Arbitration law reform: government draft makes targeted adjustments

The modernisation of German arbitration law has been on the federal government’s agenda since the previous parliamentary term (we reported on this here). The government’s latest draft to modernise arbitration procedure law takes the reform into its next phase. In principle, the approach set out in the ministerial draft remains unchanged: 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 arbitral awards, dissenting opinions, publication, court proceedings in English and the new application for restitution, therefore remain in place. Nevertheless, the government’s draft contains a number of changes that are significant in practice compared with the ministerial draft:

Commercial Courts and concentration of jurisdiction

A practically important development is the addition to section 1062 of the German Code of Civil Procedure (Zivilprozessordnung) (the “Code”). Building on the prospective possibility of concentrating jurisdiction in a Commercial Court, the planned new section 1062(6) of the Code will permit an agreement on cross-state jurisdiction even where only one of the states involved has established a Commercial Court.

This gives the states greater flexibility in establishing concentrated jurisdiction for arbitration-related matters. At the same time, greater concentration facilitates the development of expertise in arbitration-specific issues within particular judicial panels more quickly, raising the prospect of a higher degree of professionalisation in arbitration-related proceedings before the state courts. Although the draft therefore promotes greater concentration of jurisdiction, a consistent concentration in a small number of Higher Regional Courts (Oberlandesgerichte) would still be desirable in the interests of the greatest possible specialisation.

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

The revision of the new section 1063a of the Code of Civil Procedure is intended to promote greater internationalisation beyond the Commercial Courts. As regards English-language proceedings, the ministerial draft focused essentially on proceedings before the Commercial Courts. The government draft now extends this approach: under section 1063a(2) of the Code, the states may, by statutory instrument, also authorise Higher Regional Ccourts or the Highest State Courts (Oberste Landesgerichte) to conduct proceedings entirely in English where no Commercial Court has been established, provided that arbitration-related decisions are concentrated at those courts.

This effectively closes a gap in the ministerial draft since the concentration of jurisdiction under section 1062(5) of the Code of Civil Procedure will not always coincide with the seat of a Commercial Court. The government draft therefore aims to create the conditions to ensure that in such cases too an English-language arbitration need not be followed by German-language proceedings to set aside or enforce the award. The opening for English-language proceedings already envisaged in the ministerial draft is therefore made available more widely.

Electronic arbitral awards

A further practically relevant change concerns the proposed new section 1054(1) of the Code of Civil Procedure. Although the ministerial draft introduced electronic arbitral awards for the first time, it required a qualified electronic signature. The government draft now provides that, in addition to a qualified electronic signature an advanced electronic signature will suffice. The advanced electronic signature is governed by Article 26 of Regulation (EU) No 910/2014. The advanced electronic signature is governed by Article 26 of Regulation (EU) No 910/2014. Like a qualified electronic signature, it will generally be based technically on digital certificates. However, its requirements are somewhat less stringent than those applicable to qualified electronic signatures. The resulting lower level of security appears acceptable in view of the greater practicality since the threshold for using an advanced electronic signature is lower.

This amendment is to be welcomed. In connection with the ministerial draft, there were concerns that a requirement to use qualified electronic signatures exclusively could prove impracticable for international enforcement purposes because uniform international standards are lacking (see also our article here). In particular, enforcement could otherwise be made more difficult in non-European countries, where Regulation (EU) No 910/2014 does not apply and qualified electronic signatures may not be commonly used. For the same reason, the parties will continue to have the option of subsequently requesting a written version of the award (new section 1054(5), second sentence of the Code of Civil Procedure), or of objecting to an electronic arbitral award from the outset (new section 1054(1), second sentence of the Code).

Setting aside arbitral awards rejecting jurisdiction

The draft of the new section 1040(4) of the Code of Civil Procedure, concerning the setting aside of arbitral awards rejecting the arbitral tribunal’s jurisdiction, has also been amended. The ministerial draft still required the decision rejecting jurisdiction to have been made “in response to an objection under subsection (2)”. This requirement has been removed from the government draft. Accordingly, an arbitral award rejecting the arbitral tribunal’s jurisdiction may be set aside irrespective of whether the arbitral tribunal found that it lacked jurisdiction upon application or of its own motion.

This expands the provision’s scope of application. In substantive terms, the new ground for setting aside continues to strengthen arbitration: it makes it possible to correct unjustified negative jurisdictional decisions and to keep disputes in arbitration that would otherwise end up before the state courts. Although this is likely to be relevant only rarely in practice, the amendment is nevertheless consistent.

Application for restitution

Finally, the application for restitution provided for in the new section 1059a of the Code of Civil Procedure warrants attention. It allows an arbitral award to be set aside even after expiry of the time limit under section 1059(3) of the Code. In this respect, the government draft narrows the provision’s scope compared with the ministerial draft: the subsequent discovery of a document, which was still covered by section 1059a(1)(7) of the Code in the ministerial draft, is no longer provided for as a ground for restitution. Although this departs from the corresponding rule applicable in state-court proceedings (section 580, point 7(b) of the Code), the amendment appears understandable. After all, the application for restitution is intended only to address serious procedural defects. This applies all the more in arbitration law, which is founded on the principle that state courts should exercise great restraint in reviewing and amending an arbitral award rendered by an arbitral tribunal selected by the parties.

The amended wording of subsection (1) is less clear-cut. The ministerial draft still required the applicant to “substantiate” the ground for restitution. This mirrored the provision governing grounds for setting aside in section 1059(2)(1) of the Code. By contrast, the government draft requires the court to “find” that a ground for restitution exists. This reflects the wording of section 1059(2)(2) of the Code. The explanatory memorandum does not address the reasons for this amendment. The practical effect of the amended wording or whether it is merely linguistic will probably become clear only through its application in practice.

There is also a clarification in subsection (3): the arbitration proceedings themselves are now expressly included among the earlier proceedings in which an omission by the applicant may bar the applicant from relying on a ground for restitution. This is a welcome clarification, even though, given the purpose of the provision, this interpretation was already virtually inevitable. 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 draft retains the ministerial draft’s basic approach. It improves the reform’s practical usability and effectiveness in certain respects without fundamentally changing its nature. Internationalisation and digitalisation are now pursued even more consistently in some areas. For businesses and other users of arbitration, however, the practical value of the new provisions will continue to depend to a significant extent on careful procedural planning. At the same time, even under the government draft, the reform still lacks any major new impetus or surprises.