How bad is corporate arbitration now

"Essential for world trade" - arbitration tribunals shape international business

Deutsche Welle: Arbitration has been the subject of heated discussions in connection with trade agreements such as TTIP or CETA. What were the consequences?

Reinmar Wolff: Let me first briefly explain what arbitration tribunals are all about. Arbitration tribunals can only decide disputes if the parties have submitted to them. The parties determine how the arbitral tribunal is composed - usually each party appoints an arbitrator and these two agree on a third party who will act as chairman. The parties can also to a large extent agree which rules the arbitration procedure will follow. For example, you can determine the language of the proceedings or agree on confidentiality. Despite these freedoms, the decision of the arbitral tribunal, i.e. the arbitration award, has almost the same effects as a judgment of a state court of last instance.

To answer your question: The discussion about TTIP and CETA has led to the fact that arbitration is nowadays negatively perceived by the public. Arbitral tribunals are often equated with backroom justice, which gives international corporations special rights against states and undermines their democratically legitimized laws on environmental and consumer protection or social standards. Ten years ago nobody really knew what arbitration was. Today that discussion has demonized arbitration as a whole.

But isn't arbitration a tried and tested method in business in connection with international treaties?

Yes that's true. Arbitration is now the standard mechanism for resolving disputes arising from cross-border contracts. Most of such contracts contain an arbitration agreement, a clause according to which an arbitration tribunal will resolve disputes between the contracting parties. The criticism that was leveled at investment arbitration proceedings against states and which today shapes the general public perception of arbitration does not catch on with commercial arbitration tribunals. The public interest in transparency, for example, is much lower when two private companies argue with each other and the state is not involved at all.

What significance does international arbitration have for world trade anyway?

International arbitration is essential for world trade. On the one hand, this is due to the fact that it enables flexible and neutral dispute resolution. Nobody has to go to the courts in the country of their contractual partner whose language they do not speak, whose rules they do not know and whose neutrality they may not be convinced of. Rather, the parties choose the arbitrators themselves. In this way, the arbitral tribunal has the trust of both parties and can organize the arbitration process in such a way that it is fair to all. On the other hand, the arbitration award can be easily enforced in almost every country in the world against the party that has lost.

On what basis?

The so-called "New York Convention" of 1958 plays a key role in the success of international arbitration. It enables arbitration awards to be enforced abroad and thus addresses a central problem: It does not help to get a right to a court or an arbitration tribunal if you cannot enforce this decision. If the opponent does not comply with the decision voluntarily, one needs state authority, for example a bailiff, to enforce it. But he only takes action if his national law allows him to do so.

Reinmar Wolff, attorney and arbitration expert

A judgment by a state court can be enforced relatively easily within the EU. But once you leave the borders of the EU, enforcing a judgment abroad becomes quite difficult. Because this is decided by the law of the country in which the enforcement is to take place, and these rights are not standardized. It often plays a role whether, conversely, a decision from this country would also be enforced in Germany, and that can be difficult to determine. If it is not possible to enforce where the opponent has assets, the judgment of the state court is economically worthless.

It's all much easier for arbitral awards - thanks to the New York Convention, which makes it possible to enforce an arbitral award in each of its 160 member states according to simple and uniform rules. For comparison: The United Nations has a total of 193 member states. So the New York Convention applies almost everywhere in the world.

In your experience, are there countries in which the enforceability of arbitral awards is particularly difficult?

Yes, unfortunately there are, although that is a pleasantly small problem. Indeed, the New York Convention has enabled arbitral awards to be enforced worldwide using the same rules. That is the great advantage that this Convention offers. But there are also a few countries where enforcing arbitral awards tends to be difficult. Turkey or Russia are often mentioned in this context.

What about China?

China too, with China taking steps to get the problem under control. For example, a court that does not want to enforce a foreign arbitration award has to refer the matter to the highest court in advance.

Can you give an example to illustrate how such contracts that contain arbitration are structured?

This can be all cross-border contracts, for example a supply contract or a commercial agency agreement between a German company and its Chinese commercial agent. If there is a dispute between the contracting parties and the contract does not provide for a regulation, the action must be brought either to a German or a Chinese court. And that is precisely what the parties do not want: the German party does not want to go to a Chinese court and the Chinese party, conversely, does not want to go to a German court. For the sake of neutrality, it makes sense to agree on a court of arbitration and then let this neutral court of arbitration decide. Such an arbitration agreement typically stipulates that an arbitral tribunal should decide how many arbitrators are in the arbitral tribunal and how they are appointed, as well as which language and which law are to be used in the arbitration proceedings.

In this sense, "neutral" also means being at home in a third country?

That can be, but it doesn't have to be. Above all, neutral means that those who really decide the dispute - in this case the arbitrators - are actually independent and impartial.

How is Germany doing as a location for arbitration in an international comparison? Is Germany often chosen as a place of arbitration?

Germany is increasingly being chosen as a location, but unfortunately it is not yet fully exploiting its possibilities. However, efforts are being made to improve this, for example by adapting the law of arbitration or better marketing the advantages that the German legal system and German courts actually already offer today.

Which locations are particularly popular?

In Europe, for example, that would be Switzerland, France and Great Britain. Internationally, Hong Kong and Singapore play a major role.

Are there differences in which industries include such arbitration clauses in contracts?

In the international area, arbitration clauses can be found in almost all contracts. There are, of course, certain focuses. In some industries, no contract is concluded without an arbitration clause, for example in plant engineering. There are clearer differences in the purely national area, where, for example, construction matters (due to the expertise of the arbitrators) or corporate law disputes (due to the confidentiality of arbitration proceedings) are often brought to arbitration tribunals.

What are the advantages of these arbitration proceedings over state courts?

The main advantages lie in the combination of the freedom in structuring the arbitration procedure and the ease with which the award can be enforced. Because the parties choose their arbitrators, they can choose proven experts in the respective field. They do not have such options in the state court - there, business allocation plans assign the judges.

The judicial process is also usually public, while arbitration proceedings are mostly confidential. The parties can arrange arbitration in the way that best suits their dispute without being bound by rigid rules. Arbitration proceedings do not have a second instance, which saves time and money. Added to this are the advantages already described in terms of neutrality and the enforcement of the award.

The number of contractual partners in such contracts is virtually unlimited?

Correct. Agreements with more than two parties can of course also include an arbitration agreement.

Do you know of any major international projects in which this played a role?

A prominent example is the arbitration proceedings of the Federal Republic of Germany against the motorway toll consortium Toll Collect, in which a French company was also involved.

So now we've talked about the benefits. Are there any disadvantages?

Of course there are downsides too. Flexibility is a blessing on the one hand, but also a curse on the other. Anyone who makes unfavorable agreements is fundamentally bound by them. As always with contracts, you are bound to bad contracts once you have signed them. Another problem is typically the involvement of third parties. An example: A general contractor in construction has subcontractors. If he is sued by his client, the subcontractors may ultimately be to blame, but they are not also sued. Then the challenge is to get these subcontractors on board. This is relatively easy in a state court and quite difficult in an arbitration tribunal.

The interview was conducted by Klaus Ulrich.

The lawyer Dr. Reinmar Wolff, lecturer at the Philipps University of Marburg, among others, is a member of the advisory board of the German Arbitration Institute, editor of a commentary on the New York Convention and a member of the working group of the Federal Ministry of Justice and Consumer Protection to review German arbitration law.