Preliminary written proceedings mean that the parties typically exchange (at least) one further round of written submissions, and then a hearing on the merits occurs, often including the taking of evidence. Overall, choosing between these two basic approaches may be useful, and is in fact often used, in domestic cases with parties accustomed to the state court litigation approach. Structuring the proceedings in this way does not involve an overall time plan, but proceeds step by step. This is appropriate in cases with limited complexity where the arbitral tribunal expects the facts to be “put on the table” in due course without much need from the arbitral tribunal to structure complex issues. The early merits hearing may be appropriate for cases in which the factual scope is limited and the legal issues are straightforward, or where the arbitral tribunal sees a concrete prospect of settlement at an early stage. By contrast, where the factual and legal issues need further development after the initial round of pleadings, it is often useful to order a further round of written submissions and then schedule an oral hearing on the merits.

4.91  While some practitioners (in particular in Germany) are not convinced that establishing formal terms of reference is a useful technique, establishing a procedural timetable is something that arbitral tribunals should consider seriously, irrespective of whether the ICC Rules apply, in particular in more complex cases. Otherwise, the overall duration of arbitral proceedings may slip out of the tribunal’s control. Likewise, the case management techniques suggested in Appendix IV of the ICC Rules offer a variety of common-sense methods to effectively structure and conduct the proceedings. Specifically, bifurcating proceedings for monetary claims, in particular damage claims, into a liability and a quantum phase is an approach often taken by arbitral tribunals inside and outside the ICC framework. Likewise, it is often sensible to establish early on the ground rules for the production of documents such that there are no surprises at a later stage.

4.92  Finally, there are other non-binding sources providing guidance on the structuring and conduct of arbitral proceedings. Regarding specifically the topic of evidence taking, pursuant to art 2 of the IBA Rules on the Taking of Evidence in International Arbitration the arbitral tribunal “shall” consult with the parties at an early stage in order to have efficient, economical, and fair proceedings regarding the taking of evidence. Such consultation may cover witness statements, expert reports, oral testimony at a hearing, formalities regarding the production of documents, as well as privilege and confidentiality issues. In addition, in 1996, UNCITRAL published “Notes on Organizing Arbitral Proceedings” which contain a 19-item “list of matters for possible consideration in organizing arbitral proceedings.”¹²⁷ The (p. 201) Notes may be viewed as useful guidance on a variety of organizational and procedural matters that typically arise in arbitral proceedings, in particular where the parties come from different legal backgrounds. Nevertheless, the Notes have not experienced wide acceptance or use.

4.93  German law does not require the arbitral tribunal to determine the amount in dispute at the outset of the proceedings. Likewise, even at the stage of determining the costs of the arbitration and making a cost award (s 1057 ZPO) it may not be necessary to define the amount in dispute. The arbitrator fees need not necessarily depend on the amount in dispute, but may be agreed freely with the parties. Similarly, the fees of counsel may be calculated on an hourly basis, such that there is no need to know an amount in dispute as a basis for calculation.

4.94  Nevertheless, in many cases the amount in dispute is relevant for both the arbitrator fees and the fees of counsel (or possibly the fees of an arbitral institution). In such a scenario, it is advisable, if not necessary, to determine the amount in dispute at an early stage of the proceedings. The arbitrators will have an interest in this determination to the extent they wish to order an advance on costs (see paras 3.185 et seq.). Likewise, under German law counsel have a right to request advances from their clients,¹²⁸ and to the extent they apply the statutory fee scale, they should know the amount in dispute.

4.95  German arbitration law does not provide any guidance as to how the amount in dispute should be determined. In the absence of an agreement of the parties, the arbitral tribunal thus has discretion (s 1042 para 4 cl 1 ZPO, and, to the extent the arbitrator fees may be concerned, ss 317 et seq. BGB).¹²⁹ In many instances, arbitral tribunals may look to the provisions governing the determination of the amount in dispute in state court litigation (ss 2 et seq. ZPO), including the wealth of precedent in this area. These provisions again allow for broad discretion; the most important guiding principle is to look to the interest in the matter from the perspective of the person bringing the claim (Angreiferinteresse).¹³⁰

(p. 202) 4.96  This means for the most common case of a claim for payment (Zahlungsklage) that the interest corresponds to the amount the claimant seeks. Such a rule of thumb is missing for other cases, where the claim is directed to specific performance by the respondent. In particular, there is a dispute as to whether the amount shall reflect only the claimant’s interest in this performance or also consider the potential costs for the respondent.¹³¹ Where the claim is brought for a declaratory award (Feststellungsklage), the interest is usually somewhat less than a correlating claim for payment would be.¹³² In the case of a counterclaim by the respondent (Widerklage ), the interests of both claims are added together, unless they concern—from an economic point of view—an identical subject matter.¹³³ The same rule applies where the respondent alternatively declares set-off (Aufrechnung) if and to the extent that a later award contains a binding decision on the contested set-off claim.¹³⁴ Thus, the addition is limited to the amount of the principal claim.

4.97  The determination of the amount in dispute is not set in stone for the entire duration of the arbitral proceedings. Where new claims are brought that increase the amount in dispute, or where new facts arise shedding a better light on the interest in the dispute, the arbitral tribunal may at any time adjust the amount in dispute and correct requested advances on costs accordingly.¹³⁵

4.98  As mentioned above (paras 3.185 et seq.), arbitrators have the right to request the parties to pay advances on the likely fees of the arbitrators and expenses for the conduct of the arbitral proceedings (including costs for witnesses, experts, hearings, court-reporters, interpreters etc). Arbitrators are well advised to make use of this right. Thus, typically, the arbitral tribunal will request the parties to pay advances to a trust account held by the chairman. Unless otherwise agreed by the parties, and unless otherwise ordered by the arbitral tribunal, each side is generally required to pay half of the advance. This contrasts with state court litigation, where the plaintiff must pay the entire advance of the court fees.¹³⁶

4.99  In case one party—often the respondent—fails to pay its share of the advance, the claimant may step in, fund the respondent’s share and wait for the cost award to (p. 203) be rendered by the arbitral tribunal or bring action against the respondent for repayment, either before the state courts or the arbitral tribunal seized with the main matter (for details see para 3.187).

4.100  The jurisdiction of the arbitral tribunal is an important initial determination in arbitral proceedings, whether it is confirmed in an award confined to that issue or whether the arbitral tribunal decides for itself that it has jurisdiction and thus carries on with the proceedings. After summarizing the legal framework governing the jurisdiction of the arbitral tribunal under German law (below paras 4.101 et seq.), we turn to the issue of Kompetenz-Kompetenz (below para 4.104). In a next step, we distinguish lack of jurisdiction and lack of arbitrability (below paras 4.105 et seq.), before we address the procedural practicalities of challenging the tribunal’s jurisdiction (below para 4.107), interim awards on jurisdiction, and the state court review of such interim awards (below paras 4.108 et seq.).

4.101  Pursuant to s 1040 para 1 cl 1 ZPO, the arbitral tribunal is empowered to decide on its jurisdiction, it has (preliminary) Kompetenz-Kompetenz; in doing so, it may also decide on the existence and the validity of the arbitration agreement. For purposes of such analysis, an arbitration clause is to be regarded as separate from the remainder of an agreement (s 1040 para 1 cl 2 ZPO—principle of separability). A party must object to jurisdiction no later than with the statement of defense (s 1040 para 2 cl 1 ZPO), except where the arbitral tribunal finds that there is a proper excuse for a later objection (s 1040 para 2 cl 4 ZPO). The fact that a party participates in the constitution of the arbitral tribunal is not considered a waiver of the jurisdictional objection (s 1040 para 2 cl 2 ZPO). Where the arbitral tribunal exceeds its jurisdiction with respect to a specific issue during the arbitral proceedings, a party who wishes to object must do so as soon as there are deliberations on the said issue (s 1040 para 2 cl 3 ZPO). Again, a later objection requires a proper excuse, or otherwise it will be barred (s 1040 para 2 cl 4 ZPO).

4.102  Where the arbitral tribunal finds that it has jurisdiction, it generally ought to hold so by means of a preliminary ruling (s 1040 para 3 cl 1 ZPO), which is subject to challenge in front of the competent higher regional court within one month after written service of the preliminary ruling (s 1040 para 3 cl 2 ZPO). While such a challenge is pending, the arbitral tribunal may continue the arbitral proceedings and render a (final) award on the merits (s 1040 para 3 cl 3 ZPO).

4.103  In addition, German law provides for two further mechanisms in order to determine the jurisdiction of an arbitral tribunal. First, where an action is filed with the state court and a party objects on the basis that there is an arbitration agreement, the state court needs to determine the existence, validity, and enforceability of the arbitration agreement and on that basis determine its jurisdiction (s 1032 para 1 ZPO, see para 2.142). Second, prior to the constitution of the arbitral tribunal, a (p. 204) party can request the competent state court to rule on whether arbitral proceedings are permissible as between the plaintiff and the defendant (s 1032 para 2 ZPO, see paras 2.144 et seq.). As mentioned above (para 3.25), the existence and validity of an arbitration agreement may also be examined by the state court as a threshold issue in connection with certain proceedings, such as the challenge and replacement of arbitrators; the same applies where the state court is called upon to assist an arbitral tribunal in the taking of evidence (s 1050 ZPO, see below para 4.200).

4.104  German law follows a concept of preliminary Kompetenz-Kompetenz of the arbitral tribunal.¹³⁷ The arbitral tribunal has the power to determine its own jurisdiction as a matter of the German arbitration law; there is no need for further party agreement in order to confer that power upon an arbitral tribunal. At the same time, German law provides for a review by the state courts; thus, it is the state courts that have the final say over whether the parties have validly waived the jurisdiction of the state courts in favor of arbitration. Pursuant to the case law of the BGH, this allocation of powers is mandatory; the parties may not derogate the review by the state courts; they may thus not confer full Kompetenz-Kompetenz on an arbitral tribunal.¹³⁸

4.105  Section 1040 para 1 ZPO is concerned with the jurisdiction of the arbitral tribunal in general, including the question whether there is a valid and binding arbitration agreement. Issues such as lack of arbitrability lead to the invalidity of the arbitration agreement and thus lack of jurisdiction of the arbitral tribunal. Section 1040 para 2 ZPO requires that the other party object based on lack of jurisdiction. The need to object relates only to those issues that are subject to party autonomy; where a dispute lacks arbitrability, the lack of a timely objection cannot confer jurisdiction upon an arbitral tribunal.¹³⁹ In such a case, the tribunal needs to dismiss the case ex officio, irrespective of whether one of the parties has brought a timely challenge to the jurisdiction of the tribunal.¹⁴⁰

4.106  This may apply, for instance, with respect to arbitral proceedings related to the validity of corporate resolutions. Pursuant to the precedent of the BGH, arbitration agreements that do not follow four requirements pronounced by the BGH in its decision Schiedsfähigkeit II are to be considered unconscionable pursuant to (p. 205) s 138 BGB because they do not satisfy the fundamental constitutional due process requirements with respect to the rights and interests of other shareholders (see para 1.78). Since (and to the extent) the lack of jurisdiction is based on the rights of other shareholders—who are generally not party to the proceedings—there is no room for a waiver by the parties (no waiver to the detriment of third parties).¹⁴¹ By contrast, where all shareholders and parties concerned actually participate in the arbitral proceedings, a valid waiver pursuant to s 1040 para 2 ZPO can be considered.¹⁴²

4.107  German arbitration law allows the respondent to defer its jurisdiction objection until filing its statement of defense (ss 1040 para 2 cl 1, 1046 para 1 ZPO). This may be significantly after the constitution of the arbitral tribunal (s 1040 para 2 cl 2 ZPO). An objection at this stage may be highly inopportune to the claimant, who by then may have invested a significant amount of time, effort, and money into the arbitration (including, in most cases, its share of advances on cost). Nevertheless, the respondent is allowed to wait until that point of time. Indeed, the respondent may want to observe what the specific issues of the case are, how the tribunal is composed and whether the respondent concludes that the case should go forward in arbitration despite lack of the tribunal’s jurisdiction.¹⁴³

4.108  Where a party has challenged the tribunal’s jurisdiction, and the tribunal finds that the challenge is timely and has merit, it must dismiss the case by final award including a decision on costs. To the extent the tribunal does find jurisdiction despite a party’s objection, the tribunal is generally meant to render a preliminary ruling (s 1040 para 3 cl 1 ZPO) in order to allow the parties to have the competent higher regional court review the finding of jurisdiction (s 1040 para 3 cl 2 ZPO). A tribunal that does not render a preliminary ruling but proceeds on the merits may violate the “spirit” of s 1040 para 3 cl 1 ZPO, albeit without much sanction. The parties have no means to compel compliance with the preliminary ruling requirement.¹⁴⁴ The party objecting to the jurisdiction can only await the final award and then seek set aside for lack of jurisdiction (s 1059 para 2 no 1 lit a or c ZPO).

4.109  The competent higher regional court, when petitioned by a party to annul a preliminary ruling by the arbitral tribunal respecting jurisdiction, has the power to (p. 206) finally and bindingly determine the tribunal’s jurisdiction. The higher regional court may schedule an oral hearing, but need not necessarily do so (s 1063 para 1 ZPO). The opposing party must be given an opportunity to comment (s 1063 para 1 cl 2 ZPO). The court’s decision is subject to a complaint on a point of law to the BGH (s 1065 para 1 cl 1, 1062 para 1 no 2 ZPO). The court decision is binding upon the parties and the arbitral tribunal.¹⁴⁵

4.110  Whether or not there are further written submissions after the initial round of pleadings (ie request for arbitration, statement of claim, and statement of defense) is a matter for party agreement or, in the absence thereof, tribunal discretion. Often, the arbitral tribunal’s initial procedural order will contain provisions on the number of further written submissions and their content, including the necessity for witness statements, expert reports, the submission of documentary evidence, and the like. Where the initial procedural order does not contain such provisions, the arbitral tribunal will need to decide as part of its general discretion whether it wants to request or allow further rounds of briefs before moving to the next stage of the proceedings. In case of default, the arbitral tribunal may preclude further factual submissions. As explained above (see paras 4.69 et seq.), apart from the rare cases where a party has violated its general obligation to further the proceedings (s 1046 para 2 ZPO), this requires that the tribunal have first set a deadline for the submission and specified that the deadline has preclusive effect.

4.111  We will address witness statements in more detail below, when we discuss the taking of witness evidence (below paras 4.164 et seq.). However, it is worth noting already at this stage that in German practice, in line with international standards,¹⁴⁶ arbitral tribunals increasingly request that the parties submit written witness statements together with their written submissions, or at least invite and encourage the parties to do so. For the parties and their counsel, this has important implications in terms of timing and organization. Witnesses need to be contacted, and the facts need to be established in interviews with witnesses. In order for witness statements not to contradict documentary evidence, the relevant documents need to be available and analyzed before a witness statement is submitted. Thus, the submission of witness statements at an early stage of the proceedings requires a considerable amount of upfront work. Parties and their counsel should bear this in mind when they consider and negotiate timelines for submissions.

4.112  Likewise, we will address evidence from party-appointed experts in detail below (see paras 4.180 et seq.)). The important issue in the present context is once more timing and organization. Depending on when reports from party-appointed experts need to be submitted at the very latest, a significant amount of work may need to be done upfront, including the selection of experts, their instruction, the review of relevant documents, interviews with witnesses, reviews of draft reports, and the like.

4.113  Regarding document disclosure, a number of general principles need to be considered (below paras 4.114 et seq.). The IBA Rules on the Taking of Evidence in International Arbitration may provide particularly useful guidance (below paras 4.115 et seq.). Confidentiality and privilege play an important role in limiting document disclosure (below paras 4.122 et seq.).

4.114  Document disclosure is a stage of the proceedings that has become increasingly common in international arbitration,¹⁴⁷ including in cases seated in Germany. Often, it occurs after one or two rounds of written submissions and before the (main) oral hearing. Document disclosure has also found its way into proceedings with a more domestic character. Views on the usefulness and efficiency of document disclosure vary widely in the German arbitration community. Against this background, it is worth remembering that the issue of document disclosure, under German arbitration law, is not regulated specifically, but rather is left to the discretion of the arbitral tribunal unless the parties have agreed otherwise (s 1042 para 4 ZPO). Section 1048 ZPO even addresses certain aspects of document disclosure: where a party, without proper excuse, fails to produce a document by a deadline ordered by the arbitral tribunal, the tribunal may continue the proceedings and decide the case based on the information available to it (s 1048 para 3 ZPO, similarly s 30.2 DIS Rules). Thus, German arbitration law clearly presupposes that an arbitral tribunal may, in principle, order the production of documents.¹⁴⁸ Where the party bearing the burden of proof fails to produce a document—irrespective of an order from the arbitral tribunal—it risks losing the case (non liquet). Where the opposing party fails to produce a document even though production has been ordered by the arbitral tribunal, such party risks negative inferences; as in state court litigation, the arbitral tribunal may, in its discretion, assume the opponent’s factual allegations with regard to such document to be true (cf s 427 ZPO) and in any event as confirmed.¹⁴⁹

4.115  The IBA Rules on the Taking of Evidence in International Arbitration (“IBA Rules”), adopted by the International Bar Association on May 29, 2010,¹⁵⁰ address document disclosure in some detail in their art 3 as the first means of evidence, before addressing witnesses, experts, and the like. They thus clearly recognize the potential importance of document disclosure and the timing thereof in international arbitration. They seek to provide a compromise between the far-reaching discovery traditions of the Anglo-American legal systems and the reluctance and skepticism towards document disclosure in many continental European jurisdictions as well as jurisdictions inspired by the civil law system.¹⁵¹

4.117  Importantly, as this text shows, the IBA Rules do allow references to categories of documents, but only if they are “narrow and specific.” Likewise, they allow for the disclosure of electronic documents, such as emails. At the same time, they provide means to the parties and the arbitral tribunal to limit the burden associated with e-discovery, such as the identification of specific electronic files, the use of search terms, and the identification of document custodians. With respect to data hosted within the EU, special care may be necessary to observe data protection provisions.¹⁵² Regarding Germany, additional limitations may follow from German telecommunications law, in particular where emails of employees are concerned and the company has allowed the private use of company email.¹⁵³

(p. 209) 4.118  The opposing party may object to a request to produce if the request fails to satisfy the requirements of art 3.3 IBA Rules. Furthermore art 9.2 IBA Rules contains grounds for objection to production and/or refusal by the tribunal to order production for such reasons as lack of sufficient relevance to the case or materiality to its outcome, legal privilege, unreasonable burden, loss or destruction of the document, compelling grounds of confidentiality, compelling grounds of political or institutional sensitivity (including evidence that has been classified as secret by a government or a public international institution), as well as considerations of procedural economy, proportionality, fairness, or equality.

4.119  In practice, including in Germany, often certain types of tables and schedules are used to list document requests and pertaining objections, such as the so-called Redfern Schedule.¹⁵⁴ Where the parties cannot agree on the production of a document, the arbitral tribunal can make a corresponding ruling. In doing so, the arbitral tribunal shall not only consider whether the requirements of art 3.3 IBA Rules are met and whether there are any valid objections pursuant to art 9.2 IBA Rules, but most fundamentally the arbitral tribunal shall decide whether “the issues that the requesting Party wishes to prove are relevant to the case and material to its outcome” (art 3.7 cl 3 IBA Rules).

4.120  In other words, the IBA Rules do not in principle permit document requests where the requesting party merely shows that the request is reasonably believed to lead to relevant evidence. Instead, more stringently, relevance and materiality need to be established to the satisfaction of the arbitral tribunal before it will order production of a document.

4.121  The IBA Rules contain further provisions on the disclosure of documents in the possession, custody, or control of third parties, as well as provisions on the form of document production (arts 3.9, 3.12 IBA Rules).

4.122  The arbitral tribunal has discretion to limit document disclosure and production with a view to confidentiality and privilege issues.¹⁵⁵ Again, the German arbitration law does not contain any specific provisions on this issue. The IBA Rules, which the parties may have agreed on, or which may in any event serve as a source of guidance to arbitral tribunals, contain two mechanisms to protect confidentiality and privilege.

4.123  First, art 3 para 8 IBA Rules allows for assessment of issues of commercial confidentiality (trade secrets and the like) by submitting a document to an independent expert who reviews whether a document should be protected from disclosure by looking at the document and reporting back to the arbitral tribunal without the arbitral tribunal itself having to look at the document. This mechanism is meant to be limited to “exceptional circumstances.”

(p. 210) 4.124  Second, and in addition, art 9 para 2 lit b IBA Rules allows the arbitral tribunal to exclude from evidence or from document production any document for reasons of “legal impediment or privilege under the legal or ethical rules determined by the Arbitral Tribunal to be applicable.” Article 9 para 3 IBA Rules expressly addresses legal privilege, settlement negotiations, waiver of privilege, as well as the need to maintain fairness and equality as between the Parties, particularly if they are subject to different legal or ethical rules.

4.125  In addition, or in the alternative, arbitral tribunals may also seek guidance from other sets of rules, including those governing state court litigation, which are, however, by far not as elaborate. For instance, the basic provision on document disclosure in state court litigation, s 142 ZPO, does not contain any specifics regarding confidentiality or privilege as far as disclosure by a party is concerned. Instead, the prevailing view is that this is entirely a matter for the court’s discretion.¹⁵⁶ Only regarding disclosure by third parties, s 142 para 2 ZPO regulates that the provisions on the refusal of testimony shall apply mutatis mutandis. Thus, we submit that arbitral tribunals and parties are generally well advised to seek guidance from the more elaborate provisions contained in the IBA Rules.

4.126  We first address some general principles with respect to the necessity, usefulness, and timing of oral hearings (paras 4.127 et seq.) before we turn specifically to a number of organizational issues frequently relevant in German arbitration practice (paras 4.132 et seq.), such as venue, participants, privacy, minutes, the use of court reporters, interpreters, and time management.

4.127  For arbitral proceedings seated in Germany, oral hearings are not mandatory pursuant to the German arbitration law itself. Instead, unless otherwise agreed by the parties the arbitral tribunal has discretion as to whether it wishes to conduct an oral hearing or to decide on the basis of documents and information submitted to the arbitral tribunal (s 1047 para 1 cl 1 ZPO). The parties are free both to mandate an oral hearing and to agree to exclude an oral hearing. This decision is generally binding for the tribunal but in rare cases a party’s right to be heard can exceptionally require an oral hearing.¹⁵⁷ Where there is no such exclusion, each party has the right to demand an oral hearing. In case of such demand, the arbitral tribunal must (p. 211) conduct an oral hearing, but it has discretion at which stage of the proceedings it does so (s 1047 para 1 cl 2 ZPO; likewise s 28 DIS Rules). The arbitral tribunal must give the parties sufficient advance notice prior to any oral or evidentiary hearing (s 1047 para 2 ZPO), which is an expression of the party’s right to be heard and its right to equal treatment.¹⁵⁸

4.128  In German practice, oral hearings are the norm.¹⁵⁹ If nothing else, it is an important psychological aspect for the parties to “have their day in court.” A decision based only on written materials is likely to be much less persuasive to the unsuccessful party. Also, from the arbitral tribunal’s perspective, oral hearings are often useful. Many times, factual or even legal issues become clearer when discussed orally with the parties and their counsel. Thus, even where none of the parties requests an oral hearing, arbitrators should often consider scheduling one.

4.129  In terms of the appropriate timing for an oral hearing, the specific circumstances of the case need to be considered. Generally, it would not seem advisable to have an oral hearing before both the statement of claim and the statement of defense have been filed. Beforehand, it is usually not yet clear what the main issues of the case are, and an oral hearing could be of only limited use.¹⁶⁰ It may be advisable to have an oral hearing after the statement of defense has been filed, similar to an “early merits hearing” in state court litigation. Circumstances where an early hearing may be appropriate are cases with limited complexity and/or cases where there may be a realistic chance for an early settlement (para 4.89). By contrast, where the issues are more complex and an early settlement seems unlikely, it may be more useful to conduct a second round of written submissions and then have an oral hearing. In case the procedural timetable provides for document disclosure, a full merits hearing should generally be conducted only thereafter. This does not exclude, however, that an early merits hearing can be useful. In particular, it may be in the tribunal’s own interest to focus the parties on certain key issues before they embark on the exchange of far-flung document requests.

4.130  Where a party fails to appear at an oral hearing without sufficient excuse even though it has had sufficient advance notice of the hearing, the arbitral tribunal may continue the proceedings and render a final award based on the facts before it (s 1048 para 3 ZPO, likewise s 30.2 DIS Rules, art 26.2 ICC Rules). The tribunal may establish further facts based on its own motion (limited investigation, paras 4.27 et seq.) to the extent it considers this necessary in order to make a decision on the merits.¹⁶¹ Scheduling conflicts or merely “being busy” may not be (p. 212) a sufficient excuse, to the extent it would be possible for a party to send another representative.¹⁶² Where both parties fail to appear, the tribunal should ask the parties to progress the proceedings; if they fail to do so, it may order the termination of the proceedings based on s 1056 para 2 no 3 ZPO.¹⁶³

4.131  As can be seen from the previous paragraph, the consequences of not appearing to an oral hearing differ vastly between German state court litigation and German-seated arbitration. In state court litigation, failure to appear usually results in a default decision on the merits (Säumnisurteil), in particular where the defendant fails to appear. In this case, the plaintiff’s factual allegations will be deemed true (s 331 ZPO). The parties are at liberty to agree on similar consequences in arbitral proceedings,¹⁶⁴ which, however, only rarely happens.

4.132  Oral hearings need not be held at the seat of the arbitration; instead, unless otherwise agreed by the parties, the arbitral tribunal can determine an appropriate venue in its discretion (s 1043 para 2 ZPO). Usually, the arbitral tribunal should be guided by various aspects of convenience, eg the necessity for travel by the arbitrators, the parties, their counsel, witnesses, and experts, the availability of suitable locations, eg at the offices of the chairman, at an arbitral institution, or in hotels or conference centers, considerations of neutrality of the venue, and even the inhospitability of the agreed seat due to political, military, or other factors.¹⁶⁵

4.133  In most cases, oral hearings are an event where the participants meet physically in one location. Nevertheless, German law does not limit oral hearings to such a set-up. Telephone or video conferences can qualify just as well as oral hearings, but not mere virtual “meetings” (eg internet chats).¹⁶⁶ The arbitral tribunal should carefully consider which set-up is suitable for which type of hearing. Discussions of organizational or procedural issues may well be done via telephone. By contrast, the taking of evidence (especially the examination of witnesses and experts) ought to be done at an in-person meeting, unless there are compelling circumstances that require otherwise.

4.134  The arbitral tribunal must give sufficient advance notice to the parties (s 1047 para 2 ZPO). It may do so by any means it deems appropriate; there is no need for formal summons as in state court proceedings. Thus, the arbitral tribunal can (p. 213) communicate the hearing date via simple letter, telephone, or email.¹⁶⁷ It is good practice for arbitral tribunals to request the parties to communicate to the arbitral tribunal in advance who from each side will participate (by name and function).

4.135  German law does not contain any provisions on the publicity or privacy of oral hearings in arbitral proceedings. However, it is generally understood—both internationally and as a matter of German arbitration practice—that unlike state court proceedings, oral hearings in arbitral proceedings are not open to the public but rather are private.¹⁶⁸ Thus, ordinarily only the parties and their counsel will be admitted to oral hearings. Witnesses and experts are admitted for their appearance. It is within the discretion of the arbitral tribunal whether to admit them to the hearing before and/or after they testify. The German tradition, inspired by the rules governing state court proceedings, would be not to have them present before their testimony, and to allow them to remain in the hearing room once they have testified.

4.136  In addition, there may be a (limited) number of further participants in the hearing who have the status of observers or spectators. Whether this is allowed is a matter for the agreement of the parties, or, in the absence of such agreement, the discretion of the arbitral tribunal. There may be persons who have a legitimate interest in sitting in on a hearing and observing what happens, for instance representatives from the main shareholder of a party, from a regulatory authority, or a consortium partner.

4.137  The principle of privacy needs to be clearly distinguished from the principle of confidentiality, which is not a generally recognized characteristic of arbitration (see paras 1.51 et seq.). Thus, if a party expects the other participants and especially witnesses not to disclose any information about the case, it needs to conclude a specific agreement.¹⁶⁹ But even where such an agreement exists, a party is well advised to check whether it provides for confidentiality under the specific circumstances. For example, there may be exceptions for the opposing party due to prevailing public interests or adverse contractual obligations.¹⁷⁰

4.138  Different from state court proceedings (s 160 ZPO), the German arbitration law does not contain express provisions on hearing minutes or transcripts.¹⁷¹ (p. 214) Nevertheless, for practical purposes it is highly advisable for an arbitral tribunal to ensure establishment of a record of an oral hearing.¹⁷² In that vein, s 29 DIS Rules specifies that “[a]‌ record shall be made of all oral hearings. The record shall be signed by the chairman. The parties shall each receive a copy of the record.”

4.139  In practice, in larger cases or cases of significant importance it is not uncommon to use the services of a court reporter to create a verbatim transcript. A major advantage of this approach is that it relieves all participants of the need to engage in constant note-taking themselves and thus has a considerable convenience aspect. In addition, it is certainly much more reliable than other forms of creating minutes and provides an unambiguous record of due process and equal treatment of the parties. On this basis, both counsel and the tribunal have a common source for future reference, be it for closing argument, post-hearing submissions or the drafting of the award.

4.140  It is a matter for agreement between the parties and the tribunal who organizes the court reporter and who pays the person. Arbitral tribunals often expect that the parties will assume that task. Otherwise, the tribunal may do so; if it does so, it may want to obtain sufficient advances on costs to be able to pay the court reporter.

4.141  Oral hearings are to be conducted in the language of the proceedings (s 1045 para 1 cl 3 ZPO). An interpreter may be needed where not everyone in a hearing speaks that same language. This may be the case for witnesses of fact and expert witnesses who do not have sufficient command of the language of the proceedings. Since the arbitral tribunal cannot force witnesses to appear and testify (see para 4.161), it has even less power to compel testimony in a language that the witness is not willing to testify in. To the extent the parties have access to or influence over witnesses, they should carefully consider the pros and cons of using an interpreter where the witness has at least some familiarity with the language of the proceedings. For instance, the fact that an interpreter steps in to translate may be a significant advantage where parties and their counsel expect forceful, or even aggressive and intense cross-examination. On the other hand, witnesses who have conducted the relevant contract negotiations in, say, English, but refuse to testify in English may appear uncooperative, which, together with other circumstances, might possibly have an impact on their credibility in the eyes of the arbitral tribunal.

4.142  Again, arbitral tribunals often appreciate where parties take care of organizing an interpreter and paying the interpreter directly. Otherwise, again, the arbitral tribunal may want to make sure it obtains sufficient advances on costs from the parties.

4.143  German law does not contain any provisions regarding time management in hearings before an arbitral tribunal. Arbitral tribunals frequently encourage the parties to seek and reach agreement on time allocations for a hearing, eg specified and usually equal times for opening statements, certain time allotments for individual witnesses and experts, as well as time slots for closing arguments where appropriate. In the absence of party agreement, it is up to the discretion of the arbitral tribunal to manage timing during hearings, both in terms of an advance time schedule and during the hearing on an ad hoc basis. Where hearings are more complex and involve a number of issues and/or witnesses, advance planning may be strongly advisable. By contrast, in simpler and more straightforward matters, it may suffice for the arbitral tribunal to set a time frame for the overall duration of the hearing and nothing more.

4.144  Where the arbitral tribunal makes time allocations to the parties, witnesses, experts, and the like, it must treat the parties equally (s 1042 para 1 cl 1 ZPO). This does not mean that each party needs to be allocated the same amount of time by hour and minute as the other. Instead, the arbitral tribunal may differentiate if there are valid reasons to do so (see para 4.20). For instance, where one party brings only one witness and the other ten, it would be unfair that the one party receives ten times as much time for questioning a witness.

4.145  Equally important is the right to be heard (s 1042 para 1 cl 2 ZPO). The time management of the arbitral tribunal must be such that each party has a reasonable opportunity to present its case. It should be noted, however, that an oral hearing is generally not the right venue for making new factual allegations or to make first-time legal arguments; instead, the parties are generally supposed to do that in their prior written submissions. Thus, the most relevant issues are again witnesses and experts. Where the arbitral tribunal has adopted an “international style” for the overall proceedings, it will likely have required written witness statements. As a consequence, there should be no need for extensive direct examination of a witness. In this case, the right to be heard relates particularly to sufficient time for cross-examination and redirect examination of a witness.¹⁷³

4.146  The taking of evidence in a hearing of the tribunal is at the heart of many arbitral proceedings. Oftentimes, the arbitral tribunal will not be able or willing to decide a case solely on the basis of the law and the documents in front of it without testing them in a hearing with the parties, witnesses, and experts. Thus, the hearing where the taking of evidence takes place can be crucial for the outcome of the case. We (p. 216) first address the framework of applicable rules (below paras 4.147 et seq.) and then turn to the various means of evidence, ie witness evidence and party examination (below paras 4.159 et seq.), expert evidence (below paras 4.177 et seq.), documentary evidence (below paras 4.193 et seq.), and inspection of objects (below para 4.197). We also address the securing of evidence (below paras 4.198 et seq.), and the assistance by German state courts in the taking of evidence, including located abroad (below paras 4.200 et seq.). There may be additional means of taking evidence, such as seeking information from a government agency, which, however, rarely occurs in practice and is not further addressed herein.¹⁷⁴

4.147  We start with some general principles under German law (below paras 4.148 et seq.) and then turn to institutional arbitration (below paras 4.154 et seq.) as well as the IBA Rules on the Taking of Evidence in International Arbitration (below paras 4.156 et seq.).

4.148  The basic provision for the taking of evidence in German arbitration law is s 1042 para 4 cl 2 ZPO, which follows art 19 para 2 cl 2 Model Law and authorizes the arbitral tribunal to determine the admissibility of taking of evidence, take evidence, and assess freely such evidence (see para 4.27). Apart from that, there are two further provisions in the German arbitration law that deal with selected issues of evidence taking: s 1049 ZPO addresses expert evidence and s 1050 ZPO concerns assistance by state courts in the taking of evidence. In principle, all other issues are left to party agreement and, in its absence, the discretion of the arbitral tribunal. This applies, eg to the hearing of witnesses and party representatives, the production of documents, the inspection of objects, and the gathering of information from other sources.

4.149  The procedure for the taking of evidence in arbitral proceedings is less formalized than in German state court proceedings. The arbitral tribunal is not required to issue an evidence order setting forth the allegations to be proven and the means of evidence to be used to prove them.¹⁷⁵ At the same time, the arbitral tribunal certainly has discretion to use the technique of an evidence order and often this will further the efficiency of the proceedings. Likewise, the arbitral tribunal is not required to make formal rulings on offers of evidence that it does not wish to pursue.¹⁷⁶ The tribunal may decide based on its analysis of the case which allegations it thinks need to be proven and by what means, or it may even let the party representatives decide which issues they wish to prove, and then decide in the (p. 217) course of making the award what it considers relevant for the case and material for its outcome.

4.150  Regarding the conduct of evidence taking, again the arbitral tribunal has wide discretion. It is not bound to apply the traditional means of proof generally employed in state court litigation.¹⁷⁷ In particular, it is not bound to follow the distinction in German state court litigation between examination of witnesses and party representatives.¹⁷⁸ Instead, arbitral tribunals frequently treat witnesses and party representatives alike and consider the closeness of a person to a party when assessing the credibility of that person’s testimony.¹⁷⁹ Given the ZPO’s authorization of limited investigation (see paras 4.27 et seq.) the arbitral tribunal is at liberty to consider items of evidence that none of the parties has offered.¹⁸⁰

4.151  In assessing the evidence, the arbitral tribunal has discretion much like a state court judge (s 286 ZPO). The issue that arises here is the applicable standard of proof. Neither German nor international arbitration law provides a definition of this standard. As far as state court litigation is concerned, the Anglo-American tradition applies a lower standard of “preponderance of the evidence,” while the civil law systems—including Germany—typically require a conviction “beyond a reasonable doubt.” There is an ongoing discussion whether the arbitral tribunal has discretion as to which standard it applies or whether has to use the same “beyond a reasonable doubt” standard that German state courts are required to follow.¹⁸¹

4.152  In international cases the trend clearly goes towards allowing a wider discretion for the tribunal.¹⁸² This view allows arbitral tribunals to take a flexible approach and link the standard of proof to the gravity of the issue to be proven.¹⁸³ For instance, where issues of willful or criminal misconduct are concerned, arbitral tribunals will often be reluctant to draw conclusions based on a standard of mere preponderance of the evidence, but instead would seek to be satisfied beyond a reasonable doubt.¹⁸⁴ By contrast, regarding the amount of damages, arbitral tribunals may take a more generous approach and resort to estimates based on (p. 218) reasonable probabilities (which is incidentally in conformity with German state court litigation, see eg s 287 ZPO and s 252 BGB).¹⁸⁵ However, at the time of writing there is no certainty on this issue. Conversely, the stronger the nexus of the case, the parties or the arbitrators to the civil law tradition, the more likely the tribunal will be expected—at least in this respect—to act “ equivalent” to state court litigation and hence to apply the same standard of proof customary in state court litigation.

4.153  Under German law, the burden of proof is considered an issue of substantive law (see para 4.62).¹⁸⁶ Whether the arbitral tribunal considers and applies alleviations with respect to the burden of proof is again a procedural issue within the discretion of the tribunal. Thus, an arbitral tribunal may resort to the principles known from German state court litigation, such as res ipsa loquitur (Anscheinsbeweis), frustration of proof (Beweisvereitelung), and reversed burden of proof (Umkehr der Beweislast).¹⁸⁷ Also, a tribunal may seek inspiration from the principles of secondary burden of substantiation and proof (sekundäre Darlegungs- und Beweislast), which is a technique developed by German state courts to allow for the fact that there is in principle no discovery in German state court litigation and thus a party bearing the burden of proof may not have access to information necessary to make its case. This technique, when applied by a court or arbitral tribunal, may require a party that does not bear the burden of proof to make substantiated counter-allegations and disclose relevant facts where (i) the party bearing the burden of proof has no means of knowing such facts; and (ii) making such disclosures is not an undue burden to the obligated party.¹⁸⁸ An arbitral tribunal should bear in mind, however, that there may be less justification for this technique where the tribunal allows substantial document disclosure,¹⁸⁹ a context that is sometimes overlooked by German practitioners.

4.154  For the taking of evidence, the DIS Rules closely follow ss 1042 para 3, 1049 ZPO. Section 27.1 DIS Rules tasks the arbitral tribunal with establishing the facts underlying the dispute, without being bound by the parties’ applications for the admission of evidence. Section 27 DIS Rules further addresses witness and expert evidence, in the latter case very similar to s 1049 ZPO.

4.155  The ICC Rules take a comparable approach, also mandating the arbitral tribunal with establishing the facts “within as short a time as possible” (art 25.1 ICC Rules). (p. 219) Article 25 ICC Rules further addresses witnesses, experts, and documentary evidence.

4.157  The parties can adopt the IBA Rules as part of their arbitration agreement or at a later stage. In the absence of an agreement of the parties to use these “rules,” an arbitral tribunal, in exercising its discretion, may still seek inspiration from the IBA Rules. Three important general principles of the IBA Rules are (i) conducting the taking of evidence in good faith (Preamble at 3); (ii) avoiding surprises to the other party (Preamble at 3); and (iii) early consultations among the parties and between the parties and the arbitral tribunal on issues related to the taking of evidence (art 2). The IBA Rules contain detailed provisions on the disclosure of documents (art 3), witnesses of fact (art 4), party-appointed experts (art 5), tribunal-appointed experts (art 6), inspections of property, goods, processes, or documents (art 7), the conduct of evidentiary hearings (art 8), as well as the admissibility and assessment of evidence (art 9).

4.158  In German arbitration practice, it is our experience that the IBA Rules are more used as a source of inspiration rather than as agreed-upon and binding “rules.” In line with their purpose, they are used most often in arbitral proceedings with an international nexus. In seeking inspiration from the IBA Rules, different tribunals take different approaches; some apply them more strictly than others. For practitioners, especially counsel representing a party in arbitral proceedings, the IBA Rules are a useful source of possible approaches and arguments, especially as they are considerably more detailed than the provisions of the German arbitration law or rules of an arbitral institution. For arbitral tribunals, the solutions offered by the IBA Rules may serve as a good compromise between views originating from different legal systems and cultures. We will address the provisions of the IBA Rules in more detail below when we discuss the various means of evidence.

4.159  We first turn to some general principles in connection with the examination of witnesses and party representatives (below paras 4.160 et seq.). We then address issues of witness statements (below paras 4.164 et seq.) and witness preparation (below paras 4.167 et seq.), and the examination in front of the arbitral tribunal (below (p. 220) paras 4.169 et seq.). Finally, we address the assistance that state courts may provide in the taking of witness evidence (below 4.175 et seq.).

4.160  Witnesses are natural persons who can speak to facts that they have experienced, without drawing any conclusions or providing any (expert) analysis thereon. Any person that can somehow express him- or herself can be a witness.¹⁹¹ The German arbitration law does not contain specific provisions on witness evidence. The parties are free to agree on the details for the examination of witnesses. In the absence of such agreement, the matter is left to the discretion of the arbitral tribunal (s 1042 para 4 ZPO).

4.161  An arbitral tribunal does not have any power of coercion over witnesses. Thus, anyone who testifies as a witness does so voluntarily. As a consequence, an arbitral tribunal cannot summon a witness, but merely make an invitation to appear.¹⁹² As a further consequence, since any testimony is voluntary, technically there is no need to consider rights to refuse testimony. Nevertheless, in order to be able to properly assess the credibility of a witness’ testimony or refusal to testify, it may be recommendable that the arbitral tribunal explore whether there are grounds for a refusal or not.¹⁹³ With regard to witnesses who do not appear or testify voluntarily, an arbitral tribunal may seek the assistance of the competent state court (s 1050 ZPO), which may compel the appearance and testimony of a witness before the state court (but not in front of the arbitral tribunal; see para 4.175).

4.162  In German state court litigation, there is a strict distinction between witness examination (ss 373 et seq. ZPO) and party examination (ss 445 et seq. ZPO). By law, party examination is a minor form of evidence that is available only in certain circumstances and generally carries less weight than witness testimony.¹⁹⁴ Whether these distinctions still make sense in state court litigation, or whether they should be abolished, is a question that is open to debate. As far as arbitral proceedings are concerned, the law does not contain any such distinction. An arbitral tribunal has discretion how to address the issue. In today’s arbitration practice, there is less and less distinction made between witnesses and parties or their representatives. Thus, art 4.2 IBA Rules provides that “[a]‌ny person may present evidence as a witness, including a Party or a Party’s officer, employee or other representative.”

4.163  How close a person is to the claimant or the respondent, and how strong his or her personal interest is in the outcome of the proceedings, is a matter to be considered (p. 221) when assessing the evidence.¹⁹⁵ A person who is technically a witness (eg a newly hired employee with substantial personal debt) may be much less “independent” than a person who is technically considered a party representative (eg a long-time managing director with independent wealth shortly before retirement).

4.164  German law does not specifically address written witness statements, whether in arbitration or even in state court litigation.¹⁹⁶ Nevertheless, written witness statements have also become common in arbitral proceedings in Germany. Many arbitrators view them as a means to efficiently structure and streamline the proceedings. Article 4.5 IBA Rules is a useful point of reference for the suggested content of written witness statements, addressing as essential elements (i) the identification of the witness by name and address, relationships with the parties, background, qualifications, training, and experience; (ii) the necessity for a full and detailed description of the facts, and the source of the witness’s information as to those facts; and (iii) an affirmation of the truth of the witness statement.

4.165  Providing a written witness statement is, however, generally not a substitute for appearing at an evidentiary hearing. Where a witness whose appearance has been requested fails without a valid reason to appear for testimony, art 4.7 IBA Rules provides that the arbitral tribunal generally shall disregard a witness statement by that witness.

4.166  From a practical point of view, many arbitrators will usually not consider it particularly useful where witness statements merely repeat the written submissions of a party. Instead, they will expect the witness to provide more factual detail as to what the author personally experienced when and where and how. In international arbitration, it is generally not considered improper for counsel to assist in the drafting of a witness statement.¹⁹⁷ The important point is that the witness carefully reviews any such suggestions from counsel to verify whether those are a true and complete rendition of the relevant facts and a faithful expression of its own recollection, thoughts, or opinion as the case may be.¹⁹⁸

4.167  Traditionally, German practice in state court litigation has been characterized by considerable reluctance regarding contacts between a (p. 222) party or its counsel and witnesses to be examined, in particular in the case of witnesses outside a party’s immediate control. The traditional view was that such contacts may significantly impact the credibility of a witness.¹⁹⁹ Whether that is still true in state court litigation is an evolving issue.²⁰⁰ As far as arbitral proceedings are concerned, it seems that many practitioners do not per se object to such contacts. We believe that in arbitral proceedings it should not be considered improper to meet a witness in advance of an evidentiary hearing, to explain to the witness how the hearing will likely be conducted and what the witness’ duties and obligations are.²⁰¹ In our view, it is also appropriate to discuss the substance of a witness’ testimony as long as there are no improper attempts to influence such substance.²⁰² In that vein, a witness may be asked test questions and provide corresponding answers (mock examination).²⁰³ This is particularly true—and necessary—where a party and its counsel expect that there will be some type of US-style or otherwise intense cross-examination, which is a situation with which most people are not familiar and can pose significant traps for the unwary.

4.168  The above is encapsulated in art 4.3 IBA Rules, which provides that it is not considered improper for a party or its representatives to interview its witnesses or potential witnesses and to discuss their prospective testimony with them.

4.169  It is within the arbitral tribunal’s discretion how witnesses are to be examined. The tribunal may be inspired by the rules governing witness examinations in German state court litigation (ss 394 et seq. ZPO), which frequently happens in a domestic German arbitration setting. In such a case, usually the arbitral tribunal will take the lead in questioning the witness. Based on the model contained in s 396 ZPO, it will ask the witness to “tell the story” comprehensively and then ask additional questions. Only then will the parties and their representatives be allowed to ask supplemental questions (see s 397 ZPO). Generally, the party that has named a witness goes first (direct examination), and afterwards, the opposing party has the opportunity for cross-examination. It should be noted, however, that arbitrators with a significant background in the German legal system and German legal traditions often disapprove the type of vigorous, perhaps even aggressive cross-examination that is an important cornerstone in US and UK litigation.

4.170  Apart from the approach described above, an arbitral tribunal may decide to take a different approach and to let the parties and their counsel take the lead in (p. 223) examining witnesses. This is often done in an international context, in particular where (at least) one party has a common law background. Where written witness statements have been submitted, arbitral tribunals often limit the direct examination of a witness to a minimum, such as a confirmation of the witness’ personal background and the correctness of his or her witness statement. In such a case, a more active type of cross-examination may occur, too. Nevertheless, again, most arbitral tribunals sitting in Germany do not appreciate overtly aggressive cross-examination questions and tactics.

4.171  There are various methods of time management during witness hearings. It is advisable for an arbitral tribunal to consult with the parties on how much time is considered to be necessary for each witness, and to allot the time fairly between the parties in order to ensure equal treatment (s 1042 para 1 cl 1 ZPO). Various techniques have been developed in practice, including such rigid methods as the “chess clock.”²⁰⁴

4.172  In German practice, witnesses are usually examined one by one. Generally, the other witnesses are not present while a witness is examined, unless the parties agree otherwise and the arbitral tribunal does not insist on the absence of the other witnesses. In certain cases, it may be useful for an arbitral tribunal to confront witnesses with someone else’s testimony or to confront two witnesses with each other. In addition, there may be cases where it is useful for witnesses to be heard together in the first place (witness conferencing).

4.173  Under German law, an arbitral tribunal does not have the power to administer oaths.²⁰⁵ Nevertheless, a witness who willingly provides false testimony can be criminally liable for (attempted) procedural fraud. As a matter of German law, an arbitral tribunal could request the assistance of the competent state court to put a witness under oath (s 1050 ZPO), see para 4.176.

4.174  Witnesses have a right to be compensated for their out-of-pocket expenses.²⁰⁶ Under German doctrine, it is the parties (not the arbitral tribunal) who owe remuneration of expenses to the witnesses.²⁰⁷ Nevertheless, an arbitral tribunal may consider requesting that the parties make appropriate advance payments to the arbitral tribunal covering the likely expenses of witnesses in order to increase the likelihood that witnesses actually appear. In the alternative, the arbitral tribunal may leave it to the initiative of the parties which witnesses they wish to call. Thus, as a practical matter, it will be up to the party to ensure that a witness offered by it (p. 224) appears, and the willingness of the witness to appear may be linked with the preparedness of the party calling him or her to compensate for expenses.

4.175  If a witness fails to appear, the arbitral tribunal may ask the competent state court—generally the local court (AG) of the district where the witness resides²⁰⁸—for assistance; likewise, a party—with the approval of the arbitral tribunal—may make such request (ss 1050 cl 1, 1062 para 4 ZPO). The state court may then question the witness. If the witness also fails to appear before the state court, it can compel appearance by means of monetary penalties or incarceration (s 390 ZPO). The arbitrators may be present when the state court questions a witness (s 1050 cl 3 ZPO). Likewise, as a result of their right to be heard, the parties may be present and be asking questions, too, pursuant to s 1042 para 1 cl 2 and s 357 para 1 ZPO.²⁰⁹

4.176  The state court may also assist an arbitral tribunal in administering oaths.²¹⁰ As mentioned (para 4.173), under German law arbitral tribunals are not empowered to put witnesses under oath. Thus, where an arbitral tribunal decides that a witness should be put under oath, it may ask the competent state court to do so (s 1050 ZPO). In our experience, however, this is rarely done in German practice.

4.177  We first address certain general principles and legal traditions in connection with expert evidence (below paras 4.178 et seq.). We then turn to party-appointed and tribunal-appointed experts (below paras 4.180 et seq. and paras 4.182 et seq.). In a next step, we deal with the written expert report (below para 4.189) and the oral examination of experts, including expert conferencing (below paras 4.190 et seq.). Finally, we address the challenge of experts (below para 4.192).

4.178  Expert evidence is the only means of evidence that the German arbitration law addresses with some specificity in s 1049 ZPO, which closely follows art 26 Model Law. Section 1049 para 1 cl 1 ZPO provides that unless otherwise agreed by the parties, the arbitral tribunal may appoint one or more experts to render an expert opinion on certain issues defined by the arbitral tribunal. The arbitral tribunal may request a party to provide the court-appointed expert with all relevant information, documents, or objects (s 1049 para 1 cl 2 ZPO). The tribunal-appointed expert is to render (p. 225) a written or oral report (s 1049 para 2 cl 1 ZPO). If a party so requests or if the tribunal considers it necessary, the tribunal-appointed expert shall participate in an oral hearing in order to be questioned by the arbitral tribunal and the parties (s 1049 para 2 cl 1 and 2 ZPO). For such hearing, the parties may also rely on party-appointed experts and have them speak to the questions at issue (s 1049 para 2 cl 2 ZPO). Regarding neutrality of tribunal-appointed experts, the same principles apply as with respect to arbitrators (ss 1049 para 3, 1036, 1037 ZPO).

4.179  Thus, German law, at least on the face of it, expresses a certain preference for tribunal-appointed versus party-appointed experts, which is in conformity with the approach taken in German state court litigation. Party-appointed experts are mentioned only in passing. The IBA Rules take a more balanced approach; art 5 contains detailed provisions for party-appointed experts; art 6 addresses tribunal-appointed experts. We will address these provisions in more detail next.

4.180  While the German arbitration law mentions party-appointed experts only in passing, they play a significant role in arbitration practice both internationally and in Germany. Parties may instruct experts on issues of law and fact, and it is not uncommon to do so in arbitral proceedings in Germany. Parties will furnish their experts with the necessary facts and documents. Parties conclude the required engagement agreements with their party-appointed experts, and they need to remunerate them. Costs for a party-appointed expert may be included in costs of the arbitral proceedings, and the arbitral tribunal may decide who should bear such costs (s 1057 para 1 ZPO).²¹¹

4.181  German practitioners, in particular those with a strong state court litigation background (eg active or retired judges sitting as arbitrators) can have a certain skepticism toward party-appointed experts and may tend, as a matter of principle, to consider tribunal-appointed experts to be more credible and persuasive.²¹² We do not think that such skepticism is in principle warranted. There are highly credible and qualified party-appointed experts; at the same time, there are tribunal-appointed experts who do not line up to their appointed task. The issue is thus one for careful case-by-case analysis, looking at the credentials and the persuasiveness of the opinions of both party-appointed and tribunal-appointed experts.

4.182  Tribunal-appointed experts are typically tasked with issues of fact or specific (non-legal) expertise, whereas the application of the law to the facts is and remains the core task of the arbitral tribunal (p. 226) (iura novit curia).²¹³ Arbitrators may have specialized knowledge such that there is no need for a tribunal-appointed expert, eg with respect to certain business, industry, or technical issues (see also para 1.49).²¹⁴

4.183  The arbitral tribunal is free to choose an expert or experts it deems sufficiently qualified unless the parties have limited its discretion by specific requirements or certain names.²¹⁵ It may consider available lists of publicly appointed and sworn experts,²¹⁶ but need not limit itself to these lists. As a result of the tribunal’s appointment and the expert’s corresponding acceptance emerges a contract for works (Werkvertrag) under substantive law on rendering the expert opinion.²¹⁷ There is no consensus in German legal doctrine on the mechanics for concluding this contract. In particular, it is disputed whether the tribunal is authorized by the arbitrator agreement on behalf of the parties,²¹⁸ or instead acts on behalf of the party bearing the burden of proof,²¹⁹ or rather acts in its own name with the parties benefitting therefrom only as third-party beneficiaries.²²⁰ The differences of opinion are of practical relevance in particular for the question of liability for remuneration of the expert.

4.184  In the first place, the issue is of course determined by what has been agreed expressly between the parties, the tribunal, and the expert. In the absence of an agreement on the issue, in our opinion, the first view—which is also followed by German courts—best reflects the interests of all involved parties and provides for an efficient practical solution. Distinguishing along the lines of burden of proof fails where the expert opinion concerns numerous questions on both parties’ sides. As between the first and the last view, we consider the first more persuasive because, eventually, arbitration is a dispute resolution mechanism based on private party agreement, which is in line with required experts being mandated by the parties as well. The arbitral tribunal itself—be it a one-person or a three-person panel—has no legal personality, such that the individual arbitrators or the chairman would need to be considered parties to the engagement agreement with an (p. 227) expert. Given the potentially substantial costs for expert reports, this would seem inappropriate to us.

4.185  The expert’s main obligation is to answer the question(s) asked by the arbitral tribunal, which should be asked with precision and specificity. Possibly, it makes sense for the arbitral tribunal to confer with the expert on the proper wording of his or her instructions. In addition, conferring with the parties about this issue may be a good idea (see art 6.1 IBA Rules). In rendering the expert opinion, the expert is bound by the arbitral tribunal’s instructions. Further obligations of the expert are to appear at an oral hearing and to answer questions from the arbitral tribunal and the parties (s 1049 para 2 ZPO). Also, the expert must be and remain neutral; he or she must disclose facts that could give rise to doubts as to neutrality (ss 1049 para 3, 1036 ZPO). The expert is not required to take an oath, since an arbitral tribunal under German law is not empowered to administer oaths.²²¹ In theory, the arbitral tribunal could request the assistance of the competent state court to put an expert under oath (s 1050 ZPO). However, this should be very rare in practice.

4.186  Although the arbitral tribunal is usually not party to the contract and therefore not obliged to remunerate the expert, in practice it regularly requests an advance on the expert’s costs from the parties to ensure a smooth process and to relieve the expert of the risk and burden of having to look after his or her money.²²² The arbitral tribunal and the expert should agree expressly on the remuneration of the expert. The arbitral tribunal should consult with the parties on this issue. Where there is no agreement, existing fee scales may be applied; if none exist, the “usual” remuneration is deemed to be agreed (s 632 para 2 BGB). Where there is no “usual” remuneration, the expert would have the power to determine the remuneration (s 316 BGB).²²³

4.187  Tribunal-appointed experts need to render their expert work in person; they may involve assistants without the need for specific approval to a limited extent, such as for clerical or preparatory work. Still, they remain solely responsible for the opinion rendered.²²⁴ The parties are required to assist tribunal-appointed experts to the extent ordered by the arbitral tribunal to do so, eg by providing relevant information, documents, or access to objects (s 1049 para 1 cl 2 ZPO, similar art 6.3 cl 1 IBA Rules). Where a party fails to provide the required assistance and cooperation, the arbitral tribunal may draw negative inferences from such behavior (s 1042 (p. 228) para 4 cl 2 ZPO).²²⁵ By contrast, the arbitral tribunal has no power to order third parties to assist and cooperate with tribunal-appointed experts.²²⁶

4.188  Under the prevailing view in Germany, tribunal-appointed experts benefit from an implied limitation of liability; their liability towards the arbitral tribunal and the parties is limited to willful misconduct and gross negligence, equivalent to the principles applicable to experts appointed by a court in state court litigation (s 839a BGB).²²⁷

4.189  Notwithstanding the fact that s 1049 ZPO allows for an oral expert report, in practice experts—whether party- or tribunal-appointed—almost always render a written report on the questions raised in their instructions. German law does not contain any further specifics on written expert reports. Arts 5.3 and 6.4 IBA Rules may be looked at for useful practical guidance.

4.190  As set out above, German law provides for each party’s right to request a tribunal-appointed expert to appear at an oral hearing and to answer questions from the parties (s 1049 para 2 ZPO, see also art 6.6 IBA Rules). Regarding party-appointed experts, in order to assess their credibility and the persuasiveness of the views expressed by them, it is at least as important to confront them in an oral hearing and to ask them questions. Article 5.5 IBA Rules even suggests to disregard the written reports of a party-appointed expert who does not appear at an oral hearing.

4.192  Pursuant to ss 1049 para 3, 1037 ZPO, tribunal-appointed experts can be challenged for lack of neutrality. The same principles apply as to arbitrators. In particular, the two-week deadline provided for in (p. 229) s 1037 para 2 cl 1 ZPO needs to be observed. The arbitral tribunal decides on the challenge. Unlike with arbitrator challenges, for expert challenges there is no resort to the state court once the arbitral tribunal has decided.²²⁸ Article 6.2 IBA Rules contains similar provisions on the challenge of tribunal-appointed experts. By contrast, there is no possibility to challenge a party-appointed expert for lack of neutrality.²²⁹ Instead, where a party-appointed expert is particularly close to the party instructing him or her, or expresses views and behaves in a way such as to suggest lack of neutrality, the arbitral tribunal will need to consider this aspect in assessing the credibility of such expert’s views.²³⁰

4.193  Documents are important pieces of evidence in most arbitral proceedings. Increasingly, parties wish to rely on documents that they intend to obtain from the other side or third parties (document disclosure, see paras 4.113 et seq.). The German arbitration law does not contain any specific provisions on documentary evidence. Thus, in the absence of an agreement by the parties, documentary evidence is a matter for the discretion of the arbitral tribunal (s 1042 para 4 ZPO). Documentary evidence is taken by providing the document to the arbitral tribunal and by the arbitral tribunal taking note of its contents. As a result of the right to be heard (ss 1042 para 1 cl 2, 1047 para 3 ZPO), documents must also be made available to the other party or parties.²³¹ Documents may be traditional hard-copy documents or electronic documents, including emails.²³² Whether the original of the document needs to be produced is again a matter for the discretion of the arbitral tribunal. Where the other party does not deny that a copy submitted as evidence conforms to the original, arbitral tribunals will often be satisfied with copies. Of course, the arbitral tribunal has discretion to request an original.²³³ As far as electronic documents are concerned, the distinction between original and copy does not make sense.