On 1 February 2024, the German Federal Ministry of Justice (Bundesministerium der Justiz, BMJ") presented a ministerial draft bill on legislation for the modernisation of arbitration law (Gesetz zur Modernisierung des Schiedsverfahrensrechts, the Draft Bill").1 Following last year's publication of the key issues paper (link to our article2), an important step has been taken towards the implementation of the proposed reform.
The Draft Bill should be viewed in conjunction with the 2023 draft of the Legal Venue Strengthening Act (Justizstandort-Stärkungsgesetz).3 Similarly to this, the Draft Bill aims to make Germany a more attractive location for international and large-scale commercial disputes. The BMJ recognises the im-portance of implementing a reliable legal framework for efficient dispute resolution tailored to the practical needs of the business community as a key location factor. In this context, proceedings in state courts and arbitration – correctly – are not primarily seen as two competing dispute resolution mechanisms, but as complementary ones, the strengthening of which will be of overall benefit to Germany as a business location.
In the following, we would like to present and evaluate, from a practical perspective, the most important changes to German arbitration law that the Draft Bill provides.
Informal Arbitration Agreement
According to the Draft Bill, it will be possible to conclude arbitration agreements informally, provided that the arbitration agreement is a commercial transaction for all parties (Section 1031 (4) of the German Code of Civil Procedure (Zivilprozessordnung, ZPO-E)).
The planned legislative changes will allow for arbitration agreements to be concluded implicitly or verbally. The Draft Bill sees a practical need for this in connection with global supply chain and framework agreements. Whether the proposed changes are expedient in such circumstances is debatable. In any event, the omission of any written form has the potential to cause disputes and consequently delays and legal uncertainty.
An arbitration agreement typically contains not only the agreement that an arbitral tribunal shall have jurisdiction, but also various other provisions on the conduct of the arbitration proceedings (in particular the choice of an arbitration institution, the number of arbitrators and the place of the arbitration). For evidentiary purposes alone, the parties should therefore draw up their agreement in writing. Alternatively, if the parties wish to ensure that any disputes are to be adjudicated by state courts, it is advisable to document this decision as well. Otherwise, proceedings before the state court could be delayed in future by claiming that an oral arbitration agreement has been concluded and that the state court therefore has no jurisdiction.
The Draft Bill further increases the potential for abuse that results from eliminating any formal requirement by expanding the possibilities for reviewing the (non-)existence of an arbitration agreement. Under the Draft Bill, an arbitral award can also be set aside by state courts if the arbitral tribunal has wrongly denied its jurisdiction (Section 1040 (2) ZPO-E).
Finally, the elimination of any formal requirement is likely to impair the free circulation of arbitral awards issued in Germany and consequently runs against the objective of increasing the attractiveness of Germany as a place of arbitration. Article II (1) of the New York Convention states that contracting states are only required to recognise written arbitration agreements. Admittedly, the most-favoured-treatment principle of Article VII (1) alternative 2 of the New York Convention allows an arbitration party to invoke more lenient formal requirements of the domestic law of the state in which it wishes to enforce an arbitral award. However, this only helps the parties to an arbitral award issued in Germany if such regulations exist in the state of enforcement. It seems rather unlikely that the parties will take this into consideration when concluding an arbitration agreement verbally or by implication.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.