J. Litigation and Arbitration
1. General Remarks
When investing in Germany, foreign investors sometimes get involved in legal disputes with third parties or public authorities. In this respect, it is reassuring to know that Germany has a reliable, truly independent and cost-efficient court system in place, which is capable of helping the parties resolve their disputes in a reasonable and timely manner. Hence, Germany is ranked in the Economic Forum’s Global Competitiveness Report 2012-2013 among the top 10 nations in the category of Judicial Independence.
2. Structure of the German Court System
The Courts in Germany are structured in a three-tier system. Decisions made by a court of first instance may be appealed in appellate court. If, after this second instance, the outcome of the case is still disputed, the aggrieved party can petition the highest German civil court, the German Federal Court of Justice (BGH), provided that the appellate court or the Federal Court of Justice admits the petition. While appellate courts are concerned with the facts of the case and the hearing of evidence, the court of highest instance is mainly concerned with issues of law. Hence, the BGH fosters the continuous development of the law, while appellate courts assert individual interests.
Although the courts of first and second instance are, strictly speaking, not bound by the decisions of the Federal Court of Justice, it is common practice in Germany that they follow these decisions. This leads to a high degree of legal certainty, since the decisions of the first instance courts are foreseeable and not surprising or made arbitrarily. This degree of legal certainty is based on Germany’s many decades of democratic legal tradition and also on the fact that all laws in Germany are codified and available to everyone. This legal reliability and the resulting planning dependability make Germany attractive to both domestic and foreign investors.
3. Court Conduct
Legal proceedings before courts usually begin with a claim filed by a plaintiff. In his statement of claim, the plaintiff must explicitly define what he is seeking. This motion needs to be substantiated by a presentation of the facts and by the legal norms deemed relevant. After the plaintiff files his claim, the court then grants the defendant the possibility to reply to the statement of claim. If the defendant decides not to defend himself legally or not to respond to the claim, the court may decide in favor of the plaintiff simply on the grounds of default (so-called judgment by default). After both parties have presented their cases through written submissions, the court usually appoints a date for an oral hearing. The court prepares for this hearing by separating the disputed from the undisputed facts and by verifying whether the disputed facts are relevant to the case. Evidence is only gathered if the parties present the facts differently and the court considers such differences to be relevant to the outcome of the case. If so, both parties are granted the possibility to convince the court of their version of the facts through witnesses, documents, expert opinions, etc. Contrary to practice in common law countries, it is not possible to cross-examine witnesses and to question them about every aspect of the case. Questions directed at witnesses must be directly related to the facts the court is seeking to prove or disprove. In practice, this accelerates the gathering of evidence since questions concerning irrelevant facts are not permissible. By conducting legal proceedings in such a manner, both parties save a considerable amount of time and money. After evidence has been gathered and the parties heard, the court announces its verdict and provides extensive written justification for its decision. Many court decisions are collected in comprehensive court casebooks that are available to judges and lawyers, as well as to laymen. In short, Germany enjoys a very transparent legal system.
1. Advantages of Arbitration
As compared to court litigation, arbitration is advantageous – especially concerning complex M&A disputes – as the parties can influence the nomination of the arbitrators, thereby ensuring that the arbitrators have the particular expertise necessary for the dispute. Furthermore, arbitration proceedings are confidential. They are also more flexible, as the parties can determine the procedure themselves. The arbitral award can be enforced more easily than ordinary court rulings, especially abroad, since there is an effective international network of treaties and conventions in place which governs the recognition and enforcement of foreign arbitral awards.
Arbitration is generally faster than litigation because there are no stages of appeal. Standard arbitration proceedings take between one and two years in total; even complex M&A arbitration proceedings can be completed in about two years.
2. Legal Framework
Arbitration comes into play if the parties agree on ad hoc arbitral proceedings according to the German arbitration law or on institutional proceedings according to the arbitration rules (DIS Rules) of the German Institution of Arbitration (DIS).
a) The German Arbitration Law
The German arbitration law in the 10th book of the German Code of Civil Procedure (ZPO) came into force on January 1, 1998 and comprises 42 provisions. It is based on the modern and internationally recognized UNCITRAL Model Law, is independent of all other provisions of Germany’s national civil procedure law and applies to all arbitrations taking place in Germany.
Parties can easily obtain the jurisdiction of an arbitral tribunal outside the ordinary court system by concluding an arbitration agreement by which all or certain disputes that have arisen or that may arise between them with respect to a defined legal relationship, are submitted to arbitration. Such arbitration agreements must be made in writing. In the event that consumers are involved, it is also required that the arbitration agreement be concluded as an independent contract separate from the main contract. For multi-party arbitrations with several claimants and/or respondents, it is advisable to include a provision for the selection of arbitrators in the arbitration agreement, as German arbitration law does not provide a statutory mechanism for the selection of arbitrators in multi-party situations.
In German arbitration law, it is mandatory that all parties be treated equally and given equal opportunity to present their case. It is possible for both, German and foreign attorneys-at-law to appear as counsel before arbitral tribunals. In total, the provisions of the German arbitration law bestow a maximum degree of autonomy on the parties with regard to the organization of the proceedings. Although the law stipulates three arbitrators, if the parties do not determine otherwise, they may agree upon a single arbitrator, e.g. to save costs. As there are no fixed statutory provisions regarding the arbitrators’ fees, the parties and the arbitrators have to agree upon the fees (e.g. on the basis of the costs for court proceedings or on the basis of the DIS rules).
In Germany, the Higher Regional Courts determine whether an arbitral award may be reversed or not. However, the grounds for reversal must comply with comparable international standards.
b) The Arbitration Rules of the German Institution of Arbitration
The DIS, Germany’s leading institution for arbitration, and its arbitration rules, which were amended on July 1, 1998, represent an efficient and proven system of regulations which may be simply applied by using the standard arbitration clause recommended by the Institution. The DIS rules are currently available in seven languages.
The DIS rules are also based on UNCITRAL Model Law. The DIS provides administrative support during arbitration proceedings, for example during the formation of the arbitral tribunal, during the transmission of party pleadings or in case substitute arbitrators have to be appointed. According to the DIS Rules, the place of arbitration may be chosen at will, such that foreign parties can transport the rules of procedure to their chosen place of arbitration.
Unless the parties have chosen otherwise, three arbitrators determine the outcome of the case. In comparison to statutory German arbitration regulations, the DIS rules offer the advantage that they include a regulation for cases in which more than two parties are involved in a particular dispute. Problems that often arise through such a constellation, for example when appointing the arbitral tribunal, are easily solved through the DIS rules.
It is worth mentioning that, according to the DIS rules, the arbitral tribunal has the discretion to order the production of documents. In practice, most arbitral tribunals will investigate the facts only upon request of at least one party.
In international comparison, the DIS rules are a cost-efficient alternative to the regulations of other international arbitration organizations, such as the popular regulations of the Swiss Chambers’ Court of Arbitration and Mediation or the ICC. The costs of DIS proceedings depend on the amount in dispute. An administrative fee for the DIS is added to the fees of the arbitrators (e.g. for a tribunal of three arbitrators with two parties involved, the fees for the arbitrators and the DIS (exclusive value added tax) for an amount in dispute of EUR 1,000,000 amount to approx. EUR 76,700, for an amount in dispute of EUR 10,000,000 to approx. EUR 225,900 and for an amount in dispute of EUR 100,000,000 to approx. EUR 456,900).
The DIS also succeeded in facilitating fast-track arbitration agreements by recently issuing the Supplementary Rules for Expedited Proceedings. By shortening the time period for the nomination of arbitrators and by limiting the number of written submissions, it is possible to bring arbitration proceedings to a close very quickly.
Depending on whether a single arbitrator or a tribunal of three arbitrators is nominated, proceedings based on these rules can be terminated within six or nine months, respectively, after the submission of the statement of claim. Such fast-track proceedings may be suitable if the parties only want to obtain a decision on a specific legal question (e.g. if a material adverse change (MAC) has occurred).
3. Corporate Law Disputes
Germany also offers a reliable framework for arbitration proceedings involving shareholder disputes within a limited liability company (GmbH). When compared to the ordinary court system, this arbitration framework can be especially attractive to foreign companies with German subsidiaries who are involved in a dispute.
Although the ability to arbitrate such disputes had long been controversial, the BGH has approved it in a recent and well-noticed decision. The court, however, has also decided that arbitration clauses can only be deemed legally effective if strict conditions are fulfilled.
In particular, the arbitration agreement needs either to be embedded in the company’s articles upon approval of all shareholders or to be concluded in an independent contract between all shareholders and the company. Furthermore, it is not only required that the company’s executive bodies but also each shareholder be informed about the commencement and the course of the arbitration proceedings, thus enabling them to participate in the proceedings. Last but not least, each shareholder must be given the possibility to participate in the process of electing and nominating arbitrators and all shareholder resolution disputes concerning the same subject matter must be settled jointly before the same arbitral tribunal.
Although the decision of the BGH entails a complex regulating mechanism, this does not have to be an obstacle for arbitration agreements. In order to better meet the needs of its users, the DIS issued the Supplementary Rules for Corporate Law Disputes, which fulfill all the conditions set forth by the BGH. The supplementary rules are available in both German and English.
1. About Mediation
Mediation is an alternative method of dispute resolution which parties in M&A or corporate law disputes should take into consideration. Contrary to litigation and arbitration proceedings, the results reached in mediation proceedings are not decisions imposed upon the parties by a court or arbitral tribunal. In the course of mediation proceedings, the parties directly negotiate with each other and settle their dispute on their own under the guidance of an impartial instance, the mediator. Judge-based dispute resolution systems focus on hard facts and come to a decision by strictly and solely following the settings of legal provisions. The core objective of mediation is not to find a decision merely regarding the applicable law, but to explore and consider the interests and needs of the disputing parties in the first place. The aspired result is a win-win- situation based on an agreement that is satisfactory for both/all parties.
2. Advantages of Mediation
Mediation is the method of dispute resolution which gives the parties the greatest freedom of scope with regard to the result and course of the proceedings. As there are no binding rules, every problem can be discussed and every compromise can be made – everything is possible within the legal framework. Contrary to litigation and arbitration, the parties are even free to terminate the mediation at every stage of the proceedings without further consequences. Particularly, if the parties are interested in keeping up a good relationship and continuing business with each other after settling their dispute, mediation is an advantageous and recommendable procedure. On the contrary, contentious proceedings often leave one or even both parties dissatisfied and usually lead to the termination of personal and business relations.
Since mediation proceedings are confidential and nobody apart from the mediator and the parties needs to be involved, the parties can discuss and find a decision in a private setting. Ordinary court proceedings are time and cost intensive as disputes usually continue for years and several writs are exchanged. Mediation proceedings are based on the conversation of the parties and the parties often achieve an agreement in one closed session. As a result, the costs for mediation proceedings are regularly far lower than those for litigation or arbitration proceedings, especially with regard to disputes with a high amount at stake.
3. Legal Framework and Course of Proceedings
Mediation has successively gained more importance in contentious procedures in Germany over the last years. In summer 2012, the German Parliament adopted the Mediation Act. This Act sets basic provisions for mediation proceedings, such as sovereignty of the parties and confidentiality, and ensures that the mediation proceedings are governed by a qualified mediator. However, it does not contain any regulations concerning the signing of mediation contracts or the enforcement of decisions found in mediation proceedings. Thus these aspects are governed by the general provisions of Civil Law. A new provision in the German Code of Civil Procedure rules that the claimant should declare in the claim whether mediation proceedings have been initiated before the submission of the claim.
Mediation proceedings include five procedural steps. In the first step, the mediator explains the principles of mediation and the parties agree on rules for the proceedings. In the second step each party has the opportunity to depict the dispute from their point of view. In the third phase, the mediator discusses with the parties the interests of each party and their ideas for the settlement of the dispute. These interests and ideas are the basis for the discussion between the parties in the fourth phase. The final step includes the settlement and record of the achieved agreement.
Parties interested in settling their disputes in mediation proceedings should include a mediation clause as well as applicable rules of procedure into the agreements they enter into with each other. Several institutions, for example the DIS, have developed rules for mediation proceedings.
In order to ensure effective enforcement, mediated decisions should be stipulated in a notarial deed or an attorney’s settlement declared enforceable.