Arbitration law reform to strengthen Germany as a venue for international disputes

The consultation paper published by the Federal Ministry of Justice in April 2023 provides details on the 12 key points that the Ministry of Justice proposes to include in the following draft bill, and four other topics for further discussions. These four topics were emergency arbitrators; the "dissenting opinion"; the formation of joint arbitration senates at the Higher Regional Court (Oberlandesgericht) across federal state borders; and the transfer of judicial support acts from the Local Court (Amtsgericht) to the Higher Regional Court in order to bundle the jurisdiction for almost all original arbitration disputes there.

The proposed amendments include various proposals to make the arbitration process more streamlined, cost-effective and predictable. They include proposals to allow freedom of form for arbitration agreements in commercial transactions; to use English as language of proceedings also in ancillary state court proceedings; to improve transparency through the publication of arbitral awards; to simplify and streamline the enforcement of arbitral awards; and to increase digitisation of proceedings, in particular through the use of electronic communication and digital technology.

In February 2024, the eagerly awaited draft bill from the Federal Ministry of Justice was finally unveiled, aligning closely with the key considerations outlined in the earlier consultation paper. Notably, among the four additional topics slated for further discussion, the admissibility of a dissenting opinion from an arbitrator has successfully made its way into the proposed legislation. The subject sparked intense debate in Germany, particularly due to a 2020 court decision that had rejected the admissibility of dissenting opinions, deviating from the common international practice. This deviation was perceived as a hindrance to Germany's reputation as an arbitration hub. The draft bill aims to clarify that arbitrators are indeed permitted to issue dissenting opinions.

The final set of regulations that the legislator chooses to enact into binding law remains to be seen.

Meanwhile, the German Arbitration Institute (DIS) has pushed ahead with a number of initiatives that have been proposed for reform. As part of the institution’s own digital transformation, it rolled out its “DIS eFile” online platform from September 2023, meaning that cases brought under the DIS rules can be filed and managed entirely digitally. It is a key step towards the complete digitalisation of arbitral proceedings.

The DIS has also made progress in terms of improving transparency for M&A disputes brought before its arbitral tribunals. Confidentiality is a critical feature of arbitration that has led parties involved in M&A transactions to conclude arbitration agreements. In Germany, it is most common for M&A disputes to be resolved through arbitration proceedings, and as a result most decisions in this significant area are not available to the public and businesses. The lack of transparency has meant the outcome of a M&A dispute is less predictable. As a response to this, a working group comprised of some of the leading German arbitrators had evaluated more than 100 post-M&A arbitral awards and examined their potential to further develop the law. The evaluation of the arbitration awards has been published, which contributes to greater transparency in this highly relevant field.

The potential of mass arbitration, which has become a new phenomenon in the US and has created millions of filing fees and forced companies into costly early settlements, is another development the DIS is following closely. Although it is unlikely to become the norm in Germany any time soon, it is worth considering, particularly as a potential for third party funders.

Significant court decisions

Several significant court decisions concerning arbitration were made by the Federal Court of Justice and the Higher regional courts in the past year.

No binding effect of annulment proceedings in the state of origin of the arbitral award

A decision by the Federal Court of Justice from March 2023 confirmed that annulment proceedings in the state of origin of the arbitral award have no binding effect on the declaration of enforceability proceedings in Germany.

In this case, the court examined the question of whether a party who unsuccessfully tried to set an award aside at the seat of arbitration may rely on the same grounds for refusal when resisting enforcement in another country.

Although the New York Convention (Convention) sets out the rules for enforcement of foreign arbitral awards in Germany, it is silent on unsuccessful attempts to annul the award at the seat of arbitration. The German court found that nothing in the Convention suggests that an unsuccessful application to set an award aside at the seat, which was Russia in this case, would lead to an automatic enforcement of the award in another state, and that setting aside proceedings have a different subject matter from enforcement proceedings.

No anti-suit injunctions against arbitration related proceedings

A ruling by the Higher Regional Court of Hamm clarified for the first time in the context of arbitration-related proceedings that legal proceedings already pursued in Germany cannot be stopped by a prohibition of legal action obtained abroad.

In this case, a German investor had obtained an arbitral award in an investment protection arbitration before a tribunal under the realm of the International Centre for Settlement of Investment Disputes (ICSID), which was made in its favour against an EU state and is now to be enforced in the US.  In response, the state turned to the regional court at the seat of the investor and demanded that the enforcement of the arbitral award outside Europe be prohibited. The investor, in turn, used these proceedings as an opportunity to apply to a US court for the termination of the proceedings in Germany by means of a so-called anti-anti-suit injunction in order to be able to continue the enforcement.

In the first instance, the Regional Court of Essen rejected the state’s request. In the second instance, the Higher Regional Court of Hamm ruled in favour of the plaintiff state.

The Higher Regional Court of Hamm said that the state’s anti-suit injunction can particularly be based on the right to access to justice, which is protected by the German Civil Code. It found that the attempt to prevent the continuation of the pending proceedings at the Regional Court of Essen by means of the anti-anti-suit-injunction in the US constituted an infringement of the right to access to justice and, an infringement of Germany's judicial sovereignty.

Intra-EU investment arbitration

The Federal Court of Justice handed down a landmark judgment in relation to investor-state arbitration in July 2023. The decision was in line with the EU’s position on intra-EU investment arbitration, which allows EU member states to use national judicial protection against arbitral proceedings initiated by investors from other member states.

The ruling came after one EU member state reformed its domestic energy production legislation. As a result, a group of companies in another member state initiated investor-state arbitral proceedings with ICSID, as is permitted under Article 26 of the Energy Charter Treaty.

The decision underscores the eroding protection to intra-EU ICSID arbitration proceedings in the EU and the diverging jurisprudence outside the EU.

Extra-EU investment arbitration

Another decision by the Federal Court of Justice from October 2023 introduces a distinctive perspective on the applicability of CJEU’s infamous Achmea decision to bilateral investment treaties (BITs) between an EU and a non-EU country.

The case centered around a German investment in the Indian communication sector. Pursuing arbitration under the Germany-India BIT after the cancellation of the deal, the investor secured a favorable outcome before an arbitral tribunal in Switzerland and sought to enforce the award in Germany under the Convention. The defendant state's Achmea-based arguments were unsuccessful.

Referring to the CJEUs’ Komstroy decision, the court affirmed the compliance of extra-EU BITs with EU law, transferring the arguments made in the Komstroy case for a multilateral investment treaty to a BIT. The Federal Court of Justice also noted that the principle of mutual trust – a foundation of EU law – lacks relevance in the extra-EU context.

This distinction drawn by the Federal Court of Justice, setting limits between intra-EU and extra-EU ISDS mechanisms, contributes to legal certainty in ongoing discussions on the future of ISDS post-Achmea.

Co-written by Dr Sandra Gröschel and Lisa Oettig of Pinsent Masons.