6.1  Arbitration is characterized by, on the one hand, largely flexible arbitral proceedings (Chapter 4) and, on the other hand, an outcome, the award, that not only is tantamount to a state court judgment (paras 6.108 et seq.), but also is equipped with restricted remedies (paras 6.145 et seq. and 6.156 et seq.) and facilitated means of enforcement both domestically (paras 6.246 et seq.) and internationally (paras 6.287 et seq.). Before the making of an award is discussed (paras 6.86 et seq.), the different ways to resolve the dispute— by decision of the arbitral tribunal and by settlement of the parties (paras 6.2 et seq.)— and the rules which the arbitral tribunal applies when deciding on the merits and on costs (paras 6.46 et seq.) are described. In some cases, the arbitral proceedings end with a termination order instead of an award (paras 6.128 et seq.).

6.2  The standard procedure for the resolution of the dispute that the parties have brought before the arbitral tribunal is the tribunal’s decision on that dispute (p. 280) (paras 6.3 et seq.) by way of an arbitral award. Alternatively, the parties may amicably settle the case (paras 6.19 et seq.) and relieve the tribunal of the duty to render a decision on the dispute. In conformity with German court tradition, arbitral tribunals in Germany often encourage the parties to consider making a settlement. To facilitate enforcement of the terms of any such settlement, it may be recorded by the arbitral tribunal in the form of an award on agreed terms.

6.3  If the arbitral tribunal is to decide the dispute, it will typically follow a two- step procedure, consisting of deliberations (paras 6.4 et seq.) followed by voting (paras 6.16 et seq.).

6.4  The tribunal’s deliberation is at the heart of the decision- making process. While the structure and conduct of any deliberation are not legally prescribed (paras 6.5 et seq.), the process is protected by the secrecy of deliberations (paras 6.8 et seq.) and restrictions on the participants (paras 6.13 et seq.).

6.5  The style of deliberations may vary considerably without being limited to specific forms. The arbitrators may deliberate in a physical meeting, by telephone conference, by correspondence, by exchange of emails, etc.¹ The exchange of views and arguments is as little standardized as the design and effectiveness of the deliberations. If the arbitrators disagree on these questions of style, it will be for the chairman to decide.² In practice, however, the style of deliberations often depends more on the personalities of the arbitrators (including the chairman) than on the formal right to determine the style of deliberations. This is one of the core reasons why a careful selection of arbitrators can hardly be emphasized sufficiently (cf paras 3.56 et seq.). As a matter of law, the parties may agree on stipulations regarding the tribunal’s deliberations.³ Again, owing to the dominant influence of the arbitrators’ respective personalities, such party agreements would be of limited effect and are rare in practice.

6.6  It is best practice to conduct the deliberations promptly after the oral hearing of witnesses has concluded and the arbitrators’ recollection is still fresh.⁴ Often the chairman will lead and structure the deliberations but ask the co- arbitrators for their views before voicing his or her own opinion. Occasionally, arbitrators adopt the court practice of circulating a full assessment of the case (Votum), sometimes (p. 281) even in the form of a draft award.⁵ While the arbitrators may base their deliberations on such full- fledged draft, its unannounced circulation may also be perceived as inappropriate, in particular if it is issued by a co- arbitrator.

6.7  The prevailing view restricts the scope of deliberations to the outcome of the case and assumes that the legal reasoning need not be deliberated.⁶ Since, however, at least the majority of the arbitrators must sign the award and will likely refuse to do so if not comfortable with its reasoning, the deliberations will invariably extend to the reasoning leading to the agreed outcome of the case. In addition, differences of opinion that may exist between and among the arbitrators will often relate not to the outcome of the case only but rather also to the underlying reasoning.

6.8  The arbitrators are under an obligation of secrecy regarding the content and course of the deliberations.⁷ This duty is usually rooted in the arbitrator contract even if not expressly stipulated there.⁸ Similar to the conflict disclosure obligation (paras 3.128 et seq.), it should also be understood as a duty that is directly attached to the arbitrator’s office and that exists regardless of the validity of the arbitrator contract.⁹

6.9  The secrecy of deliberations does not only protect the arbitrators (whose conduct and position during the deliberations shall not be disclosed), but also the integrity of the arbitral process as such.¹⁰ Since arbitration is deemed to be a dispute resolution mechanism equivalent to state court proceedings, it must be ensured that the arbitrators decide according to their best knowledge. This again requires an open discussion of the case, including an equally open exchange of pros and cons and frank addressing of the respective strengths and weaknesses. Such an open atmosphere could be seriously endangered if the arbitrators had to take into consideration that the parties or other third persons would become privy to the content of the deliberations.

6.10  Since the secrecy of the deliberations also aims to protect the integrity of the proceedings, it is not within the parties’ or the arbitrators’ power to abandon such secrecy.¹¹ It is therefore somewhat incongruous that the prevailing view allows for the parties to agree that the deliberations be held in their presence (para 6.15).

(p. 282) 6.11  The secrecy of deliberations is constrained by law, in particular by s 1052 para 2 ZPO (para 6.18). It is further acknowledged that the secrecy of deliberations does not bar an arbitrator from informing the parties of evident bias on the part of another arbitrator.¹² Although such bias will often become apparent only in the deliberations, the secrecy of the deliberations cannot yield to any ground for challenge (s 1036 para 2 ZPO, paras 3.112 et seq.) or even any ground that is to be disclosed under s 1036 para 1 ZPO (paras 3.116 et seq.) even if the respective party is thereby deprived of its right to challenge. In light of its significance for the arbitral procedure as such (para 6.9), the secrecy of deliberations may allow at best for the disclosure of such grounds for challenge that would also qualify as grounds for setting aside the award (cf para 6.215). Any further allowance would serve to demote the arbitrators to agents of a party’s procedural remedies.

6.12  An obvious consequence of the arbitrator’s duty to keep deliberations confidential is his or her right to refuse to give evidence in court proceedings.¹³ At the same time, a breach of the confidentiality obligation is not a criminal offence under s 203 StGB inasmuch as this provision does not address arbitrators. It is a matter of dispute whether it is impermissible in light of the arbitrator’s secrecy obligation to issue a dissenting opinion (paras 6.102 et seq.).¹⁴ The more elegant solution may in any event be to make clear within the award that certain issues are the result of a majority decision.¹⁵

6.13  Third persons may attend the deliberations if all arbitrators agree and the third persons do not influence the outcome of the case.¹⁶ Uncontroversial examples of such attendance include secretaries (performing administrative tasks like taking notes)¹⁷ and trainees.¹⁸ Tribunal- appointed experts or advisers must not attend deliberations since such attendance would run the risk of influencing the outcome of the case.¹⁹ Nevertheless, the prevailing view is more generous and allows for the attendance of advisers if the tribunal leaves neither the factual nor the legal assessment of the case to the adviser²⁰ or at least (p. 283) if the tribunal maintains a critical stance and does not merely adopt the adviser’s decision.²¹ This view, however, deprives the parties of their right to be heard.²² If the tribunal seeks to include third- party advice, it may appoint its own expert and question the expert in the oral hearing. The parties’ right to comment on the expert’s views cannot be circumvented by making the expert the tribunal’s private adviser.

6.14  To what extent (administrative) secretaries may be involved in the decision- making process has been subject to a lively discussion during the last few years. Internationally, a number of institutional²³ and best practice guidelines²⁴ have been released on this topic. German law will take no offence as long as the secretary’s duties are limited to purely administrative tasks like organizing the files, arranging hearing logistics, typing the award etc.²⁵ Conversely, it is clear that a secretary must not act as a fourth arbitrator:²⁶ the parties have mandated the arbitrators in person to decide the dispute and the arbitrators cannot delegate this task to a secretary.²⁷ The exact borderline, however, is difficult to determine. The prevailing view allows for the secretary to draft the award based on the tribunal’s decision of the dispute.²⁸ In international arbitrations, the secretary is even deemed to be permitted to submit a draft award which only in a second step is subject to the tribunal’s deliberation.²⁹ Such procedure, however, entails the risk that the tribunal abdicates its duties by merely rubber- stamping the secretary’s draft without forming an own opinion. It is in any event not best practice for a responsible tribunal to transfer its core duties to a secretary in such way.

6.15  The prevailing view allows for the attendance of the parties during the deliberations if all arbitrators and parties agree.³⁰ However, since the secrecy of deliberations also protects the integrity of the arbitral process (para 6.9), the better arguments suggest that the parties’ attendance constitutes a ground for setting aside the award under s 1059 para 2 no 1 lit d ZPO, and in actual best practice attendance of the parties in the deliberations is essentially unheard of, and rightly so.

6.16  If the arbitral tribunal consists of a sole arbitrator, the arbitrator simply applies the law to the facts (para 6.47). With more than one arbitrator, the specific procedure needed for making the decision is enshrined in s 1052 ZPO. This provision adopts art 29 Model Law and adds rules on the refusal of an arbitrator to participate in the voting (para 6.18).

6.17  If the parties have not agreed on a voting procedure, the content and order of voting proposals is to be determined by the chairman.³¹ In practice, the voting is often not a formalized act, but rather an iterative process in the course of the deliberations. Each arbitrator has one vote and the decision is taken by the absolute majority of votes.³² In case of a tie, ie if the arbitrators cannot reach a decision, the arbitration agreement becomes incapable of being performed (s 1032 para 1 ZPO)³³ and the arbitral tribunal issues a termination order under s 1056 para 2 no 3 ZPO.³⁴ The parties can agree that in case of a tie the chairman’s vote shall be decisive³⁵ or that another procedure shall apply.

6.18  As the arbitrators are appointed to decide the dispute, each arbitrator is under a duty to vote; to abstain from voting violates this duty.³⁶ If an arbitrator abstains from voting, the other arbitrators can take the decision without the abstaining arbitrator (s 1052 para 2 cl 1 ZPO). Even in that case, any decision is to be taken with the absolute majority of all members of the arbitral tribunal (para 6.17).³⁷ The remaining arbitrators must give the parties advance notice of their intention to make the award without the abstaining arbitrator (s 1052 para 2 cl 2 ZPO). Therewith, the parties shall be given an opportunity to exert influence on the refusing arbitrator,³⁸ eg by reminding him or her to adhere to his or her duties and threatening to jointly remove him or her from office as arbitrator (cf para 3.172). If no such notice is given or if it is given at too short notice as to allow for influencing the arbitrator, the award is subject to setting aside under s 1059 para 2 no 1 lit d ZPO.³⁹

6.19  Since the parties are the masters of the arbitral proceedings, they can at any time end their dispute including by agreeing on a settlement (paras 6.20 et seq.). While (p. 285) a settlement puts an end to the dispute, it is not an executory title. The parties can, however, request the arbitral tribunal to transform the settlement into an award on agreed terms, which allows for enforcement of the terms of the settlement in the same way as any contested arbitral award (paras 6.34 et seq.). With these stipulations, s 1053 ZPO implements art 30 Model Law, the sole modification being that the tribunal is in principle not at liberty to decline to issue an award on agreed terms (para 6.37). German law also attributes advanced effects to an award on agreed terms (s 1053 paras 3 and 4 ZPO, paras 6.43 et seq.).

6.20  Section 1053 para 1 cl 1 ZPO merely requires that the parties (para 6.22) settle (para 6.21) the dispute (paras 6.23 et seq.) during the arbitral proceedings (para 6.25).

6.21  A settlement in any event requires a contractual agreement under the law chosen by the parties or otherwise applicable under conflict of law rules.⁴⁰ Beyond this basic prerequisite, it is disputed whether a settlement always requires mutual concessions as demanded under German substantive law (s 779 para 1 cl 1 BGB)⁴¹ or whether one party’s concession suffices.⁴² The prevailing view apparently is in favor of such requirement. The better view, however, speaks for making a distinction between the procedural requirements for a settlement (as defined in s 1053 ZPO) and the substantive requirements under the law governing the settlement (eg s 779 BGB).⁴³ While s 779 BGB may indeed invalidate settlements to the extent that it applies (para 6.28), there is little reason why the “settlement” under s 1053 para 1 cl 1 ZPO (and, subsequently, the award on agreed terms) should be available only if the parties compromise.⁴⁴ The wording of s 1053 ZPO is flexible enough to accommodate the practical need to extend the provision to acknowledging claims, and the drafting history of art 30 Model Law, the provision’s blueprint, provides no support for such restriction either.⁴⁵

6.22  The settlement must be concluded between the parties, ie the parties to the arbitral proceedings, not necessarily the parties to the arbitration agreement.⁴⁶ As long as at least two parties to the arbitral (p. 286) proceedings are parties to the settlement, additional third parties can also join the settlement.⁴⁷ Not all parties to the arbitral proceedings need to be involved in the settlement;⁴⁸ the arbitral proceedings can, however, be terminated only with regard to the parties to the settlement.

6.23  The parties need to settle the dispute. Similar to the involvement of the parties (para 6.22), the settlement needs to encompass at least partially the matter in dispute⁴⁹ but may also go beyond it.⁵⁰ The arbitral tribunal can terminate the proceedings only to the extent that the matter in dispute is settled.⁵¹ A full settlement of “the dispute” which allows for a termination of the proceedings consists of a substantive law solution plus the procedural law agreement that the arbitral proceedings shall be terminated.⁵² Without the latter, the tribunal cannot terminate the proceedings as stipulated by s 1053 para 1 cl 1 ZPO (cf s 1056 para 2 no 2 ZPO).⁵³

6.24  The “dispute” to be settled also comprises the allocation of costs. If the parties fail to agree on an allocation of costs, the tribunal must render an (adversarial) arbitral award on costs under the standard of s 1057 ZPO (paras 6.48 et seq.). Section 98 ZPO, according to which in case of a settlement before the state courts the costs shall be deemed to have been cancelled against each other absent any agreement of the parties to the contrary, applies neither directly nor by way of analogy.⁵⁴ However, this cost allocation may be reached by way of interpretation of the settlement or as a standard for inspiration of the arbitral tribunal when allocating the costs under s 1057 ZPO.

6.25  Section 1053 ZPO furthermore requires the settlement to be reached during arbitral proceedings, ie after the commencement of the proceedings (s 1044 ZPO).⁵⁵ Some authors extend the scope of the provision to pre- arbitral settlements, arguing with the practical need for transforming a settlement reached within a mediation or elsewhere into an arbitral award.⁵⁶ However, the constitution of an arbitral tribunal (and the remuneration (p. 287) of its members) will usually not be a viable option for the parties, whether in terms of time or cost, in particular since s 796a ZPO allows for the enforcement of settlements reached between attorneys. Absent a relevant practical need, the scope of s 1053 para 1 cl 1 ZPO should not be extended to pre- arbitral agreements. Section 1053 ZPO applies to settlements reached outside and within the arbitral proceedings, be it with or without the assistance of the arbitral tribunal.⁵⁷ Such assistance can often be observed in domestic arbitrations seated in Germany since it is a distinct feature of German civil procedural law to actively encourage the parties to settle the case (para 1.28). In particular in international proceedings, however, the arbitral tribunal must carefully avoid giving rise to grounds for a later challenge (para 3.125).

6.26  Only a valid settlement has legal effects. The validity of the settlement is to be assessed under the law chosen by the parties or otherwise applicable to it under choice of law rules⁵⁸ with the exception of form requirements if the settlement is transformed into an award on agreed terms (paras 6.43 et seq.).⁵⁹ Some authors contend that the parties’ freedom to choose the law applicable to the settlement is even extended as under s 1051 ZPO (cf paras 2.183 et seq.).⁶⁰ At first sight, it is indeed plausible that s 1051 ZPO could be extended by way of analogy from the substantive law governing the merits of the case to the substantive law governing the settlement of the case. While, however, the arbitral tribunal’s decision on the merits is not subject to further review in setting aside proceedings (para 6.187), the validity of the settlement can be reviewed under s 1059 para 2 no 1 lit d ZPO (para 6.32). Extending the scope of s 1051 ZPO would therefore make sense only if the state court were bound by s 1051 ZPO (which is not the case). Section 1051 ZPO applies directly to the parties’ choice of law if any dispute about the validity of the settlement is submitted to an arbitral tribunal.

6.27  No valid settlement can be concluded if the law thus determined does not entitle the parties to conclude such a settlement even if the matter in dispute is nonetheless arbitrable (cf s 1030 para 1 cl 1 ZPO, paras 2.49 et seq.).⁶¹ Neither can the requirements under the applicable contract law be ignored nor can the mere fact that arbitral proceedings are pending between the parties extend the parties’ ability to settle a dispute.⁶²

(p. 288) 6.28  If German substantive law governs the settlement, s 779 BGB contains specific grounds for invalidity. The provision requires that the dispute be resolved by way of mutual concession; minor concession is considered sufficient, including on the allocation of costs.⁶³ If the fact situation (or the realization of a claim) that the parties had considered as definite turns out not to comport with reality and if the dispute would not have arisen had the facts been known, then the settlement is invalid under s 779 BGB.

6.29  Settlements before German courts are often concluded with the reservation of a right to revoke within a defined time frame. Such reservation is usually to be interpreted as a condition precedent to the validity of the settlement.⁶⁴ Only once the time frame has lapsed without revocation does the settlement become valid and can it serve as the basis for an award on agreed terms.⁶⁵

6.30  While the settlement reshapes the substantive legal situation, it does not directly terminate the arbitral proceedings. Rather, the arbitral tribunal will terminate the proceedings (s 1053 para 1 cl 1 ZPO) in a separate procedural step, be it by making an award on agreed terms under ss 1053, 1054 ZPO (paras 6.34 et seq.) or, if the procedural prerequisites for an award on agreed terms are not met, by issuing a termination order under s 1056 para 2 no 2 ZPO (para 6.135). Such termination order requires that the parties have agreed on the termination of the proceedings, which will usually be part of the settlement. Even if the settlement is silent on the termination of the proceedings, such agreement can usually be derived by way of (supplementary) interpretation. If exceptionally the parties have made clear that they did not agree on the termination of the proceedings and no other termination ground under s 1056 para 2 ZPO exists, the arbitral tribunal must decide the dispute by way of an (adversarial) award based on the substantive legal situation as it has been reshaped by the settlement.⁶⁶

6.31  The arbitral tribunal must examine the validity of the settlement before taking further procedural steps.⁶⁷ If it turns out to be invalid, the arbitral tribunal cannot terminate the arbitral proceedings. Until the arbitral tribunal has terminated the arbitral proceedings, the parties can urge the invalidity of the settlement before the arbitral tribunal.

(p. 289) 6.32  If the arbitral tribunal has issued an award on agreed terms (paras 6.34 et seq.), the invalidity of the settlement can be asserted only as a ground for setting aside the award. Beyond this (time- limited) remedy, the award is protected by its res judicata effect.⁶⁸ The setting aside application can be based on the irregularity of the procedure (s 1059 para 2 no 1 lit d ZPO).⁶⁹ A lack of jurisdiction (s 1059 para 2 no 1 lit c ZPO) can be invoked if the tribunal has ruled on the validity of the settlement principally and the arbitration agreement does not encompass this subject matter. Jurisdiction is not at issue, however, if the validity of the settlement has been tested only as a preliminary question.⁷⁰ If in their arbitration agreement the parties have empowered the arbitral tribunal to decide on the validity of the settlement, then an award principally doing so has binding effect in setting aside proceedings (s 1055 ZPO).⁷¹

6.33  If the arbitral tribunal has issued a termination order under s 1056 para 2 no 2 ZPO (para 6.135), this order serves to terminate the arbitral proceedings (s 1056 para 1 ZPO), including the office of the arbitrators (s 1056 para 3 ZPO), regardless of the validity of the settlement.⁷² If an incorrect termination does not render the arbitration agreement incapable of being performed under s 1032 para 1 ZPO (para 2.158), the arbitration agreement remains in force in its original scope.⁷³ The legal situation is similar to the arbitration agreement surviving the setting aside of an arbitral award rendered on this basis (s 1059 para 5 ZPO).⁷⁴ Whether the invalidity of the settlement must be claimed before an arbitral tribunal or a state court depends on whether the arbitration agreement also encompasses the validity of the settlement.⁷⁵ The original dispute can in any event be brought before a (newly constituted) arbitral tribunal, which will examine the validity of the settlement as a preliminary question.

6.34  Elevating the party settlement to an award on agreed terms pursues mainly one aim, namely facilitating enforcement. If a party does not comply with a settlement voluntarily, it must be enforced before the competent state court or arbitral tribunal before it can actually be executed against the debtor. An award on agreed terms has the same effect as any other award (s 1053 para 2 cl 2 ZPO) and can be enforced similarly, including abroad under the New York Convention (para 6.302). International enforcement was decisive for the legislature’s decision to replace the former “arbitral settlement,” a discrete executory title that was not (p. 290) recognized internationally, by the award on agreed terms.⁷⁶ It is generally advisable for the parties to request an award on agreed terms and appropriate for the arbitral tribunal to suggest such requests.

6.35  The award on agreed terms is issued by the arbitral tribunal upon a request by the parties (paras 6.36 et seq.). If the tribunal considers that the settlement is valid (paras 6.31 et seq.)⁷⁷ and complies with German public policy (para 6.38), the arbitral tribunal issues the award on agreed terms without further scrutiny.

6.36  An award on agreed terms can be issued only if both parties so request, although not necessarily jointly.⁷⁸ The request will often already be included in the settlement.⁷⁹ All parties to the settlement need to request that the (full) settlement be recorded as an award on agreed terms.⁸⁰ If only some of these parties file the request, then the award on agreed terms must be limited to the requesting parties. Once filed, the request cannot be withdrawn unilaterally.⁸¹

6.37  An award on agreed terms can be issued only between at least two parties to the arbitration. While third parties can readily become party to the settlement agreement (para 6.22), they cannot be included in an award unless they have previously acceded to the arbitration agreement and become party to the arbitration.⁸² The third party’s joinder and its accession to the arbitration agreement is impliedly contained in the request to render an award on agreed terms.⁸³ Each request to issue an award on agreed terms similarly includes the submission to the jurisdiction of the arbitral tribunal of any additional matter not encompassed by the arbitration agreement.⁸⁴

6.38  Under art 30 para 1 Model Law, the settlement is recorded as an arbitral award if not objected to by the arbitral tribunal. The German legislature found this requirement too broad and too unspecific.⁸⁵ It was thus replaced by the requirement that the contents are not in violation of public policy (s 1053 para 1 cl 2 ZPO). The standard for (domestic) public policy is the same as under s 1059 para 2 no 2 lit b ZPO (paras 6.225 et seq.).⁸⁶

6.39  Form and content of the award on agreed terms follow the same general rules that govern form and content of any other award (s 1053 para 2 cl 1 ZPO). It is in particular to be signed by the arbitrators (s 1054 para 1 ZPO). Additional signatures by the parties do not invalidate the award on agreed terms but may question the arbitral tribunal’s intention to issue an award.⁸⁷

6.40  Two exceptions to the rule exist: first, the award on agreed terms must state that it is an award (s 1053 para 2 cl 1 ZPO). This serves to avoid confusion with a protocol taken by the arbitral tribunal.⁸⁸ Second, the award on agreed terms does not need to give reasons upon which it is based (s 1054 para 2 ZPO) and in fact cannot, since the tribunal did not make the decision but merely transformed the parties’ decision. For this reason, it is advisable to state in the award that it is an award on agreed terms although such declaration is not legally required.⁸⁹

6.41  The award on agreed terms has the same effect as any other award on the merits of the case (s 1053 para 2 cl 2 ZPO), ie the same effect as a final and binding court judgment (s 1055 ZPO, paras 6.108 et seq.). Like any other award, the award on agreed terms can be enforced in Germany after it has been declared enforceable (s 1060 ZPO).⁹⁰ For recognition and enforceability abroad, the award on agreed terms constitutes an award under the New York Convention as under most other enforcement regimes.⁹¹

6.42  Like any other award, the award on agreed terms is subject to setting aside proceedings under s 1059 ZPO.⁹² The content of the award, however, is not the result (p. 292) of legal proceedings before the arbitral tribunal, but rather traces back directly to the parties. Procedural deficiencies during the arbitral proceedings before the settlement, including the constitution of the arbitral tribunal, will therefore usually not affect the award.⁹³ The arbitral tribunal likewise cannot interpret the award on agreed terms (s 1058 para 1 no 2 ZPO), since it did not make (but rather only issue) the decision.⁹⁴

6.43  If a settlement in state court proceedings is recorded in the court record, this recording substitutes for notarial certification (s 127a BGB) which German substantive law requires for a number of contracts, including on the transfer of real estate (s 311b para 1 BGB) and of shares in a limited liability company (s 15 para 4 GmbHG). Section 1053 para 3 ZPO extends this effect to awards on agreed terms.⁹⁵ However, the prevailing view— in light of s 1055 ZPO: unconvincingly— requires the award on agreed terms to be declared enforceable (s 1060 ZPO) before the land registry (Grundbuchamt) registers a transfer of title (para 6.256).

6.44  Section 1053 para 3 ZPO does not apply to sham awards on agreed terms. Such “awards” stem from arbitral proceedings which were initiated for the sole purpose of saving notarization costs.⁹⁶ While case law has thus far been called upon to address only clear- cut cases, the borderline between “real” and “sham” arbitrations will often be somewhat blurred.

6.45  Since an award on agreed terms is tantamount to an adversarial award (s 1053 para 2 cl 2 ZPO, paras 6.41 et seq.), it can be declared enforceable by the higher regional court like any other award (s 1060 ZPO). Moreover, in light of the consensual content of the award on agreed terms,⁹⁷ the parties can agree to have the award on agreed terms declared enforceable by a public notary. The notary’s declaration as enforceable serves as an executory title⁹⁸ for which lower fees are due than for proceedings for a declaration of enforceability before the higher regional courts.⁹⁹ As opposed to the state court which performs a full review of the award on agreed terms pursuant to all six grounds under s 1060 para 2 cl 1, s 1059 para 2 ZPO, the notary’s review is restricted to violations of public policy (s 1053 para 4 cl 2, para 1 cl 2 ZPO). The notary’s declaration of enforceability in turn does (p. 293) not preclude grounds for setting aside the award; s 1059 para 3 cl 4 ZPO does not apply.¹⁰⁰

6.46  If the arbitral tribunal is to decide the dispute, it will first determine its jurisdiction over the dispute. To the extent that the arbitral tribunal lacks jurisdiction (paras 2.3 et seq.), it cannot decide on the merits and will dismiss the claim. Only if the arbitral tribunal finds that it has jurisdiction will it decide the dispute under the applicable rules (para 6.47) and render an award on the merits, either granting or dismissing the claim. If the parties settle the case, the arbitral tribunal’s decisions are replaced by the parties’ agreement; the arbitral tribunal’s tasks are then significantly reduced (paras 6.19 et seq.).

6.47  The arbitral tribunal will decide the dispute on the merits by applying the rules of law that the parties have chosen (s 1051 para 1 cl 1 ZPO). By submitting to arbitration, the parties broaden their freedom to choose the applicable law as compared to dispute resolution before German state courts. This includes the right to agree on rules of law other than national laws (s 1051 para 1 cl 1 ZPO), the right to agree on an ex aequo et bono decision under s 1051 para 3 ZPO, and the extended freedom from substantive law limits. If the parties have not elected a substantive law, the arbitral tribunal applies the law of the state with which the subject matter of the proceedings is most closely connected (s 1051 para 2 ZPO). For details on the legal rules which the arbitral tribunal shall apply to the merits of the dispute, see paras 2.183 et seq.

6.48  While it may at first sight seem uneventful, the decision on costs often belongs to the more challenging tasks of an arbitral tribunal. Remarkably, a provision addressing the decision on costs is one of the few additions that the German legislature made to the Model Law, inasmuch as costs are of importance at the termination of (p. 294) any arbitral proceedings and the parties frequently do not enter into cost- related stipulations.¹⁰¹

6.49  Since the particularities of cost procedures in German arbitration are easier to understand when contrasted with the cost procedures in German state court arbitration, a short overview over the former will be given as background information.

6.50  In German state court proceedings, two cost decisions are to be taken: the first one allocates the costs between the parties and is taken by the court as part of the judgment. Although the court allocates the costs sua sponte (s 308 para 2 ZPO), parties usually request a cost decision in their favor. Pursuant to the general rule of s 91 para 1 cl 1 ZPO, the party that has not prevailed in the dispute is to bear the costs of the legal dispute. This general rule is supplemented by rules for specific procedural settings including costs for unsuccessful appellate remedies (s 97 ZPO), costs for withdrawn claims (s 269 para 3 cl 2 and 3 ZPO), and costs incurred as a result of default by a party (s 344 ZPO). The decision on cost allocation rendered by the court does not determine any amounts, but rather indicates which party has to bear the costs fully or in which portion.

6.51  The amounts to be borne by a party are determined in a second step. The party that is entitled under the court’s cost allocation decision must apply to the court registrar (Rechtspfleger) and request fixing of the amounts due based on the court’s cost allocation (ss 103 et seq. ZPO). The registrar will fix only such costs as the party is entitled to receive under s 91 ZPO, in particular costs that were necessitated to appropriately bring or defend against the court action. Lawyer’s fees are to be refunded only up to the amounts of the statutory lawyer’s fees (s 91 para 2 cl 1 ZPO, see also para 3.178). Lawyer’s fees as well as court fees depend on the amount in dispute, which is to be determined by court order.

6.52  The provision on costs in arbitral proceedings, s 1057 ZPO, takes up on the distinction between allocation of costs and fixing the amount of costs. For both steps, however, the arbitral tribunal is in charge since arbitral tribunals do not have registrars for fixing the costs and the state court registrars are not competent to determine costs based on arbitral awards.¹⁰²

6.53  In the first step, the arbitral tribunal will allocate the costs between the parties to the arbitration. Unlike a German state court, the arbitral tribunal enjoys broad discretion as to the criteria for cost allocation (paras 6.60 et seq.).

(p. 295) 6.54  The second step again consists of fixing the amount of costs to be awarded. The arbitral tribunal can indeed issue a separate cost award for this purpose. If it does so, it can restrict the main award to the allocation of costs and then collect the relevant figures only after the main award has been issued. The procedurally more efficient and more often chosen route, however, is to request the parties’ cost submissions towards the end of the proceedings.¹⁰³ This route, which is mandatory in ICC proceedings (art 37 para 4 ICC Rules), allows the arbitral tribunal to render one final award which already includes the complete cost decision. Regardless of which route the arbitral tribunal chooses, it has equally broad discretion to determine the amount of costs to be borne by each party (para 6.68).

6.55  The arbitral tribunal has jurisdiction to decide on costs unless the parties have excluded this jurisdiction fully or in part. This follows from the explicit wording of s 1057 para 1 cl 1 ZPO, which is referenced by the provision’s second paragraph (“also”). While it is rare in practice for parties to exclude the tribunal’s jurisdiction to allocate costs, certain institutional rules such as the ICC Rules entrust the institution with fixing at least some kinds of costs, in particular the arbitrator’s fees and expenses. To the extent that the arbitral tribunal has jurisdiction to rule on costs, it will decide sua sponte, ie even if the parties have not requested a cost decision.¹⁰⁴

6.56  A specific issue arises in the event the arbitral tribunal declines its jurisdiction due to the lack of a valid arbitration agreement encompassing the dispute. In that case, the parties have not validly empowered the arbitral tribunal to issue binding decisions on them. This would generally also include decisions on costs;¹⁰⁵ under that approach, the parties would need to bring claims for cost recovery under substantive law before the state courts.¹⁰⁶ The prevailing view under German law, however, assumes a residual jurisdiction stemming from the (invalid or otherwise insufficient) arbitration agreement.¹⁰⁷

6.57  It is important to identify which exact relationship is encompassed by the arbitral tribunal’s cost decision.¹⁰⁸ The arbitration agreement as the source of the arbitral tribunal’s jurisdiction empowers it to make rulings only with effect between the parties to the arbitration (s 1055 ZPO). Therefore, the sole contents of the cost decision are how the costs (p. 296) are allocated between the parties and which amount shall be borne by each party, again only with regard to the other party.

6.58  It follows from the cost decision’s confinement to the relationship between the parties that the cost decision cannot and does not govern the relationship between the parties and third persons including the arbitrators, the arbitral institution, the parties’ lawyers, experts, witnesses, translators, court reporters, and others.¹⁰⁹

6.59  If the cost decision, for example, fixes a certain amount as an arbitrator’s fees, it only obliges one party vis- à- vis the other either to pay its share of the arbitrator’s fees to the arbitrator or to refund such payments as were already made by the other party.¹¹⁰ Such cost decision does not have any legal effect on the relationship between the parties and the arbitrator.¹¹¹ Neither does it entitle the arbitrator vis- à- vis the parties nor provide for an executory title for the arbitrator’s fee claim.¹¹² It does not even fix the amount due to the arbitrator with binding effect for the arbitrator (para 6.72). Any dispute arising between the parties and the arbitrator regarding his or her fees must be settled before the competent state court (unless the arbitrator agreement exceptionally provides for an arbitration agreement itself).¹¹³ In these proceedings, the state court is not bound by the cost decision contained in the arbitral award.

6.60  The arbitral tribunal allocates the costs of the arbitration as between the parties (s 1057 para 1 cl 1 ZPO). It enjoys broad discretion as to the standard under which the allocation shall be made (s 1057 para 1 cl 2 ZPO). The law does not provide for a specific standard under which the allocation is to be made, but instead merely stipulates that the circumstances of the case, in particular the outcome of the proceedings, shall be taken into consideration. This solution provides for the necessary flexibility.¹¹⁴ At the same time, it expresses the expectation that the principle of “cost follows the event,” with its statutory modifications as defined in ss 91 et seq. ZPO, will in most cases be followed.¹¹⁵ German arbitration practice indeed puts specific weight on this (p. 297) principle, in particular in domestic cases.¹¹⁶ Arbitral tribunals seated in Germany likewise often apply the cost rules for specific procedural settings in state court proceedings (para 6.50) by way of analogy.¹¹⁷

6.61  It is less common but still within the arbitral tribunal’s discretion to apply a totally different standard for the allocation of costs,¹¹⁸ including the so- called American Rule whereby each party bears its own costs regardless of the outcome of the case.¹¹⁹

6.62  More often, arbitral tribunals seated in Germany will modify the “cost follows the event” rule rather than fully replace it.¹²⁰ Criteria for such modifications include the legal and factual decisiveness of the decision¹²¹ and in particular the conduct of the parties during the arbitral proceedings (cf art 37 para 5 ICC Rules).¹²² Although some tribunals are still reluctant to impose cost sanctions for dilatory or even so- called guerrilla tactics, it is recommended¹²³ and has proven effective to use the allocation of costs to encourage efficient conduct of the proceedings. In doing so, the arbitral tribunal can take into account failure or delay to pay advances on costs, abusive requests for or responses to requests for evidence, excessive submissions or exhibits, excessive document requests, or failure to comply with procedural orders.¹²⁴

6.63  The arbitral tribunal’s discretion is limited by party agreements on a cost allocation standard.¹²⁵ The parties can in particular bind the arbitral tribunal to apply the cost allocation rules for state court proceedings (ss 91 et seq. ZPO).¹²⁶ Such party agreements are not rare in domestic proceedings. They have the advantage that from the outset the parties can better assess the cost risks associated with an arbitration.¹²⁷ However, the price paid for such foreseeability is the lack of flexibility when it comes to finding a suitable cost allocation for a specific case.

6.64  The arbitral tribunal decides on the cost allocation by means of an arbitral award (s 1057 para 1 cl 1 ZPO), be it a final (p. 298) award or a separate cost award (cf s 1057 para 2 cl 2 ZPO). A cost award must fully comply with the formal requirements of s 1054 ZPO (paras 6.91 et seq.) and is subject to setting aside and declarations of enforceability.¹²⁸

6.65  The main award and the cost decision are closely connected. If the cost decision is set aside (with or without the main arbitral award) and the case is not remitted to the arbitral tribunal under s 1059 para 4 ZPO (para 6.244), the parties can rely only on a substantive law cost recovery claim which they must bring either before the arbitral tribunal or the state court (s 1059 para 5 ZPO, para 6.243).¹²⁹

6.66  If only the main award is set aside, the prevailing view assumes that the cost decision shares this fate, regardless of whether the main award is set aside fully or in part and of whether the cost decision was rendered as a separate cost award.¹³⁰ In fact, main award and cost decision are interrelated. An award can therefore be set aside in part only if the defective part is separable from the remaining award. The main decision and cost decision are also not separable irrespective of whether the cost decision is part of the main award or has been issued as a separate cost award. An application for setting aside must therefore refer to both the main award and the cost decision (in the same award or in a separate cost award). By way of interpretation, an application to set aside a main award is to be extended to encompass its cost decision including in a separate cost award. If, however, only the main award has been set aside, the prevailing view may be supported by the parallel legal situation before German state courts, in which the order fixing the costs becomes baseless once the cost allocation decision is quashed or amended.¹³¹

6.67  The decision on which amounts are to be borne by each party can be made only for such amounts as are “fixed.” Costs are fixed if the arbitral tribunal knows the amount in which they were incurred.¹³² The arbitral tribunal cannot itself fix the amount in which costs were incurred since this would be beyond its jurisdiction (paras 6.57 et seq.). It needs to await cost submissions from the parties (para 6.54) if the costs are not its own or otherwise already known.

6.68  The arbitral tribunal has broad discretion to determine in which amount costs are to be borne by a (p. 299) party. The law does not restrict this discretion— with one exception: the costs incurred by the parties are compensable only to the extent that they were necessary for the proper pursuit of their claim or defense (s 1057 para 1 cl 1 ZPO). Costs incurred by the parties include costs for legal representation and expenses of the parties (paras 6.79 et seq.). As the case may be, costs for taking evidence (paras 6.77 et seq.) may also be incurred by the parties. The determination of which party costs are necessary in a given case is again in the hands of the arbitral tribunal. As a general rule, costs which are refundable under the (rather strict) rules for state court proceedings will not be unnecessary in arbitral proceedings.¹³³ The arbitral tribunal is at liberty to acknowledge higher costs, in particular for legal representation (para 6.80). Costs which are not incurred by a party and the reimbursement of which is not limited by necessity include arbitrators’ fees and expenses (paras 6.71 et seq.), fees of the arbitral institution (para 6.74), and court fees (paras 6.75 et seq.).

6.69  The arbitral tribunal’s discretion also allows it to take into account the broader picture, in particular to compare the amounts spent by the parties overall and for specific cost items such as lawyer’s fees or experts. If both parties have spent high amounts, the arbitral tribunal may more easily regard these costs as compensable than in the case that one party has limited its expenses to a more reasonable amount.¹³⁴ Conversely, there may be valid reasons why one side has spent significantly more money on the pursuit of its case than the other, eg where there are multiple parties on one side, necessary translations, or one side had significantly more work in making its case for reasons of sustaining its burden of proof.

6.70  The rules on compensable costs are subject to deviating party agreements. The parties can tie the arbitral tribunal’s decision to the statutory rules for state court proceedings (even though this will often not be advisable), can— either directly or, more commonly, by reference to institutional rules (eg the ICC Note on Personal and Arbitral Tribunal Expenses or the DIS Guidelines for the Reimbursement of Arbitrators Expenses)— define a standard at least for some types of costs like travel and accommodation costs, or can include or exclude specific cost items from refund.¹³⁵ The parties can even agree to exclude refunding of costs entirely.¹³⁶ Finally, in particular institutional rules commonly bind the arbitral tribunal to an amount determined as refundable at least for some cost items, for example the fees and expenses of the arbitrators and the ICC administrative expenses under art 37 para 1 ICC Rules.

6.71  The amount of the arbitrators’ fees results from the fee arrangement in the arbitrator contract (para 3.177). Besides some other fee schemes, the most common calculation methods for arbitrators’ fees depend on the amount in dispute which, in turn, is to be determined by the arbitral tribunal. Institutional rules like the ICC Rules or the DIS Rules also follow this approach.

6.72  Since the cost decision does not go beyond the relationship between the parties (paras 6.57 et seq.), the amount of the arbitrators’ fee claim remains unaffected by their cost decision.¹³⁷ The arbitral tribunal’s determination of the amount in dispute serves as a specification of the performance under the arbitrator contract by one of the parties to that contract.¹³⁸ Such specification is to be made at the reasonably exercised discretion of the arbitral tribunal (s 315 para 1 BGB).¹³⁹ If the determination is not equitable, the parties to the arbitration can apply to the state courts to revise the specification (s 315 para 3 BGB).¹⁴⁰ The cost decision in the award is binding (only) between the parties to the arbitration (s 1055 ZPO). Each party can, however, have a cost decision in an award set aside under s 1059 para 2 no 1 lit d ZPO if it is based on a non- equitable amount in dispute.¹⁴¹ Such non- equitable determination is not binding on the parties to the arbitration (s 315 para 3 cl 1 BGB) so that the amount of the arbitrators’ fees is not yet fixed as required by s 1057 para 2 cl 1 ZPO.

6.73  The Federal Supreme Court’s earlier case law had mistakenly invoked the notion that nobody shall judge on one’s own behalf and that an arbitral tribunal that determines the amount in dispute and includes its fees calculated on that basis in the cost decision in its award violates public policy.¹⁴² According to the court, the only exception was if the arbitrators’ fees thus established were fully covered by advances on costs already.¹⁴³ While it is true that the arbitral tribunal would indeed violate public policy if it ruled on its own fee claim in its arbitral award,¹⁴⁴ it in fact does not do so (para 6.72). In a landmark decision of 2012, the Federal Supreme Court has rightfully given up this restriction.¹⁴⁵

6.74  Arbitral institutions charge fees for their services, in particular for administering the case under the institution’s rules. The fee schedules of the institutions usually determine the fees as a certain fraction of the amount in dispute. These fees form part of the reimbursable costs.¹⁴⁶

6.75  Court fees form part of the costs of the arbitration if the court’s cost decision did not result from contentious proceedings that on the merits resolved a dispute.¹⁴⁷ This is in particular the case if the court proceedings merely supported the arbitral proceedings, as it is particularly evident for judicial assistance proceedings under s 1050 ZPO (paras 4.200 et seq.): it cannot make a difference whether for example the taking of evidence was accomplished in arbitral proceedings or instead outsourced to a state court.¹⁴⁸ Fees for a court decision under s 1032 para 2 ZPO, on the other hand, result from a self- contained dispute in which both parties take opposing positions.¹⁴⁹ No need exists to correct the cost allocation of these contentious proceedings by adding their costs to the costs of the arbitration. The fees for a court appointment of an arbitrator under s 1035 paras 3 or 4 ZPO will be costs of the arbitration at least if the appointment was not due to a party’s failure: if the party- appointed arbitrators cannot agree on a chairman, his or her appointment by the court does not resolve a dispute between the parties. Moreover, it is random which party files the court application and thus “wins” the court appointment procedure.

6.76  Costs stemming from court proceedings in a matter that is encompassed by the arbitration agreement are not costs of the arbitration and can therefore not be included in the cost decision under s 1057 ZPO even if the court, like US courts under the American Rule, does not order reimbursement of costs.¹⁵⁰ Bringing such claim may, however, be a violation of the arbitration agreement and give rise to a substantive law claim for damages. Such a claim for damages needs to be brought in the arbitration as a main claim, not only in the cost submission.

6.77  The costs for taking evidence belong to the costs of the arbitration, which may be incurred by the parties or may pertain to the general costs of the arbitration. If they belong to the general costs of the arbitration, the costs for taking of evidence are fully recoverable subject to the arbitral tribunal’s cost decision (para 6.68). These costs include any costs that were triggered by the (p. 302) arbitral tribunal, eg costs for hearing venues, court reporters, tribunal- appointed experts, reimbursement of witness expenses promised by the arbitral tribunal or the arbitral tribunal’s travel expenses for taking evidence.¹⁵¹ The costs for tribunal- appointed experts form part of the general costs of the arbitration irrespective of whether the expert contract was concluded with members of the arbitral tribunal or with the parties to the arbitration.

6.78  Costs for taking evidence that were incurred by the parties are recoverable only to the extent that they were necessary (para 6.68). These costs include the fees and expenses for party- appointed experts (cf s 1049 para 2 cl 2 ZPO) as well as fees and expenses for witnesses. The latter may be promised and paid by a party if their amount stays within reasonable limits and the witness is not contractually committed to a specific testimony.¹⁵²

6.79  As party- incurred expenses, the costs for legal representation can be recovered by the parties only to the extent that they were “necessary for the proper pursuit of their claim or defense” (para 6.68). This phrase is inspired by s 91 para 1 cl 1 ZPO, which applies to state court proceedings and restricts the reimbursable lawyer’s fees and expenses to the statutory fees and expenses as set out in the German Law on the Remuneration of Attorneys (s 91 para 2 cl 1 ZPO). It is therefore not unusual for arbitral tribunals to adopt this standard for their cost decision and it is indeed common that an arbitral tribunal will align its cost decision with ss 91 et seq. ZPO, in particular in domestic or smaller proceedings.¹⁵³

6.80  However, for larger disputes commonly lawyers are engaged on the basis of hourly rates or other fee arrangements. Moreover, the German Law on the Remuneration of Attorneys does from the outset not apply to lawyers from foreign jurisdictions who frequently act in international arbitrations. In recognizing these facts, it is accepted that arbitral tribunals do not exceed their discretion when they include lawyer’s fees beyond the statutory standard in their cost decision.¹⁵⁴

6.81  Costs for inhouse counsel replacing or complementing external counsel are not refundable in German state court proceedings.¹⁵⁵ Again, the arbitral tribunal’s discretion covers both consideration and non- consideration of such costs.¹⁵⁶ An (p. 303) argument in favor of a deviation from the rules in state court proceedings is that inhouse counsel may well assume parts of the work that otherwise would have to be done by outside counsel. In particular if one party has significantly involved inhouse counsel while the other party has not, the cost decision may otherwise become imbalanced.¹⁵⁷ It may, however, be difficult or undesirable to calculate and disclose the inhouse counsel’s salary that is to be allotted to the arbitral proceedings.¹⁵⁸

6.82  The arbitral tribunal may also include the costs for a party’s employees who are not lawyers, again deviating from the practice of German state courts. Again, well- prepared documents and other facts can significantly reduce the workload (and fees) of outside counsel and thus contribute to cost- efficient proceedings.¹⁵⁹

6.83  The arbitral tribunal can include other necessary (para 6.68) expenses of the parties in its cost decision, inter alia travel and accommodation costs, postal and courier fees, costs for copies and telecommunication.¹⁶⁰ In order not to jeopardize an otherwise good impression that a party may have made on the tribunal, parties and their counsel are well advised to refrain from including excessive costs in their cost submission.

6.84  German state courts may award interest on costs based either on a substantive or procedural basis. Substantive law claims may be based on s 291 BGB, which grants interest on payment claims as of their pendency in the amount of five percentage points above base rate. Procedurally, s 104 para 1 cl 2 ZPO allows for interest in the same amount from the filing of a request to that effect or the pronouncement of the judgment, whichever is later. A claim based on s 291 BGB can be awarded by the arbitral tribunal if German substantive law applies (s 1051 ZPO) and the prevailing party has so requested.¹⁶¹ Whether s 104 para 1 cl 2 ZPO applies by way of analogy under German arbitration law is a matter of dispute.¹⁶²

6.85  The arbitral tribunal determines the amount of costs that are to be reimbursed by one party to the other by means of an award, be it in the main award or a subsequent cost award. Procedural efficiency calls for only one award, but if costs can be fixed only later, then a separate cost award is necessary (s 1057 para 2 cl 2 ZPO). The cost award must meet the (p. 304) formal requirements of s 1054 ZPO and is subject to the same remedies as any other award (para 6.64). For specific issues resulting from the close connection between the main award and the cost decision, see paras 6.65 et seq.

6.86  The formal requirements for making an award under s 1054 ZPO are manageable, in particular if compared to the strict rules that govern the making of a judgment under German civil procedural rules. With the lowering of the formal requirements, the German legislature intended to meet the practical needs of international arbitration.¹⁶³ Not even all of the few formal requirements affect the arbitral award if violated: while some requirements are essential for the notion of an award with its res judicata and other effects (para 6.92), the violation of others results in a ground for setting aside only (para 6.99) or does not have any effect on the award (para 6.101).

6.87  The formal rules of s 1054 ZPO apply only to awards, not to other decisions of the arbitral tribunal like procedural orders. While no abstract definition exists for what an arbitral award is, it is understood from its legal effect (s 1055 ZPO, paras 6.112 et seq.) that arbitral awards are characterized by an element of finality.¹⁶⁴ Arbitral awards therefore include awards on agreed terms (s 1053 para 2 cl 1 ZPO; paras 6.34 et seq.), separate cost awards (s 1057 para 2 cl 2 ZPO),¹⁶⁵ partial awards deciding a part of the dispute in a final manner, for instance one of several requests,¹⁶⁶ partial awards ordering reimbursement of the other party’s cost advances that have been voluntarily paid,¹⁶⁷ and interim awards containing a final decision for a fixed term (para 5.88). Section 1054 ZPO does not apply to preliminary rulings under s 1040 para 3 ZPO (para 4.102)¹⁶⁸ or to interim measures under s 1041 ZPO (para 5.89). If the arbitral tribunal finds that it does not have jurisdiction, the prevailing view allows the tribunal to decide by means of an arbitral award although the parties did not empower the tribunal (para 6.56).¹⁶⁹

(p. 305) 6.88  The most difficult area is that of interlocutory decisions including interlocutory awards (Zwischenschiedssprüche), ie decisions on individual issues in dispute that are preliminary to the parties’ requests like jurisdiction and liability.¹⁷⁰ Such interlocutory decisions may have res judicata effect under s 1055 ZPO (paras 6.112 et seq.) and may be set aside and enforced, they may bind only the arbitral tribunal for the subsequent proceedings or they may not even have such a binding effect. Compliance with s 1054 ZPO is required only in the first case, ie if the award has the effects under s 1055 ZPO.¹⁷¹ While some authors also apply s 1054 ZPO to interlocutory decisions binding the arbitral tribunal,¹⁷² this view unnecessarily needs to postulate different notions of an award for its form (s 1054 ZPO) and effects (s 1055 ZPO). Interlocutory decisions which do not qualify as awards therefore do not need to comply with s 1054 ZPO (or with other form requirements) regardless of whether they bind the arbitral tribunal.¹⁷³

6.89  Interlocutory decisions are awards if the parties have empowered the arbitral tribunal to decide the interlocutory question only while the remaining dispute is to be decided by the state courts.¹⁷⁴ This is because in such cases the arbitral tribunal’s decision must also be final and binding for the state court. Since the parties can choose another forum for the remaining part of the dispute, they can also agree that the arbitral tribunal may issue an interlocutory award if the arbitral tribunal has jurisdiction to decide the entire dispute.¹⁷⁵ In other cases, the arbitral tribunal cannot issue an interlocutory award.¹⁷⁶ Whether such decision of an interlocutory question is binding for the arbitral tribunal depends on the arbitral tribunal’s will as it becomes evident from its decision.¹⁷⁷ If the arbitral tribunal (incorrectly) labels its decision as an (interlocutory) award, this indicates its will to be bound by it.¹⁷⁸

6.90  Awards under the reservation that the arbitral tribunal is still to decide on a set- off defense (paras 2.134 et seq.) are not deemed to be awards under s 1054 ZPO¹⁷⁹ while they are classified as awards if a state court is to decide on such defense.¹⁸⁰ If (p. 306) the arbitration agreement stipulates that the parties can appeal against the award to a supreme arbitral tribunal, the first arbitral tribunal’s decision is an arbitral award only if the appeal was not filed or if it was dismissed by the supreme arbitral tribunal.¹⁸¹

6.91  An arbitral award will typically consist of a cover page also identifying the parties to the arbitration and the arbitral tribunal, a table of contents, a table of abbreviations, the procedural history, the facts of the case and the parties’ requests, the arbitral tribunal’s legal reasoning, the dispositive part, and the signatures of the arbitrators. The exact composition of the arbitral award and its elements is subject to the arbitrators’ background; in particular in domestic proceedings it is not rare that an arbitral award’s structure closely mirrors that of a German state court judgment. This diversity, however, does no harm, as only few elements are legally required under s 1054 ZPO.¹⁸² For successful enforcement, however, the court will need to identify two elements that are not mandatory under this provision, namely the parties to the arbitration¹⁸³ and the dispositive part.¹⁸⁴ For DIS arbitrations, s 34.2 DIS Rules is more demanding as it requires full identification of the parties to the arbitral proceedings and their legal representatives and the names of the arbitrators who have rendered the award. The award is to be made in the language determined under s 1045 ZPO.¹⁸⁵

6.92  The arbitral award needs to be made in writing and to contain the arbitrators’ signatures (s 1054 para 1 ZPO). As long as these form requirements are not complied with, the award is legally not in existence, does not have res judicata effect (s 1055 ZPO), does not terminate the arbitral proceedings (s 1056 para 1 ZPO), and cannot be set aside (s 1059 ZPO) or declared enforceable (s 1060 ZPO).¹⁸⁶ As can be concluded from s 1054 para 2 ZPO, all of the requirements under s 1054 para 1 ZPO are not susceptible to a party agreement to the contrary.¹⁸⁷

6.93  Written form in practice means physical production of a paper document although legally written form can be substituted by electronic (p. 307) form for which a qualified electronic signature under the German Signature Act is needed (s 126 para 3, s 126a BGB).¹⁸⁸ Pronouncing the award orally is in any event insufficient.¹⁸⁹

6.94  The arbitrators must sign the arbitral award (s 1054 para 1 cl 1 ZPO). Any signature needs to be made by the arbitrator in person and can, like most duties of an arbitrator (para 3.173), not be delegated to a proxy.¹⁹⁰ All arbitrators need to sign one and the same document, and be it on different pages.¹⁹¹ The arbitrators can provide a blank signature¹⁹² and agreed amendments can be made to the award after signature.¹⁹³ Often, after the arbitrators have agreed on the award, only the signature pages will be circulated and signed while the chairman finally assembles the full copies of the award.

6.95  However, the majority of signatures suffices if an award states the reason for the omitted signature (s 1054 para 1 cl 2 ZPO). Different from the parallel provision for deliberations (s 1052 para 2 ZPO), s 1054 ZPO does not require refusal (or even obstruction) on the side of the arbitrator¹⁹⁴ even though this was the primary motive for the provision.¹⁹⁵ In fact, indicating the reason why signatures have been omitted merely allows for distinguishing between drafts which are not yet fully signed and final awards.¹⁹⁶ Even an incorrect reason stated in the award does not affect its validity.¹⁹⁷ It is, however, good practice to have the award signed by all arbitrators whenever possible.¹⁹⁸ The majority of signatures is sufficient regardless of the number of missing signatures¹⁹⁹ and regardless of whether the chairman has signed the award.²⁰⁰

6.96  The prevailing view allows the arbitrators to re- enter into the deliberations until the award is signed by all arbitrators if a majority of them decides to do so.²⁰¹ Once (p. 308) the award has been signed by all arbitrators, amendments to the award can be made only by unanimous decision.²⁰² If the award has been delivered to at least one party (paras 6.105 et seq.), the arbitrators can no longer amend their decision.²⁰³

6.97  The award must state the reasons upon which it is based (s 1054 para 2 ZPO). These reasons do not need to meet a high standard;²⁰⁴ in particular they do not need to be correct in a way that they legally justify the arbitral tribunal’s decision.²⁰⁵ Such high standard would not take into account the fact that the parties have entrusted solely the arbitral tribunal with the decision of the dispute. The reasons must, however, not be contradictory and need to comment at least along general lines on the principal points of the parties’ arguments.²⁰⁶ Although they should sensibly do so, the reasons do not need to demonstrate that the arbitral tribunal has fully granted both parties the right to present their case.²⁰⁷

6.98  The reasons are dispensable if either the award is an award on agreed terms (s 1053 ZPO, paras 6.34 et seq.) or if the parties have waived this requirement (s 1054 para 2 ZPO). Given the weight of the award’s reasons for its acceptance, such waiver should not be assumed lightly. An agreed waiver of remedies against the award does not suffice for that purpose.²⁰⁸

6.99  If under these rules reasons are necessary but fail to meet the required standard, this does not deprive the decision of its qualification as an arbitral award. The prevailing view acknowledges a ground for setting aside under s 1059 para 2 no 1 lit d ZPO²⁰⁹ although this ground requires a causal link between the procedural deficiency and the outcome of the proceedings, and such link will hardly ever exist in case of insufficient reasons. Classification as a ground for setting aside and an (p. 309) extension of s 1059 para 2 no 1 lit d ZPO are, however, the lesser evil compared to no sanction at all.²¹⁰

6.100  The date of the award and the place of arbitration (s 1043 para 1 ZPO, paras 2.174 et seq.) must be stated in the arbitral award (s 1054 para 3 cl 1 ZPO). Section 1054 para 3 cl 2 ZPO stipulates a fiction against which no counter- evidence can be brought:²¹¹ the award is deemed to have been made at that date and at that place. The place of arbitration is decisive for the arbitral award’s nationality and the jurisdiction of the higher regional court under s 1062 para 1 ZPO (paras 6.174 et seq.). By contrast, the date of the award— to which the fiction was extended without a template in the Model Law²¹²— has no legal relevance since the deadline for the setting aside application under s 1059 para 3 ZPO starts with receipt of the arbitral award and not with its making.²¹³

6.101  At first sight, s 1054 para 3 ZPO reads as if the indication of date and place of arbitration, which are both mandatory requirements, were an integral part of the arbitral award. However, the failure to indicate the place of arbitration was not understood to be sanctioned under the German arbitration law in force before 1998 and the reform explicitly aimed at alleviating (rather than tightening) the form requirements for arbitral awards.²¹⁴ Omission of date or place of arbitration therefore results neither in a non- award nor in a ground for setting aside the award.²¹⁵

6.102  It is a matter of dispute under German law whether issuance of dissenting opinions is reconcilable with the secrecy of deliberations (para 6.12). The German legislature refrained from implementing a provision on dissenting opinions and indicated that the prevailing view under former German law allowed dissenting opinions.²¹⁶ (p. 310) Regardless of their general admissibility, it is recognized that dissenting opinions should be avoided whenever possible and that implementation of dissenting views in the reasons of the award is preferable, not least for the sake of an increased acceptance of the award by the parties.²¹⁷

6.103  If dissenting opinions are considered admissible at all, they must not disclose the course and content of the deliberations.²¹⁸ It will be subject to a majority decision of the arbitral tribunal whether the (admissible) dissenting opinion is delivered alongside the award to the parties.²¹⁹ Issuance of an inadmissible dissenting opinion does not constitute a ground for setting aside the award, but may give rise for a claim for damages against the defaulting arbitrator.²²⁰ Some of these issues may be avoided if the arbitral tribunal seeks the parties’ consent on the delivery of dissenting opinions.

6.104  Before an ICC arbitral award is signed and delivered to the parties, it must undergo the scrutiny process by the ICC Court of Arbitration (art 33 ICC Rules). This scrutiny aims to ensure a high quality (and an increased likeliness of enforceability) of the award and it is a distinctive feature under the ICC Rules.²²¹ Article 33 cl 2 ICC Rules distinguishes between questions of form and of substance: questions of form include typographical, clerical, and computational issues²²² as well as missing information under the ICC Award Checklist and others.²²³ The Court can instruct the arbitral tribunal to adjust the arbitral award according to its comments on form. Questions of substance are treated differently, as the Court will solely draw the arbitral tribunal’s attention to such issues. Whether or not the arbitral tribunal makes amendments to its draft accordingly is left to its own decision; art 33 cl 2 ICC Rules explicitly confirms that the arbitral tribunal’s liberty of decision shall not be affected. Questions of substance may include whether the tribunal has neglected any issues or has decided issues not raised by the parties, has given reasons for all decisions, whether the dispositive section of the award is clearly formulated, and whether costs and interests are properly addressed.²²⁴

6.105  A copy of the award signed by the arbitrators is to be delivered to each party (s 1054 para 4 ZPO). Delivery has replaced deposit under the former German law;²²⁵ such deposit with a German state court nowadays is not even any longer possible.²²⁶ Delivery must be made to the party, its counsel, or any other authorized receiving agent.²²⁷ While the law does not prescribe a specific form of delivery, a registered letter with return receipt or a courier are advisable as they provide for evidence of the date of delivery, which in turn is dispositive under s 1059 para 3 ZPO.²²⁸ Section 1054 para 4 ZPO also allows electronic transmission,²²⁹ though this practice has not been made broad use of. Often arbitral tribunals distribute the award via complementary email in addition to its hard- copy delivery. The parties can agree on a specific form of delivery including by registered letter with return receipt to the parties’ counsel.²³⁰

6.106  It is important to note that each party is to receive an award with the original signatures of (the majority of) the arbitrators.²³¹ A simple copy of an originally signed award does not suffice even if it was certified by the chairman, the arbitral institution, or any other body.²³² The parties cannot waive the requirements under s 1054 para 4 ZPO.²³³ As long as no award with original signatures has been delivered to a party, the deadline for setting aside applications under s 1059 para 3 ZPO does not commence.

6.107  Under institutional rules, usually the arbitral institution rather than the arbitral tribunal will deliver the award to the parties (art 34 para 1 ICC Rules, s 36.2 DIS Rules). The award will not be delivered until the costs of the arbitral proceedings have been fully addressed (art 34 para 1 ICC Rules, s 36.3 DIS Rules). Arbitral tribunals in ad hoc proceedings will usually also withhold the arbitral award until the costs have been fully paid.²³⁴

6.108  The main effect of an arbitral award is addressed by s 1055 ZPO, pursuant to which the arbitral award has the same effects between the parties as a final and binding court judgment (paras 6.109 et seq.). As a separate effect, the arbitral award terminates the arbitral proceedings (paras 6.126 et seq.).

6.109  The arbitral award has the same effects between the parties as a final and binding court judgment (s 1055 ZPO). This provision, which has no equivalent in the Model Law but rather was perpetuated from the former German arbitration law,²³⁵ references a bundle of effects that German civil procedure law attaches to a state court judgment (paras 6.112 et seq.). These effects are transferred to any arbitral award (paras 6.110 et seq.).

6.110  German law distinguishes between procedural and substantive res judicata. Substantive res judicata is one of the main effects of procedural res judicata. A matter gains procedural res judicata effect once no remedy is available which suspends the res judicata effect and brings the matter before a court of higher instance (s 705 ZPO). If applied to arbitral awards, any award would instantly gain procedural res judicata effect, since awards are never open to a full review.²³⁶ However, since s 1055 ZPO ties the effects of a judgment with (procedural) res judicata effect up to any arbitral award, it is futile to discuss the award’s procedural res judicata.

6.111  Section 1055 ZPO rather requires an award (paras 6.87 et seq.), ie a final and binding decision which was made in writing and bears the signatures of the (majority of the) arbitrators (s 1054 para 1 ZPO, paras 6.92 et seq.). The effects under s 1055 ZPO moreover require the award to be delivered to each party under s 1054 para 4 ZPO (paras 6.105 et seq.). The effects under s 1055 ZPO occur only with the delivery to the last party²³⁷ since a party cannot be bound by a decision of which it has not and cannot have knowledge.

6.112  While procedural res judicata means formal non- appealability (para 6.110), substantive res judicata— as one of the (p. 313) main effects of procedural res judicata— implies that the content of the decision is definite between the parties.²³⁸ This definiteness becomes obvious in subsequent proceedings: it does, on the one hand, hinder subsequent proceedings on the same matter (res judicata in a narrower sense) while, on the other hand, it facilitates subsequent proceedings in which the earlier decision must not be reviewed again if it becomes relevant as a preliminary issue (prejudicial effect).²³⁹

6.113  If, for example, a plaintiff has obtained a first judgment that a rent contract between the parties is valid and has not been terminated and this decision has become res judicata, a second claim filed by the defendant based on the same facts and requesting a declaration that the contract has been validly terminated would be inadmissible. If, however, the plaintiff initiates follow- up proceedings and requests payment under this contract, the court must not take into account the defense that the contract has been validly terminated based on the same facts. Section 1055 ZPO extends these effects to arbitral awards.

6.114  According to the prevailing view, substantive res judicata of an arbitral award differs in two respects from that of a court judgment. Both of these differences are rooted in the understanding that access to state court justice is a scarce resource while arbitration is available against payment. First, while a state court will take into account the res judicata effect of an earlier judgment on its own motion, it will consider the res judicata effect of an arbitral award only upon a party’s objection.²⁴⁰ Second, while the parties to a judgment cannot jointly waive its res judicata effect, the parties to an arbitral award are legally allowed to waive the award’s res judicata effect.²⁴¹

6.115  German law is restrictive when it comes to the scope of which elements of a decision are covered by the res judicata effect. This effect is limited to the matter in dispute (Streitgegenstand) as it has been decided in the decision’s dispositive part (s 322 para 1 ZPO)²⁴² and its opposite, eg the non- existence of the claim that has been awarded (kontradiktorisches Gegenteil).²⁴³ It neither covers the reasoning (which may be relevant only for (p. 314) interpretation of what is covered by the dispositive part²⁴⁴) nor— contrary to common law concepts— facts or legal consequences of facts which are essential for the cause of action or defense.²⁴⁵ By way of example, a decision awarding a seller’s payment claim gains res judicata effect only to the extent that the buyer is obligated to pay. Although such decision legally requires a sales contract to have been validly concluded, the existence and validity of such contract does not become res judicata. If the seller wishes to extend the res judicata effect to preliminary questions like the existence of a valid contract, he or she needs to request a separate decision (cf s 256 para 2 ZPO).²⁴⁶

6.116  The matter in dispute (Streitgegenstand) is defined by the request plus the underlying set of facts.²⁴⁷ As an example, if payment of a specific sum of money has been requested based on a sales contract and awarded (or such claim has been dismissed) in the decision’s dispositive part, only the (non- ) existence of a payment claim based on these facts becomes res judicata. If the buyer has negotiated a bill of exchange in the same amount, a payment claim based on such bill of exchange is considered to be another matter in dispute than the contractual payment claim.²⁴⁸ A seller whose request for payment based upon the contractual payment was dismissed in a final and binding decision can therefore bring another claim for the same amount based on the bill of exchange without being restricted by the first decision’s res judicata effect.

6.117  An exception to the rule that res judicata does not extend to preliminary issues (para 6.115) exists for the set- off defense. According to s 322 para 2 ZPO, a decision that the counterclaim does not exist becomes res judicata up to the amount for which the set- off has been asserted. If the court or arbitral tribunal has denied the set- off defense because it found the counterclaim to be non- existent, subsequent proceedings in which payment of the counterclaim is requested would be inadmissible for reasons of res judicata. If, however, the set- off defense was dismissed for other reasons than the non- existence of the counterclaim, eg for grounds of a prohibition of set- off, the existence of the counterclaim does not become res judicata.²⁴⁹

6.118  The res judicata effect is limited to the parties to the dispute²⁵⁰ as explicitly confirmed by s 1055 ZPO. Third parties are included only exceptionally as in the res judicata effect of a judgment, in (p. 315) particular singular and universal successors to a party and executors, insolvency administrators, or administrators of estates to a party.²⁵¹ Common law concepts like the extension to privies or the application of issue preclusion in subsequent litigation with third parties are unknown under German law.

6.119  The strict limitation of res judicata to the parties to the dispute time and again creates the risk to be caught between two stools. A typical situation would be where a seller is successfully sued by his or her buyer for damages due to defective goods while he or she cannot gain refund from his or her seller since he or she cannot establish the defectiveness of the goods. Similar situations often occur in chains of contractors where the res judicata effect of a judgment or arbitral award that the customer has obtained against the general contractor does not extend to the subcontractor. Before state courts, the third party can be included in the litigation and bound to the judgment by way of a third- party notice (ss 72 et seq. ZPO). While third- party notices generally also work in arbitration, the underlying arbitration clauses need careful drafting and need to include also the third party notice addressee (para 2.137).

6.120  Res judicata cannot change the legal situation to stone. German civil procedural law allows for remedies terminating the binding effect (or enforceability) where new facts occur. Under s 767 ZPO, the debtor can assert objections against the claim itself as established by the judgment by filing a corresponding court action (paras 6.276 et seq.). Such objections, however, can be brought only if they occurred after the close of the hearing in which they could have been brought last. In case of a judgment ordering recurrent performance becoming due in the future, s 323 ZPO provides each part with a remedy for the modification of the judgment if the new facts result in a material change to the factual or legal circumstances on which the decision is based. Section 323 ZPO is also limited to grounds that have arisen after the hearing on the facts in the preceding proceedings was closed.

6.121  These remedies are to be brought before the arbitral tribunal if they are covered by the arbitration agreement.²⁵² The arbitral tribunal has jurisdiction for the s 767 ZPO action if the arbitration agreement covers the new objection.²⁵³ If under these rules the arbitral tribunal has jurisdiction, a new arbitral tribunal needs to be constituted since the office of the arbitrators had ended with their award (para 6.127).²⁵⁴

6.122  Apart from substantive res judicata, procedural res judicata has some other effects which s 1055 ZPO also extends to arbitral awards. These effects include the binding effect under which the court (or arbitral tribunal) is bound to its judgment (or arbitral award) for subsequent decisions.²⁵⁵ By way of exception, the arbitral tribunal can correct and interpret its arbitral award subject to s 1058 ZPO (paras 6.145 et seq.). The procedural res judicata also gives rise to the effect that substantive law provisions tie in with a final and binding judgment.²⁵⁶ For example, under s 864 para 2 BGB certain claims of a possessor lapse if a final and binding judgment declares that the debtor has a (specific) right to the property.

6.123  For judgments, the procedural res judicata also triggers enforceability as final and binding judgments serve as executory titles (s 704 ZPO). Contrary to the wording of s 1055 ZPO, arbitral awards are not executory titles which allow for enforcement. According to s 1060 para 1 ZPO, enforcement of the award only takes place if the award has been declared enforceable. Only the higher regional court’s order declaring the arbitral award enforceable serves as an executory title (s 794 para 1 no 4a ZPO). Such declaration of enforceability is also required for arbitral awards that order the respondent to make a declaration of intent. According to s 894 ZPO, such declaration shall be deemed to have been made as soon as the judgment has become final and binding. As part of the enforcement law, this fiction, however, applies only once the award has been declared enforceable (s 1060 para 1 ZPO).²⁵⁷

6.124  German law foresees a limited number of judgments changing a legal right or status; this effect occurs with procedural res judicata. For example, a general partnership can be dissolved by way of a judgment (s 133 HGB). While it is acknowledged that decisions changing a legal right or status can be requested from an arbitral tribunal, it is a matter of dispute whether an award changing a legal right or status (Gestaltungsschiedsspruch) must be declared enforceable under s 1060 ZPO to effectuate that change. The prevailing view postulates the need for a declaration of enforceability (para 6.255)²⁵⁸ although the better grounds advocate the opposite: s 1060 para 1 ZPO pierces the full equalization of an arbitral award with a final and binding judgment (s 1055 ZPO) only as to enforcement. The effect of changing a legal right or status, however, under German law does not belong to enforcement but is a separate and independent effect.²⁵⁹

6.125  Section 1055 ZPO applies only to awards with a place of arbitration in Germany (s 1025 para 1 ZPO). For the res judicata effect of foreign awards, German law of civil procedure refers to the lex arbitri, ie to the arbitration law at the place of arbitration (para 6.290).

6.126  Besides having the effects of a final and binding judgment (paras 6.109 et seq.), the arbitral award also terminates the arbitral proceedings (s 1056 para 1 ZPO). Just like for the effects under s 1055 ZPO (cf para 6.111), the award needs to meet the formal requirements of s 1054 para 1 ZPO and must have been delivered to all parties in order to terminate the proceedings.²⁶⁰ Moreover, only the final award, ie the award deciding the last part of the matter in dispute, has terminating effect; partial awards may become res judicata but never terminate arbitral proceedings.²⁶¹

6.127  Simultaneously with the termination of the arbitral proceedings, the arbitrators’ office terminates (s 1056 para 3 ZPO); they become functus officio. The law sets out only three tasks for which the arbitrators are deemed to be still in office: for a separate cost award under s 1057 para 2 ZPO (para 6.85), for correction, interpretation, and an additional award under s 1058 ZPO (paras 6.145 et seq.), and for remission of the case after the award has been set aside under s 1059 para 4 ZPO (para 6.244). For other newly arising arbitral tasks, a new arbitral tribunal needs to be constituted.²⁶²

6.128  While the arbitral proceedings are designed to end with a final award, they can under specific circumstances also end without an award. As a second termination instrument, the law provides for a termination order (s 1056 para 1 ZPO).

6.129  It is a matter of dispute whether arbitral proceedings can terminate only with a final award or with a termination order, in other words whether s 1056 para 1 ZPO is exhaustive. The prevailing view assumes that all arbitral proceedings need an award or a termination order to terminate.²⁶³ While legal certainty indeed speaks in favor of this position, at least some cases exist in which arbitral proceedings must (p. 318) end without an award or termination order. One example would be the death of a sole arbitrator who was agreed upon in the arbitration agreement and who was decisive for the choice to arbitrate (cf para 2.165). The better reasons therefore speak in favor of s 1056 para 1 ZPO’s non- exhaustive nature.

6.130  Section 1056 para 2 ZPO sets out a number of grounds for termination orders, most of which have been adopted from art 32 Model Law. The German legislature has added the failure of the claimant to state its claim (s 1056 para 2 no 1 lit a ZPO).²⁶⁴ It has furthermore transformed art 32 para 2 lit c Model Law, according to which a termination order is to be issued if the arbitral tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible, into the more specific provision of s 1056 para 2 no 3 ZPO.²⁶⁵

6.131  The termination order under s 1056 para 2 ZPO is mostly understood to be constitutive for the termination of the arbitral proceedings.²⁶⁶ A termination order also ends the arbitral proceedings if none of the grounds enlisted in the law is met (para 6.143). According to the prevailing view, s 1056 para 2 ZPO is of mandatory nature,²⁶⁷ which view is supported by the need for legal certainty.

6.132  The arbitral tribunal issues a termination order if the claimant fails to submit its statement of claim within the time limit set under s 1046 para 1 ZPO and if such default has not been justified to the tribunal’s satisfaction under s 1048 para 4 ZPO (s 1056 para 2 no 1 lit a ZPO). Unlike a dismissal of the claim in an award, such termination order leaves the parties with nothing but costs (paras 6.140 et seq.) and an unresolved dispute.²⁶⁸ Whether in light of this result the arbitral tribunal needs to inform the parties before it issues a termination order²⁶⁹ appears to be a more theoretical question since without such information the arbitral tribunal will not be able to determine that the default has not been justified.

6.133  A termination order is also to be issued if the claimant withdraws its claim, unless the respondent objects and the arbitral tribunal recognizes a legitimate interest on (p. 319) the part of the respondent in obtaining a final settlement of the dispute (s 1056 para 2 no 1 lit b ZPO). It is obvious that the arbitral proceedings must end if both parties are in agreement on the withdrawal. The arbitral tribunal will usually set a deadline for obtaining such consent.

6.134  If the respondent objects, the tribunal needs to decide whether the respondent has a legitimate interest in obtaining an award that settles the dispute in a final and binding manner. Such legitimate interest is to be assumed if the claimant could otherwise initiate proceedings anew: it is unacceptable to lose a favorable procedural situation just in order to be exposed to the same claim later again. The respondent lacks a legitimate interest in obtaining an award only if the claimant waives its claim,²⁷⁰ if a new claim would be inadmissible due to a preclusive time limit, or if the claimant cannot initiate new arbitral proceedings for other reasons. Obtaining a cost award will usually not constitute a legitimate interest in continuation of the proceedings since in the event of a termination the arbitral tribunal still needs to decide on costs (para 6.141).²⁷¹

6.135  As long as they are in agreement, the parties can terminate the arbitral proceedings for any reason including settlement or performance by the respondent.²⁷² Upon such agreement, the arbitral tribunal will issue a termination order (s 1056 para 2 no 2 ZPO). The party agreement on the termination of the proceedings may simultaneously include a waiver of the arbitration agreement so that the state courts have jurisdiction over future disputes.²⁷³ Whether the parties also intended to waive the arbitration agreement is subject to interpretation of their termination agreement.

6.136  Another ground for a termination order is that the parties fail to pursue the arbitral proceedings (s 1056 para 2 no 3 option 1 ZPO), eg by non- payment of the advances on costs,²⁷⁴ by non- appearance in a hearing,²⁷⁵ or by other means.²⁷⁶ The arbitral tribunal needs to request the parties to continue to pursue the proceedings before (p. 320) it issues a termination order. For that purpose, it will make sense to set a deadline and point the parties to the legal consequences of their inactivity.²⁷⁷ If the parties jointly stay the proceedings, the arbitral tribunal cannot issue a termination order under s 1056 para 2 no 3 option 1 ZPO.²⁷⁸ The arbitrators may, however, terminate their arbitrator contracts for cause under appropriate circumstances (para 3.199).²⁷⁹

6.137  Finally, a termination order can be issued when the continuation of the proceedings has become impossible (s 1056 para 2 no 3 option 2 ZPO). Impossibility may have legal or factual grounds;²⁸⁰ oftentimes it results in the arbitration agreement becoming incapable of being performed (s 1032 para 1 ZPO).²⁸¹ Examples for impossible continuation are a tie decision in the arbitral tribunal²⁸² or extraordinary conditions such as war or hostilities that prevent a party from participating in the arbitral proceedings.²⁸³ If the ground for the impossible continuation simultaneously deprives the arbitral tribunal of its jurisdiction, a termination order cannot be issued based on the prevailing view that a decision denying jurisdiction is made by means of an arbitral award (para 6.56).²⁸⁴ Such grounds include the termination of the arbitration agreement, its challenge or a judgment under s 1032 para 2 ZPO. If the dispute before the arbitral tribunal is res judicata of a state court judgment or inadmissible on other grounds than jurisdiction, the claim in any event needs to be dismissed by means of an award.²⁸⁵

6.138  The parties may agree on further reasons for issuing a termination order although s 1056 ZPO does not explicitly open that avenue (see also para 6.131 on mandatory nature).²⁸⁶ However, legal certainty is not affected if the parties extend the grounds (p. 321) for terminating the proceedings. Those who posit that an arbitral tribunal declining its jurisdiction has no power to render its decision as an award (para 6.56) need to allow for the issuance of a termination order in these cases.²⁸⁷

6.139  There are no legal requirements as to form and content of a termination order under s 1056 ZPO. Since the termination order is not an award irrespective of its denomination,²⁸⁸ s 1054 ZPO does not apply. Thus, a termination order could also be issued orally. In practice, arbitral tribunals will issue the termination order in writing and signed by at least the chairman, will specify the arbitration including parties and arbitral tribunal, will issue the termination, and will indicate the grounds on which it is based.²⁸⁹

6.140  The termination order has the same terminating effect as an arbitral award on the arbitral proceedings (s 1056 para 1 ZPO, para 6.126) and on the office of the arbitrators (s 1056 para 3 ZPO, para 6.127).

6.141  Similar to an award (para 6.126), the termination order terminates the proceedings only if the entire dispute including the costs has been resolved (cf para 6.24). This will often be the case if the parties amicably settle the dispute (para 6.24). If the parties do not resolve the allocation of costs, the arbitral tribunal needs to issue a separate cost award (paras 6.48 et seq.).²⁹⁰

6.142  The termination order is furthermore relevant for the suspension of limitation that began to run with the commencement of the arbitral proceedings (s 204 para 1 no 11 BGB); it ends six months after the termination order has been issued (s 204 para 2 BGB).²⁹¹ Since it puts an end to the arbitration, the termination order indirectly also renders the arbitrators’ fee claims due (s 614 cl 1 BGB).²⁹²

6.143  Since the termination order is not an award (para 6.139), the remedies against an arbitral award (s 1059 ZPO) are unavailable for a termination order.²⁹³ In fact, procedural orders are not subject to review at all. An arbitral award terminates the arbitral proceedings under s 1056 para 1 ZPO regardless of whether it later is successfully set aside; s 1059 para 4 ZPO only exceptionally allows for continuation of the already terminated arbitral proceedings. The terminating effect of arbitral awards irrespective of their validity and indeed future existence is justified by the need for legal certainty regarding the pendency of arbitral proceedings. As demonstrated by s 1056 para 1 ZPO, this need is the same for termination orders as for arbitral awards. At the same time, the law does not set out an option to remit the case to the arbitral tribunal as under s 1059 para 4 ZPO if the termination order was invalid. Even if a termination order was not based on a ground for termination, it therefore maintains its terminating effect.²⁹⁴

6.144  However, the parties are free to agree on a reopening of the proceedings.²⁹⁵ Since the office of the arbitrators has ended (para 6.127), the arbitrators also need to approve the reopening.²⁹⁶ Whether the arbitration agreement is affected by the termination of the proceedings is to be assessed under general rules (waiver or s 1032 para 1 ZPO).

6.145  The arbitral award is binding on the tribunal (para 6.122). Once it has been delivered to the parties, the arbitral tribunal can therefore not amend its findings even if it finds that it incorrectly decided the case. Section 1058 ZPO is no exception to this rule, as the arbitral tribunal is allowed to change its word but not its will. However, s 1058 ZPO takes account of deficiencies that the award may suffer from beyond the correct application of the law to the facts. The need for such clarification is significant in light of the low requirements for an award (paras 6.91 et seq.). Section 1058 ZPO applies to any award that meets the requirements of s 1054 paras 1, 4 ZPO (paras 6.92 et seq.).²⁹⁷

6.146  The arbitral tribunal can correct any errors in computation, any clerical or typographical errors or any errors of similar nature in the award (s 1058 para 1 no 1 ZPO). Errors of similar nature need to be as obvious as computational, clerical, or typographical errors are.²⁹⁸ Once there can be any doubt whether the award is incorrect, such ambiguity may be cured by way of interpretation (para 6.147) but cannot be corrected.²⁹⁹ Correction is an instrument to obtain what the arbitral tribunal has decided but accidentally did not express; it is a means to correct the expression of the tribunal’s decision, not the underlying decision.³⁰⁰ Correction does not allow for adding legal reasoning.³⁰¹ As long as these guidelines are adhered to, the correction may significantly amend or even reverse the decision in its dispositive part (eg if the arbitral tribunal confused the party roles or omitted a “not”).³⁰² Violation of these rules constitutes a ground for setting aside the correction award under s 1059 para 2 no 1 lit d ZPO.³⁰³ Since correction aims at obvious errors, the arbitral tribunal can also correct errors in awards on agreed terms even though it did not make the underlying decision.³⁰⁴ Otherwise, the parties would have no remedy at all to correct errors in such awards.

6.147  Similar to its correction, the (authentic) interpretation of the award under s 1058 para 1 no 2 ZPO must not amend the decision that the arbitral tribunal has reached.³⁰⁵ Interpretation rather serves only to clarify ambiguous parts of the award (not the entire award³⁰⁶). Interpretation may in particular be an instrument to rephrase the dispositive part of the award in a way that it becomes enforceable.³⁰⁷ If the interpretation award exceeds these limits, it is subject to setting aside under s 1059 para 2 no 1 lit d ZPO.³⁰⁸

6.148  An additional award under s 1058 para 1 no 3 ZPO can be made if the arbitral tribunal has made a final award which, however, does not cover the entire matter in dispute as defined by the parties’ requests. Whether these requests have been referenced in the award is irrelevant.³⁰⁹ An additional award can also be made on costs if the cost decision was not included in the final award.³¹⁰ The putatively final award triggering an additional award under s 1058 para 1 no 3 ZPO is to be distinguished from a partial award in which the arbitral tribunal deliberately does not adjudicate the entire matter in dispute. The award following a partial award requires neither a party request nor observance of the deadline under s 1058 para 3 ZPO.³¹¹

6.149  The interpretation of an award and an additional award can be made by the arbitral tribunal only if requested by at least one party (s 1058 para 1 ZPO). Only the correction can likewise be made on the tribunal’s own initiative (s 1058 para 4 ZPO).

6.150  Any party request under s 1058 ZPO needs to be filed within the deadline of one month after the award has been received by that party (s 1058 para 2 ZPO). This deadline runs for each party individually.³¹² The parties may agree on another deadline, even after the original deadline has lapsed.³¹³ The arbitral tribunal, however, cannot extend the deadline; each party can legitimately rely on the fact that the award is subject to interpretation only within the set time frame and that an additional award can be rendered only within that time frame as well.³¹⁴ If the arbitral tribunal interprets the award or renders an additional award although the request did not meet the relevant deadline, its decision is subject to being set aside under s 1059 para 2 no 1 lit c and d ZPO.³¹⁵ A belated request for correction can be understood as a suggestion for a correction on the tribunal’s own initiative;³¹⁶ (p. 325) a correction issued upon a belated request is therefore not subject to setting aside for that reason.

6.151  Only the party request is subject to the deadline set out by s 1058 para 2 ZPO. If the arbitral tribunal corrects its award on its own motion, it is not bound by a deadline.³¹⁷ This is in compliance with the wording of the provision and meets a practical need for correction that becomes obvious only later.

6.152  The procedure follows the general rules of ss 1042 et seq. ZPO.³¹⁸ Before the arbitral tribunal renders a decision on the interpretation or on an additional award, it needs to give all parties the opportunity to present their case (s 1042 para 1 cl 2 BGB). While it is best practice to grant the parties the right to be heard also for the correction of obvious mistakes, this is not legally necessary³¹⁹ since a state court would not need to hear the parties before such decision³²⁰ and the due process standard in arbitral proceedings is not higher than in German state court proceedings.

6.153  The arbitral tribunal should make the correction or give the interpretation within one month and make an additional award within two months (s 1058 para 3 ZPO). This deadline serves only as a guideline for the arbitral tribunal; if it exceeds the deadline, the tribunal’s decision is not subject to setting aside or other sanctions.³²¹

6.154  Section 1054 ZPO applies to the correction or interpretation of the award and to an additional award (s 1058 para 5 ZPO). Any decision under s 1058 ZPO that does not dismiss the request therefore has to meet the form requirements of an award (paras 6.92 et seq.).

6.155  As it contains a separate decision, an additional award (s 1058 para 1 no 3 ZPO) is indeed an award and subject to the same remedies including setting aside.³²² (p. 326) Interpretation and correction, conversely, become part of the original award so that both decisions can be set aside and enforced only together.³²³ Only if interpretation or correction exceed their borders, eg amend the underlying award, can they be set aside separately.³²⁴ The deadline for a request to set aside the award is extended by s 1059 para 3 cl 3 ZPO (para 6.179).

6.156  The setting aside application as set out in s 1059 ZPO is one of the most important elements in German arbitration for a number of reasons. First, it provides for a state court review of the arbitral award without (the possibility of) which the effects of a state court judgment could not be attached to an arbitral award. Section 1059 ZPO therefore serves as a— constitutionally required³²⁵— counterpart to s 1055 ZPO.³²⁶ Notably, the effects of an award under s 1055 ZPO are not contingent on an actual court review. Although the review under s 1059 ZPO at least in part serves public interests, it cannot be initiated by the court on its own motion. The application is rather solely in the hands of the parties. The law could establish such mechanism since at least one party will usually be interested in filing the setting aside application (“private enforcement”).

6.157  Second, s 1059 ZPO sets out an exhaustive list of criteria for state court review which balance the powers between the arbitral tribunal and the state court. As s 1059 ZPO does not go beyond an internationally recognized set of grounds for setting aside an arbitral award which the courts do not apply in an unduly extensive interpretation, it is also the essential provision for establishing the arbitration- friendliness of German law.

6.158  Third, although the number of setting aside applications in Germany is small as compared to the number of arbitral proceedings, the grounds for setting aside legally limit the broad discretion that the arbitral tribunal enjoys in procedural matters. Moreover, having one’s own award set aside for the violation of procedural standards does not contribute to an arbitrator’s good reputation. The sanction that the setting aside proceedings provide will, even if the parties do actually not make use of this remedy, often admonish the arbitrators to comply with their duties.