Daniel Busse, Robert Hunter, Karl Pörnbacher

Lovells LLP

A Time to Celebrate - Important Anniversaries for the International Arbitration Community

2008 and 2009 were important anniversaries in arbitration. In 2008, the arbitration community celebrated both the 10th anniversary of the current ICC Arbitration Rules and the 50th anniversary of the ‘New York’ Convention on the Recognition and Enforcement of Foreign Arbitral Awards. For the German arbitration community there were three further anniversaries to remember: in 2008 both the reformed arbitration law and the arbitration rules of the German Institution of Arbitration (DIS) turned 10 years old, and in 2009 the world’s first-ever bilateral investment treaty (BIT) - between Germany and Pakistan - turned 50.

Against this background, the following is a short account of the framework and recent developments in Germany, Germany’s investment treaty programme, and the ever-increasing influence of EU law from a German perspective.

Commercial arbitration in Germany - an update on the current situation

The authors of this article described the legal framework of arbitration in Germany and some salient features of commercial arbitration in last year’s edition. In particular, they gave an account of the important role arbitration plays with respect to Germany, in sectors such as insurance and reinsurance, energy, sports, and others. That account will not be repeated here. It should however be noted that further progress has been made in all the areas described in last year’s article. As an example, reinsurance arbitration is increasingly perceived as a field where industry expertise is essential and continues to gain importance, in particular with the increase of run-off business. The increased interest in reinsurance arbitration is also reflected by the activities in Germany in this field, such as the DIS Task Force on insurance and reinsurance arbitration and an increasing number of conferences on that subject, notably the ARIAS Europe conference on 12 to 13 October 2009 in Hamburg.

Overall, both in the past year in particular and since the modernisation of Germany’s arbitration law in 1998 in general, Germany has continued to consolidate its place on the arbitration map as one of the key players. In 1998, the UNCITRAL Model Law was incorporated into the German Code of Civil Procedure (ZPO) with only a few minor modifications. Germany’s arbitration law also stipulates that the New York Convention applies to the enforcement of foreign arbitral awards in Germany. Over the past 10 years since its inception, the modernised arbitration law has proven to be user-friendly. The structure of the German arbitration law means that its rules can be applied - and adapted as necessary - to cases of all sizes and complexities without any risk of cutting corners on the procedural standards. Its flexibility ensures that simple cases are not over-complicated by a costly set-up that would be disproportionate to the size of the case. Moreover, the interference of state courts is limited to very few (enumerated) instances - mainly to supporting the arbitral proceedings. As a result, it comes as no surprise that both national and international corporations increasingly entrust their disputes to the German arbitration law. That is even the case in industry sectors such as banking and finance, which were, for a long time, rather averse to arbitration as a dispute resolution mechanism. The increasingly positive attitude of German parties towards international arbitration is reflected by the ICC figures which show that Germany is the nation with the most parties in disputes and is in fourth place regarding the number of arbitrators. This upward trend can be expected to continue.

This progress of arbitration in Germany becomes especially obvious when looking at the success of the DIS, the leading arbitral institution in Germany. Over the last decade, the DIS has gained a reputation for handling cases in a smooth and speedy manner, which is to some extent due to the benefits of having a rather slim administration body. The DIS is also known for its commitment to the education and support of the younger generation of arbitrators and counsel specialised in arbitration. The legal framework is complemented by the DIS Arbitration Rules. The DIS Arbitration Rules, also revised in 1998, offer a well-structured and convenient framework for international arbitration practitioners as they are largely based on the UNCITRAL Arbitration Rules. The most important feature of the DIS Arbitration Rules is the flexibility they offer, giving individual procedural agreements, as far as possible, priority over any non-mandatory rules. In view of the increasing interest in a speedy decision, in 2009 the DIS introduced an additional set of rules for expedited proceedings. The increasing recognition of the DIS is confirmed by the case figures. In 2008, the overall amount in dispute of all arbitration proceedings administered by DIS exceeded E880 million, with 116 newly filed cases. In 2009, the overall amount in dispute is expected to exceed E1 billion. In spring 2009, the DIS launched a regional group in London, as part of a larger project promoting the DIS internationally. The first group meeting in London was a resounding success with both German and international arbitration practitioners attending.

The increasing role of arbitration in a German setting shows no signs of slowing down. In the course of the festivities for the 10th anniversaries of both the arbitration law and the DIS Arbitration Rules, all participants stressed that arbitration continues to gain in importance. In a speech held on the occasion of the celebration of the anniversaries in October 2008, Brigitte Zypries, the federal minister of justice, highlighted the importance of arbitration as an alternative to state court proceedings. In light of the governmental support, it can be expected that the German legislature will strive to keep the German Arbitration Act up to date and will respond to any calls to preserve the well-functioning system of arbitration. Moreover, German courts have continued to uphold the autonomy of arbitration as a means of dispute resolution replacing state courts, and are very hesitant to set aside an arbitral award. The pro-arbitration approach was also evident in a recent decision taken by the German Federal Court of Justice. On 6 April 2009, the Federal Court of Justice confirmed the general arbitrability of disputes concerning the validity of shareholder resolutions, overturning its own judgment of 29 March 1996, according to which disputes concerning the validity of a shareholder resolution could not, or at least could not easily, be arbitrated.

Trends in German BIT practice: recent changes and developments

Germany’s 50-year investment treaty programme has played an important role in Germany’s economic success. Since concluding the first-ever bilateral investment treaty (BIT) - with Pakistan - in 1959, Germany has signed 139 BITs that are characterised by high and progressive standards of investment protection. One hundred and twenty-six of these are currently in force, making Germany the world leader in terms of the number of BITs. Taken as a complement to the EC and the OECD, between whose member states BITs are typically not concluded, Germany’s BITs provide an almost complete global framework of international investment protection. This, together with the granting of federal investment guarantees that the existence of these BITs allows, has encouraged both outward and inward foreign investment flows as well as international cooperation.

The German BIT programme is actively managed by a department of the German Federal Ministry of Economics and Technology whose efforts have been effective both in expanding the global network of BITs and in keeping that network up to date with international developments in investment protection law and practice. In particular, Germany has taken the initiative in negotiating new BITs to replace its earliest ones. Two common improvements to earlier BITs are the inclusion of an express prohibition of arbitrary and discriminatory measures and the inclusion of investor-state arbitration. Starting with the German-Ecuador BIT (signed in 1965 and replaced in 1996), Germany has now renegotiated more than half of the BITs it concluded in the 1960s and ’70s. Ten of these renegotiated treaties have already entered into force.

German practice has also responded to changes deriving from European law. Responding to the basic ‘freedoms’ of the European Community (in this context the freedoms of establishment and of domicile rights), the current German ‘model’ BIT (ie, the text used openly as the basis of negotiations with other states) ties the definition of nationals whose investments are to be protected by the BIT to the concept of freedom of establishment as set out in articles 44 and 48 of the Treaty Establishing the European Community, shifting the notion of ‘investor’ from a national to a European level. In a similar manner, Germany has recently abandoned its previous test of corporate ‘nationality’ (which was for many decades determined by reference to the ‘seat’ of the company) to a simpler test of place of incorporation. This reflects a recent amendment to German law intended to increase the international competitiveness of Germany’s company law.

In recent years, German investors have been making increased use of the extensive German BIT programme. There have been about 20 known cases brought by German investors against Germany’s BIT partners. Of these, at least 15 have been commenced in the past seven years. These include a number of claims by German investors against Argentina - among them by Siemens (registered in 2002), Wintershall (2004) and Hochtief (2007) - a well-publicised arbitration by Fraport against the Philippines (registered in 2003 and now subject to ICSID annulment proceedings), an ad hoc arbitration by the insolvent engineering company Walter Bau AG against the Kingdom of Thailand (resulting in a final award in July this year) and very recent proceedings by Deutsche Bank against the Republic of Sri Lanka (registered in March 2009). Germany is also on the receiving end of an investment treaty claim for the first time. In April 2009, Vattenfall, a Swedish power company, filed a request for arbitration with ICSID claiming breaches by Germany of the Energy Charter Treaty in relation to a new-build coal-fired power plant in Hamburg. The case is pending.

Change is also accelerating at a macro-political level. As discussed in more detail in the next section, the EC is positioning itself to play an increasingly important role in the investment protection law of its member states. In the long term, the future of the German BIT regime will depend to a large extent on decisions and developments at EU level. Whatever happens, with its experience of a half-century of BIT negotiations and foreign investment flows under BIT protection, and of managing the largest network of BITs in the world, Germany can be expected to remain a leading force in the future evolution of investment protection law just as it has been since its creation of the first BIT in 1959. Those readers who are interested in these and other issues in the field of BITs may wish to attend a major international conference at the beginning of December in Frankfurt when over 30 of the world’s leading arbitrators, political economists, government and industry representatives and counsel will be addressing and debating current best practice and appropriate responses to the most pressing policy issues affecting investment protection. Details are available at www.50yearsofbits.com.

Germany and the influence of the EU on arbitration and investment protection

Recent developments in the field of arbitration are just as much influenced by EU law as any other field of law in Germany. However, until now, the European legislature has been quite reluctant to touch upon arbitration in its legislation. At present, arbitration is excluded from the scope of application of the Brussels I Regulation (EC) No. 44/2001 by virtue of article 1(2)(d). This exclusion extends not only to arbitration proceedings as such, but also to arbitration-related court proceedings, for example, relating to the validity of arbitration agreements.

However, the latter might be about to change: in the well-known Heidelberg Report, commissioned by the European Commission in order to assess the application of the Regulation, the German authors Professors Hess, Pfeiffer and Schlosser come to the conclusion that the strict exclusion of proceedings relating to arbitration from state courts leads to adverse results for arbitral proceedings in the European Union. The professors make several recommendations. They suggest that court decisions relating to arbitration be governed by the Regulation. In addition, the authors make two crucial suggestions: first, in respect of ancillary proceedings concerned with the support of arbitration by courts, it is proposed that exclusive jurisdiction should be established at the seat of arbitration (new article 22(6)). Second, they suggest that once proceedings on the validity, existence or scope of the arbitration agreement (or all of the above) are pending at the court at the seat of the arbitration, all other proceedings concerning these matters should be stayed (new article 27A). As a consequence of the deletion of the exclusion in article 1(2)(d), court decisions relating to arbitration proceedings, for example, decisions setting aside an arbitral award or regarding the existence, validity or scope of the arbitral agreement (or all of the above), could be recognised under the Brussels I Regulation.

The suggestions in the Heidelberg Report served as the basis for the European Commission’s Green Paper which put them up for discussion to the public. Within Germany, reactions were mixed. The Federal Council of Germany (Bundesrat) agreed that the courts at the seat of the arbitration should have jurisdiction on matters of the existence, validity and scope of the arbitration agreement. The German Bar Association (DAV) agreed that the New York Convention still works well and should therefore remain untouched. According to the German Bar Association, a court of a member state should stay its proceedings when the validity of an arbitration agreement is contested before a court in the member state of the seat of arbitration. The reactions put forth by industry associations (German Chambers of Industry and Commerce (DIHK), Association of German Banks, German Insurance Association (GDV) and German Confederation of Skilled Crafts (ZDH)) voiced doubts about the plans of the European Commission, fearing that the application of the New York Convention would suffer. It remains to be seen whether the Heidelberg Report will have an influence on the EU’s approach to arbitration.

On a separate topic, but one also relevant to an important branch of arbitration, the EC is set to play an increasingly important role in the BIT practice of its member states. In recent proceedings brought to the ECJ by the EC against Sweden and Austria, the European Court determined that the retention of guarantees concerning the free movement of foreign investment capital in a member state’s BITs is incompatible with the EC Treaty. The continuance of these provisions in member states’ BITs thereby constitutes a breach of European Law. The ECJ stated explicitly that its judgment applies to every member state and stressed that each member must take appropriate steps to fully comply with EU law.

An even greater change is on the horizon in the form of the Treaty of Lisbon. Upon completion of the ratification process, the Treaty of the European Community will be renamed as the Treaty on the Functioning of the European Union (TFEU) and will provide Brussels with an extended range of competences. One area of extended competence is directly relevant to Germany’s BIT programme. Under the heading ‘Common Commercial Policy’ (CCP), articles 206 and 207 TFEU will vest the EU with the exclusive competence to regulate foreign direct investment. Upon transfer (directly upon the entry into force of the TFEU), the EU will be vested with the capacity to negotiate and sign BITs to regulate the treatment of foreign direct investments within the EU. The precise extent to which this competence will be transferred to the EU is a topic of intense debate. EU competence will be limited to ‘foreign direct investment’, since this restriction is included in the expression of the transfer of competence itself in article 207 TFEU. Therefore, indirect (or portfolio) investment will not be covered by the EU competence. This begs the issue of the precise definitions of ‘direct’ and ‘indirect’ investment. Recourse to IMF and OECD definitions might appear arbitrary in a jurisdictional context, with the consequence that attempts at precise, new definitions will be fraught with problems and generate continuing debate.

This example illustrates that a practicable solution to the question of competence will urgently be required to resolve such uncertainties, particularly since the Treaty of Lisbon contains no transitional provisions with the consequence that the transfer of competence will take place with immediate effect upon its coming into force. The obvious solution - to conclude ‘mixed’ agreements with the participation of both member states and the EU - would unfortunately be extremely cumbersome and a more efficient solution needs to be found. Given the formidable scale of the negotiation and ratification process ahead, it is essential that the EU draws on the comprehensive knowledge, experience and competence of member states in the BIT negotiation process to develop an effective and mutually beneficial EU investment protection policy and network. Germany, an international leader in the development and innovation of investment treaties with a well-developed export, trade and investment policy, is especially well-situated to take a leading role.

Lovells is a top-quality international legal practice, focused on the commercial and legal needs of its clients around the world. With over 3,000 people in 27 offices in Europe, the Middle East, Asia and the US, Lovells is one of the largest international legal practices. Lovells is recognised as one of the leading international law firms for litigation, international arbitration and alternative dispute resolution work. Its dispute resolution practice is unmatched in terms of size, international reach and breadth of experience. It is represented in all major jurisdictions, comprises over 80 partners and some 250 qualified legal staff globally and has been involved in dispute work in over 100 countries. Lovells’ international arbitration group is a distinct area of specialisation within the global dispute resolution practice. It has the resources and expertise to handle the most complex arbitrations worldwide, covering a wide range of industry sectors including engineering, IT, energy, insurance, international trade and financial services. The practice group regularly deals with parties, tribunals and witnesses from all types of legal and commercial cultures and frequently advises clients on the protections afforded by bilateral and multilateral investment treaties. The international arbitration practice has experience with many different arbitral rules, including the UNCITRAL rules and the rules of major international institutions such as AAA, CIETAC, DIS, ICC, ICSID, LCIA, and SIAC, and is familiar with the arbitral laws of many different countries. Lovells also advises on and drafts arbitration agreements and represents clients at all stages of arbitration proceedings (including drafting pleadings and submissions, collecting and evaluating evidence, acting as advocates at the hearing, representing clients during settlement negotiations and in enforcement proceedings). Many of its lawyers also act as arbitrators.