Arbitration law reform: government draft makes targeted adjustments

The modernisation of German arbitration law has been on the Federal Government’s agenda since the last parliamentary term (we reported on this here. With the current government draft bill on the modernisation of arbitration procedure law, the reform of German arbitration law is entering its next phase. In principle, it follows the approach already set out in the ministerial draft: German arbitration law is to become more digital and more international. The key elements of the reform, which we have already explained in our article on the ministerial draft – such as video hearings, electronic awards, dissenting opinions, publication, English-language proceedings and the new application for restitution – therefore remain in place. Nevertheless, the government draft contains a number of changes that are significant in practice compared with the ministerial draft:

Commercial Courts and Concentration of Jurisdiction

Of practical relevance, first of all, is the amendment to Section 1062 of the German Code of Civil Procedure (ZPO). Following on from the possibility of establishing a concentration of jurisdiction at a Commercial Court in future, under the now proposed Section 1062(6) of the ZPO, a cross-state agreement on jurisdiction may also be concluded even if only one of the participating states has a Commercial Court.

For the federal states, this increases flexibility in establishing arbitration-related concentration of jurisdiction. At the same time, greater concentration facilitates the development of expertise in dealing with specialist issues of arbitration law within individual tribunals more rapidly, which gives rise to hopes for greater professionalisation of arbitration-related proceedings before the state courts. Although a greater concentration of jurisdiction is thus encouraged, a consistent focus on a small number of Higher Regional Courts, in the interests of the greatest possible specialisation, would still be desirable.

English as the language of proceedings in arbitration-related court proceedings

Meanwhile, the revision of the new Section 1063a of the Code of Civil Procedure (ZPO) ensures greater internationalisation beyond the Commercial Courts. The draft bill focused primarily on proceedings before the Commercial Courts with regard to English-language proceedings. The government’s draft now extends this: under Section 1063a(2) of the ZPO, the federal states may, by statutory order, also authorise those Higher Regional Courts or Supreme Regional Courts where no Commercial Court has been established to conduct proceedings entirely in English, provided that arbitration-related decisions are concentrated there.

This effectively closes a gap in the draft bill. This is because the concentration of jurisdiction under Section 1062(5) of the Code of Civil Procedure does not always coincide with the seat of a Commercial Court. The government draft thus aims to create the conditions ensuring that, even in such cases, an English arbitration proceeding does not necessarily have to be followed by German annulment or enforcement proceedings.

The provision for English-language proceedings already laid down in the draft bill will thus be more widely applicable.

Electronic arbitral awards

A further change of practical relevance concerns the newly proposed Section 1054(1) of the ZPO. Whilst the draft bill introduced electronic arbitral awards for the first time but required a qualified electronic signature, the government’s draft now permits not only a qualified electronic signature but also a so-called ‘advanced’ electronic signature. The advanced electronic signature is regulated in Article 26 of Regulation (EU) No 910/2014. Similar to the qualified electronic signature, it is technically based, as a rule, on digital certificates. However, the requirements for it are somewhat lower than those for qualified electronic signatures. The resulting reduction in security appears acceptable in comparison to the increased practicality, as the barrier to use is lower.

This amendment is to be welcomed. In connection with the draft bill, there were concerns that relying exclusively on qualified signatures might prove impractical in terms of international enforcement due to the lack of uniform international standards (see also our article here). Particularly in non-European countries, where Regulation (EU) No 910/2014 on the various forms of signature does not apply and qualified signatures are not commonly used in cases of doubt, enforcement could otherwise be made more difficult. For the same reason, the parties retain the option of subsequently requesting a written copy (new Section 1054(5), second sentence, of the ZPO) – or of objecting to the electronic arbitral award from the outset (new Section 1054(1), second sentence, of the ZPO).

Setting aside awards concerning the tribunal’s own lack of jurisdiction

The draft of the new Section 1040(4) of the ZPO concerning the setting aside of awards relating to the arbitral tribunal’s lack of jurisdiction has also been amended. The Ministry’s draft still linked a decision on lack of jurisdiction to “a challenge pursuant to paragraph 2”. This requirement has been omitted from the Government’s draft. Accordingly, an arbitral award concerning the arbitral tribunal’s lack of jurisdiction may be set aside, regardless of whether the arbitral tribunal declared itself to lack jurisdiction upon application or “of its own motion”.

This broadens the scope of application of the provision. In substance, the new ground for setting aside an award serves to strengthen the arbitration system: it makes it possible to correct unjustified decisions finding the arbitral tribunal lacks jurisdiction and to keep disputes within the arbitration process that would otherwise end up before the state courts. In practice, however, this is likely to be relevant only rarely. Nevertheless, the amendment is consistent.

Application for restitution

Finally, the application for restitution regulated in the new Section 1059a of the Code of Civil Procedure (ZPO) deserves attention; that is, the possibility of setting aside an arbitral award even after the expiry of the time limit set out in Section 1059(3) ZPO. In this respect, the Government’s draft has narrowed the scope of application compared with the Ministry’s draft: The subsequent discovery of a document, which was still regulated in Section 1059a(1)(7) of the ZPO in the draft bill, is no longer provided for as a ground for restitution. Although this means that alignment with the comparable provision in state proceedings (Section 580(7b) of the ZPO) has been abandoned, this amendment appears reasonable. After all, the application for restitution is intended solely to remedy serious procedural defects. This applies all the more so in arbitration law, as it is based on the guiding principle that state courts should exercise great restraint in reviewing and amending the award of the arbitral tribunal selected by the parties.

Less clear is the amended wording of paragraph 1. The draft bill still required the applicant to ‘substantiate’ the ground for restitution. This corresponded to the provision on grounds for setting aside in Section 1059(2)(1) of the Code of Civil Procedure (ZPO). By contrast, the government’s draft focuses on the court ‘finding’ that a ground for restitution exists. This corresponds to the wording in Section 1059(2)(2) of the Code of Civil Procedure (ZPO). The explanatory memorandum does not address the reasons for this amendment. The extent to which the amended wording will have any practical effect, or whether it is merely of a linguistic nature, will likely only become apparent in practice.

In addition, there is a clarification in paragraph 3: the arbitration proceedings themselves are now expressly mentioned as a previous proceeding in which the applicant’s omissions give rise to preclusion. This is a welcome clarification, even though this interpretation was already virtually inevitable given the purpose of the provision. After all, the application for restitution is intended to override the fundamental finality of the arbitral award only in exceptional cases.

Overall assessment

The Government’s draft adheres to the basic concept of the Ministry’s draft. It improves the practical applicability and effectiveness of the reform in specific areas, without fundamentally altering its character. Internationalisation and digitalisation are now being pursued even more consistently in some respects. For businesses and other legal practitioners, however, the practical value of the new provisions will still depend to a large extent on the deliberate structuring of proceedings. Meanwhile, even under the government draft, there are still no major breakthroughs or surprises to be found.