Official Journal of the International Trademark Association by njw73786

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    Official Journal of the International Trademark Association




          Confusion, Dilution and Speech: First Amendment
          Limitations on the Trademark Estate: An Update
                         Michael K. Cantwell
   Materiality and Puffing in Lanham Act False Advertising
       Cases: The Proofs, Presumptions, and Pretexts
                     Richard J. Leighton
    Preventing Loss of Trademark Rights: Quantitative and
     Qualitative Assessments of “Use” and Their Impact on
                 Abandonment Determinations
                   Christopher T. Micheletti
           Considerations Regarding Dilution in Argentina
                 Iris Quadrio and Veronica Canese
      The Use of Arbitration and Mediation for Protecting
      Intellectual Property Rights: A German Perspective
                          Erik Schäfer
     Brief of Amicus Curiae the International Trademark
            Association in Support of Petitioner in
   KP Permanent Make-Up, Inc. v. Lasting Impression I Inc.
                 and MCN International Inc.



Vol. 94                   May-June, 2004                     No. 3
Vol. 94 TMR                                                                         695



THE USE OF ARBITRATION AND MEDIATION FOR
PROTECTING INTELLECTUAL PROPERTY RIGHTS:
         A GERMAN PERSPECTIVE∗

                               By Erik Schäfer ∗∗

                              I. INTRODUCTION
     In Germany, there is more circumspection than in the United
States about considering alternatives to dispute resolution in the
courts. Although arbitration is the only “real” alternative to state
justice in German experience, in the field of intellectual and
industrial property rights, arbitration is generally provided for
resolution of disputes only in license or research and development
agreements that have international connections (such as a party
from outside Germany). This is doubtless because, when compared
with other countries, disputes can be resolved in German courts
relatively fast and at a fairly reasonable cost based on the statute
governing court costs (GKG)1 and the statute relating to lawyers’
charges (BRAGO).2 In addition, there is great confidence in the
specialist courts that are exclusively competent in intellectual
property matters by their very nature.3
     Other dispute resolution methods, characterized by interest-
based discussions that are moderated by an impartial third person
without decision-making powers or the possibility of obtaining a
directly enforceable result (e.g., mediation), are increasingly known


    ∗
       This paper is based on a lecture given to the Association of Patent Attorneys of
Nordrhein-Westfalen in Düsseldorf, Germany.
     ∗∗
        Partner, Cohausz & Florack, Düsseldorf, Germany, Associate Member of the
International Trademark Association.
    1. Gerichtskostengesetz—Federal Statute on Court Fees; see http://jurcom5.juris.de/
bundesrecht/gkg/.
    2. Bundesrechtsanwaltsgebührenordnung—Federal Ordinance on Attorney Fees [as
of 01.07.2004 Rechtsanwaltsvergütungsgesetz—Law on Attorney Fees]; see http://
www.brak.de/seiten/pdf/GebO-Englisch%20in%20EuromitAnlagen; http://jurcom5. juris.de/
bundesrecht/bragebo/index.html.
     3. § 143 Patentgesetz—Patent Act, see http://jurcom5.juris.de/bundesrecht/patg/
index.html; § 140 s. Markengesetz—Trade Mark Act, see http://jurcom5.juris.de/
bundesrecht/markeng/index.html; Art. 91s. Council Regulation (EC) No. 40/94 of 20
December 1993 on the Community trade mark, see http://oami.eu.int/en/aspects/
reg/reg4094.htm;      § 15   Geschmacksmustergesetz—Registered      Design     Act,   see
http://jurcom5.juris.de/bundesrecht/geschmmg/index.html; Art. 82 Council Regulation (EC)
No. 6/2002 of 12 December 2001 on Community Designs, see http://oami.eu.int/EN/
aspects/pdf/reg2002_6.pdf; § 27 Gebrauchsmustergesetz—Utility Model Act, see http://
jurcom5.juris.de/bundesrecht/gebrmg/index.html; and state governmental decrees.
696                                                                      Vol. 94 TMR

in Germany. However, many German attorneys and their clients
doubt the usefulness of these methods because they fail to see the
point of a neutral third-party intermediary when their own
negotiations have proved fruitless. They tend to expect, as
required by German law of procedure, that the judge will actively
promote settlement during trial. Practitioners in cross-border civil
litigation and international arbitration know that, in jurisdictions
other than Germany and a few other German-speaking countries,
judicially-initiated settlement efforts may not be expected.
Therefore, German parties may be more easily persuaded to try
alternative dispute resolution (ADR) in international settings, as
compared with purely “internal” disputes.
     From a more international perspective, the trend towards
specialization coupled with legal services becoming more
“professionalized” has led to a situation where those specializing in
trademarks, licensing, franchising and merchandising are not
sufficiently familiar with the potential and pitfalls of ADR, even if
ADR clauses are included in the contracts they draft. This may
cause avoidable difficulties if a dispute arises under such
agreements. Therefore, intellectual property attorneys should be
sufficiently familiar with alternative dispute resolution methods so
they can recognize when ADR is likely to lead to a more
economically beneficial result than the decision of a state court.
     Another important reason for examining alternative methods
of dispute resolution is related to increasing use of the Internet
because service providers commonly invoke ADR methods to
resolve various disputes, for example, the ICANN procedures for
settlement of disputes. Other domestic domain registries
administered by institutions like the WIPO Arbitration and
Mediation Center have also adopted ADR procedures.4 An
increasing number of other institutions also offer online dispute
resolution.     Current     developments     include     sector-based
alternatives5 to dispute resolution systems, which are partly
housed in portals for B2B electronic commerce.6
     Finally, while it can be assumed that many disputes will
concern contractual performance, issues relating to trademarks
and/or other aspects of intellectual and industrial property
protection are likely to arise as well. In international relations,
above all, intellectual property practitioners cannot avoid these
privately organized procedures.


   4. For dispute resolution service providers           accredited   with   ICANN,   see
www.icann.org/dndr/udrp/approvedproviders.htm.
     5. See, e.g., WIPO services http://arbiter.wipo.int/disputes/index.html, ICC DOCDEX
dispute resolution http://www.iccwbo.org/drs/english/docdex/all_topis.asp, or AAA special
Rules http://www.adr.org/index2.1.jsp?JSPssid=15707.
    6. See, e.g., AAA online services https://apps.adr.org/webcase2/FrontPage.htm.
Vol. 94 TMR                                                                                697

     This article will consider the general prerequisites for ADR
from a German perspective, including the various available
methods and proceedings before arbitral tribunals and in civil
litigation in state courts.

                  II. CONFLICT AND THE CHOICE OF
                         AN ADR PROCEDURE
     Any kind of ADR requires the parties’ agreement, either before
or after a dispute arises, to refrain from taking the dispute initially
to a state court.7 There are only a few exceptions, such as the
German law relating to employee-inventors,8 in which parties are
obliged by rules or law to initially undertake ADR proceedings.
     Since parties to a dispute are rarely disposed to agree,
especially where a trademark infringement has allegedly occurred,
this means that ADR’s chief role in intellectual property practice is
likely to be in the realm of contracts, especially long-term
contracts, where the parties agree to alternative dispute resolution
at the outset of their relations. Examples of such contracts are:
         (a) license agreements;
         (b) contracts with a licensing aspect, such as franchising
     and other distribution agreements,9 merchandising agree-
     ments, film production and other copyright agreements;
         (c) research and development contracts;
         (d) complex agreements on prerogatives and delimitations
     relating to trademarks; and
         (e) agreements relating to the exploitation of intellectual
     property rights, such as pooling arrangements, contracts with
     freelance inventors and the like.
     Difficulties encountered in the performance of a long-term
contract can upset the relationship between the parties, sometimes
with drastic economic consequences. In such situations, because


     7. In this article, the term “state court” means any court set up by a state, i.e., state
courts and federal courts.
     8. Under this law, disputes between employed inventors and employers relating to
inventions made by the employee while working for the employer are submitted to the
permanent conciliation office of a statutory conciliator at the German Patent and
Trademark Office. The conciliator, having heard the parties, issues a settlement proposal
that becomes final and binding on the parties, if neither of them objects within a statutory
period of time. If a timely objection is filed, the dispute may be submitted to the state courts.
However, after the labor contract has come to an end, the conciliation procedure is no longer
a mandatory requirement.
    9. In the author’s experience, disputes arising from all forms of distribution
agreements often comprise issues concerning registered trademarks, trade designations
and/or trade dress.
698                                                                          Vol. 94 TMR

contractual and legal rights are often designed to achieve results
that do not—or only partly—coincide with the economic aims of the
parties, it may be in the best interest of all concerned to seek a
settlement. From the parties’ perspective, the available legal
remedies/claims will not always afford the most desired, i.e.,
economically useful, result. Settlement discussions that are not
exclusively centered on the perceived legal rights of the parties,
but rather their needs, may allow solutions, which could not have
been ordered by a judge or arbitrator because they consist of a
modification of the original agreement. It will be more difficult to
achieve a settlement of this kind the longer a dispute lasts, other
than where there is financially-based dispute weariness. At the
same time, as disputes continue, parties will assume a more
hardened stance and their positions of attack or defense and
respective versions of events become internalized and emotionally
charged, often preventing a solution that takes economic needs
into account. No signs of weakness can be revealed, which makes it
difficult to take the first step to conciliate. But by prolonging this
first step, the resulting agreement rarely leads to a win-win
situation, but rather simply splits the baby. Both practical
experience and research have shown that the involvement of a
third-party intermediary at an early stage can soften the parties’
hardened positions, even when the efforts of the parties and their
representatives were initially unsuccessful.10
     To assist those who draft agreements or others who face actual
dispute in selecting the method most likely to serve their needs,
this article will first consider conciliation and mediation based on
negotiations. Failing either one of these options, the parties can
turn to the courts or an agreed-upon arbitral tribunal. Finally, this
article will then explore arbitration as an alternative to state
justice.

               III. COMPLEMENTARY METHODS OF
                DISPUTE RESOLUTION WITHOUT A
              BINDING DECISION BY A THIRD PARTY
                                     A. Mediation
    Mediation negotiations are led by a neutral third-party
intermediary (mediator).11 Its distinctive feature is that a mediator


   10. For a highly instructive study of conflict dynamics, see Friedrich Glasl,
Konfliktmanagement. Ein Handbuch für Führungskräfte, Beraterinnen und Berater (Bern,
1997). English summary by T. Jordan at http://www.mediate.com/articles/jordan.cfm.
    11. For an introduction with extensive bibliographical references, see Jörg Risse,
“Wirtschaftsmediation” (2000) Neue juristische Wochenschrift 1614. On negotiating
techniques in general, see, e.g., R. Fischer & W. Ury, Getting to Yes (2d ed., 1991) [hereafter
Getting to Yes]; W. Ury, Getting Past No (1993) [hereafter Getting Past No]; Robert H.
Vol. 94 TMR                                                                              699

has no power to render a decision; the parties retain their full
freedom to make decisions at all stages. Mediation is further
characterized by the fact that it is not limited to legal issues. The
emphasis instead is on the parties’ interests, such that narrowing
down the field of negotiation to legal claims or positions that have
been asserted should be avoided. Rather, narrowing down the
complexity occurs by identifying and concentrating on the parties’
economic needs and interests.
     What distinguishes mediation from ordinary negotiating
techniques is the commonly overlooked fact that it makes use of
techniques calling for knowledge in the fields of communication
science and behavioral psychology. It is essential to recognize that
in situations of conflict, communication is extremely disturbed.12
The two sides no longer listen to each other and/or misunderstand
each other on account of expectations they are often unable to
rationalize. This may occur if the participants are afraid to “lose
face,” if they have a stake in the dispute because they will be held
accountable in their firm, or if they have focused too early only on
legal issues and become blind to the opportunity encompassed in
the resolution of any conflict.
     In principle, conflicts are seen as multi-layered in mediation
and they cannot be grasped using legal criteria alone. Mediation
thus requires the mediator to be conversant with specific
negotiation techniques and to have experience with their practical
application. Using the example of the so-called “Harvard” concept,
the discussion below briefly outlines what this entails.13
     According to this model, mediation breaks down into various
phases:
          (a) Preparatory phase, in which the mediator is chosen
     and the ground rules for the ensuing proceedings are
     discussed.
          (b) Determination of the subject matter of the conflict by
     the parties and the mediator. During this phase, it is also


Mnookin, Scott R. Peppet & Andrew S. Tulumello, Beyond Winning: Negotiating to Create
Value in Deals and Disputes (2000), http://www.beyondwinning.com/index.shtml.
   12. Jennifer E. Beer/Eileen Stief, The Mediator’s Handbook, 67-84 (New Society
Publishers 3d. ed. 1997).
    13. The “Harvard Concept” is an empiric approach to negotiation that includes
normative elements. Basically, it aims to promote a “negotiation culture” that allows a
structured and “rational” problem solving approach. One key phrase is “separate the people
from the problem.” Other characterizing phrases are “move from focusing on positions to
concentrating on interests,” or “do not try to force your perception of the ‘right’ solution on
the other party, try to identify the problem to solve it jointly,” or “agree on a negotiation
process that discourages playing foul tricks.” This collaborative negotiation technique is
increasingly known in Germany. It is likely to be accepted for cultural reasons. Even though
Germans are not really less emotional or irrational than others, they tend to prefer an
objective, problem-focused approach in negotiations.
700                                                                         Vol. 94 TMR

      necessary to clarify the extent to which rifts between the
      participants affect the factual issues. The aim is to separate
      issues pertaining to the parties’ relations from factual
      matters, in order to concentrate on the factual issues or the
      interests at stake. In this phase the parties can also be made
      aware of their Best Alternative To a Negotiated Agreement
      (BATNA) and their Worst Alternative To a Negotiated
      Agreement (WATNA). Often, but not always, the WATNA
      would be litigation.14 Lastly, the aim of this phase is to
      encourage the parties not to focus single-mindedly on their
      negotiating positions and rights but to shift their attention to
      the underlying interests.15 Essentially this is achieved by
      questioning the rationale behind the parties’ positions as
      voiced in the beginning.
          (c) Setting of criteria acceptable to the parties that are to
      be satisfied by a mutually-agreed settlement. Options, i.e., the
      beginnings of a solution, are then jointly worked out.
          (d) Evaluation of the options in light of the agreed-upon
      criteria and reduction of the number of possible solutions.
      Normally this is achieved by identifying potential adverse
      effects of the identified options from the perspective “what
      would happen if?”
          (e) Decision regarding the acceptance of a solution,
      followed by its implementation. This often requires so-called
      “log rolling.” For example, some elements of a possible solution
      may be of more interest to one party than the other and vice
      versa. Combining these elements may allow an optimized
      settlement agreement. To re-establish confidence, often


    14. For example, if a licensor terminates a trademark license for cause and the licensee
only needs 6 to 12 months to fully switch to another trademark as it had planned for some
time, then delay provoked by litigation may better serve the licensee’s needs than accepting
an agreement that would entail more expense than litigation, especially if licensee believes
that it has a reasonable chance to win the litigation. If licensor has a good chance of
obtaining a cease and desist injunction that is enforceable irrespective of an appeal being
filed, this evaluation could drastically change. Hence, the BATNA / WATNA largely depend
on factors that may change over time.
    15. Edward de Bono is probably right when stating in his book—de Bono’s Thinking
Course (rev. ed. 1994) —that humans tend to employ more intellectual effort in defending or
imposing solutions, which were arrived at by far less intellectual effort and intuition.
Mediation aficionados also use the “orange” parable: Two girls have a dispute about who
should get the only orange that is available in the household. The mother intervenes, cuts
the orange in half, one for each girl. Later she finds the skin of one half of the orange and
the fruit pulp of the other. It turns out that one girl had wanted to eat the pulp and the
other had used the skin for a baking preparation. Had they talked about their needs each of
them could have obtained all she wanted and not only half of it. Of course, real life
commercial disputes do not always have the potential for a 100% win-win outcome, but
there is often a huge potential for solutions that are not win-lose and that are not always
obvious at first sight.
Vol. 94 TMR                                                                             701

     damaged by a dispute, the parties may also wish to agree on
     collaborative procedures for monitoring the implementation of
     their agreement.
     The techniques used by the mediator include:
         (a) Guiding the parties through active listening, i.e.,
     questioning in such a way as not to predetermine the outcome,
     combined with feedback recapitulating what has been
     understood without making any judgment. It is important that
     mediators should not allow their personal conclusions or
     opinions to point the parties in a certain direction too early in
     the proceedings.
         (b) Restoring and ensuring effective communication
     through the designated techniques and through insistence
     that the parties also distinguish between factual and
     emotional matters. This reduces tension and makes the
     parties feel that they are being understood.
         (c) Acting as moderator in the discussions by:
             (i) Encouraging the use of creative techniques like
         brainstorming to reveal where resolution is possible;
             (ii) Using visual aids such as flip-charts, metaplan
         cards16 and other tools to chart the progress of proceedings
         phase by phase;
             (iii) Conversing one-to-one with individual parties in
         critical situations, in order to decrease tension or overcome
         impasses in the negotiations.
     In an ideal situation, these techniques should allow the
participants to achieve a solution that is beneficial to all, one in
which a given amount is not divided by way of compromise, as
often happens in conciliation proceedings. This is the reason for
allowing greater room for, and widening the stated aim of, the
mediation.
     Mediation is possible at any time before, during or after a
dispute comes before a state court or an arbitral panel, and is
especially suited to situations in which the parties must
collaborate permanently or over a long period of time. Mediation
lends itself especially to joint research and development projects
that come to a standstill because of differences of opinion. No court
or even arbitral panel can act quickly enough to resolve difficulties.


    16. “Metaplan” originally is a method of visualization for planning purposes whereby a
“flow chart” is generated. It consists of a huge piece of cardboard stuck on the wall on which
small square, oval, round and other shaped pieces of cardboard may be affixed with pins.
Interrelations may be represented by arrows and lines drawn on the cardboard. The
advantage is that the small cards can be moved around on the big cardboard to dynamically
adjust the visual representation of the train of thought.
702                                                                       Vol. 94 TMR

Moreover, a court decision based on claims and rights would
generally not be conducive to the success of such projects. It is also
conceivable that mediation results in the parties’ reaching a
solution that ensures the success of a project and narrows the
dispute to financial claims to be settled legally, or at a later date.
There are no disadvantages to participating in mediation, other
than the risk of spending time and money to no avail, since the
parties retain full command throughout and can terminate the
proceedings at any time.

              B. Hybrid Dispute Resolution Procedures
    Practice has led also to the development of “hybrid” methods
that may bridge the gap between procedures based on negotiation
and those aimed toward reaching a final decision.
    The following variants are still seldom used in intellectual
property related disputes in Germany, although German parties
have been participating in such procedures internationally,
especially in the context of huge construction and engineering
projects:
        (a) Med-Arb, in which arbitration proceedings follow a
    failed mediation.17
        (b) Last Offer Resolution, in which the parties present to
    the neutral their confidential offers of conciliation. If
    mediation fails, the mediator is authorized to select the offer
    that is closer to a reasonable settlement and to declare it to be
    contractually binding upon the parties. This forces the parties
    to submit offers that are as moderate as possible.
        (c) Minitrial, in which the mediator is flanked by a
    member of the senior management of each party.18 The parties
    present their positions, as in a trial, but within strict time
    limits. The members of the senior management then negotiate
    under the guidance of the mediator. In this procedure the
    emphasis is generally on legal issues. There is usually no
    provision for an enforceable award.
        (d) Early Neutral Evaluation, in which the neutral
    provides the parties with her/his views on the likely outcome
    of the dispute if it were litigated or arbitrated. This method
    can also be used for the evaluation of technical matters.




   17. See, e.g., WIPO publication No. 446 (E) Chapter “Recommended Clauses” p. 91s.;
ICC ADR Rules and Guide to ICC ADR, ICC publication No. 809 (E) pp. 5, 26-27.
   18. See, e.g., David W. Plant, “Resolving International Intellectual Property Disputes,”
ICC Publishing S.A. 1999, p. 23s.
Vol. 94 TMR                                                                          703

                       C. The Traditional Approach
     Practitioners may also make use of conciliation procedures as
traditionally understood, in which the mediator submits a
conciliatory proposal based on what is deemed to be equitable
and/or an assessment of the claims made by the parties. This
approach has a long tradition in Germany and is close to what
happens during settlement discussions led by the judge in a civil
case.19 This is often what German parties have in mind when
discussing the option to involve a third party as facilitator.
     A variation of this approach is to empower the neutrals to
determine the parties’ contractual rights and duties in accordance
with their free discretion, if the parties fail to agree (known as
Expert       Determination/Schiedsgutachter).20      Because     this
determination of factual or legal issues would concern contractual
rights, it is not directly enforceable as would be an arbitral award.
Its enforcement would require the intervention of a state court or
arbitral tribunal that, depending on the applicable law, could
exercise a certain control.21As far as intellectual property rights
are involved, this dispute resolution method is varied in Germany
by the statutory procedure prescribed by the conciliation board
under the law relating to employee inventors.22 This procedure
provides for the decision (“settlement proposal”) to become binding
and enforceable if neither party objects within a statutory period of
time. In all of these procedures, the mediator submits a legal
rather than an interest-based solution to the parties for their
acceptance, on the basis of his or her experience and recognized
authority. Generally, in this method of ADR the neutrals selected
by the parties normally have a legal background that predisposes
them to resolve disputes in this manner.




    19. The German Federal Code of Civil Procedure now requires the trial judge to make
an early settlement attempt, unless this is clearly without any prospect.
    20. This is provided in § 317 et seq. of the German Civil Code (BGB)—
http://bundesrecht.juris.de/bundesrecht/bgb/htmltree.html.       When    drafting  dispute
resolution clauses, the parties should exercise all reasonable care to make clear whether
they opt for this type of expert determination or (binding) arbitration.
     21. E.g., in Germany such determination under § 317 BGB could be revised by a court
if it is inequitable/unconscionable.
   22. See § 28 ss. of the Employed Inventors Act at http://jurcom5.juris.de/bundesrecht/
arbnerfg/index.html.
704                                                                          Vol. 94 TMR

                        IV. PRIVATE ARBITRATION
                A. Arbitration as the “Real” Alternative
                            to State Justice
     Private arbitration, like state justice, aims to settle a legal
dispute through a final, binding decision. It is characterized by the
fact that the parties to a dispute have agreed, before or after their
conflict arises, that the dispute will be finally decided not by a
state court but by an arbitral panel. The effect of such an
agreement is to rule out recourse to state courts and to require the
matter to be referred to arbitration.23
     To a large extent, the manner in which proceedings are
conducted is decided by the tribunal, with input from the parties,
provided certain minimum standards are observed. There can be
no appeal of the final decision unless the parties have agreed
otherwise, e.g., by providing for the possibility of appeal by referral
to a second “higher” arbitral tribunal. This would require a specific
agreement to arbitrate in that manner, which normally will not be
made because the parties select arbitration to obtain a fast final
decision that avoids the hazards of a “march through the
instances’” of state court systems.
     When an arbitral award is accepted and performed by the
parties, there is no need for the state to intervene. However, this
does not mean that arbitration takes place outside the bounds of
law. Indeed, it is enshrined in the legal system of most countries
as, in principle, an equal alternative to state justice. For instance,
§ 1055 of the German Code of Civil Procedure (ZPO)24 clearly
states that an award shall have the same effect as a final court
judgment. According to ZPO § 1032(1), a court must reject as
inadmissible claims relating to a matter covered by an arbitration
agreement. Similar provisions are to be found in the arbitration
laws of many other countries.




    23. Normally, the agreement to arbitrate should also include: (i) a determination of the
place of arbitration; (ii) the number of arbitrators (otherwise determined in accordance with
eventually agreed upon arbitration rules; and (iii) the language(s) of the arbitral
proceedings. Unless institutional arbitration rules are selected, agreeing to the place of
arbitration is important because it establishes a nexus of the arbitration agreement with
the arbitration law and competent court of this location, which may be called upon to
overcome problems in the constitution of the arbitral tribunal or procedural irregularities.
Hence, the place of arbitration must be chosen wisely.
   24. The German Code of Civil Procedure is a federal law dating back to the 19th
century, which governs all civil procedures, irrespective of the court with jurisdiction in any
case or arbitration. There are no state or court specific supplementary or other rules. An
English version of the relevant 10th book of the German Code of Civil Procedure can be
found at http://www.internationaladr.com/germany1.htm.
Vol. 94 TMR                                                                                 705

                         B. Interrelationship Between
                         Arbitration and State Courts
                         1. Interrelationship Due to
                        Disturbances or Irregularities
     Disputes during arbitration may arise when (i) a party fails to
comply with an arbitration agreement, (ii) the arbitration
proceeding is not conducted correctly and a party objects, or (iii) a
party refuses to accept the arbitrators’ decision. In the first
instance, the arbitral tribunal does not yet exist. In the second, the
likelihood is that the losing party refuses to accept the decision
reached by the panel. In the third, the arbitral tribunal has ceased
to exist, so it is impossible for it to set aside its own award or
change the award.
     In such cases, the only avenue for a party to pursue its claim
is generally through resort to a state court. Therefore, national
arbitration laws contain provisions relating to the following powers
available to a state court:
         (a) the constitution of the arbitral tribunal;25
         (b) the challenge to, and replacement of, arbitrators;26
         (c) applications for setting aside of awards;27 and
         (d) applications to enforce awards.28
     The first two items listed above involve “subsidiary” powers of
state courts that only come into play if the parties do not cooperate
and have not agreed on a third party to which these powers are
delegated.29 Measures relating to the constitution of the arbitral
tribunal are necessary only if the parties have not agreed on a
procedure for selecting the panel. Difficulties may be encountered
in appointing the members of the arbitral tribunal because of a
party’s refusal to cooperate.


    25. See § 1035 ZPO [http://www.dis-arb.de/]; FAA (US) Chap. 1, Sec. 5
[http://www.adr.org/index2.1.jsp > search for Federal arbitration Act]; UNCITRAL Model
Law Art. 11 [http://www.uncitral.org/english/texts/arbitration/ml-arb.htm]. These arbitra-
tion laws are only referred to as examples. For other arbitration laws, search the Internet at
sites such as http://www.eurolegal.org/arblaws.htm#CKO; http://www.kluwerarbitration.com/
arbitration/arb/default.asp; http://www.lib.uchicago.edu/~llou/intlarb.html; http://www.laweye.de.
   26. See §§ 1036-1039 ZPO; UNCITRAL Model Law Art. 12-15.
  27. See §§ 1059 ZPO; FAA (US) Chap. 2, Sec. 10, 12, Chap. 2, Sec. 201; UNCITRAL
Model Law Art. 34.
    28. See §§ 1060-1061 ZPO; FAA (US) Chap. 3, Sec. 301; New York Convention on
Recognition   and     Enforcement      of   Foreign    Arbitral Awards Art. V, at
http://www.uncitral.org/english/texts/arbitration/NY-conv.htm.
    29. See, e.g., § 1035(1) ZPO; FAA (US) Chap. 1, Sec. 5; UNCITRAL Model Law Art.
11(2). Please be aware that some municipal arbitration laws may provide for a judicial
review of decisions of arbitration institutions and other third parties on challenges at some
stage.
706                                                                       Vol. 94 TMR

     National arbitration laws may provide how the members of
the arbitral tribunal are to be appointed when the parties are
unable to agree on whom to select30 and have not agreed on
arbitration rules and/or an appointing authority.31 Generally,
applications for such decisions are made in the competent court
under the legal procedure in force at the agreed place of
arbitration.32 If no place of arbitration has been agreed upon and
both parties are within the jurisdiction of the courts of the same
country, the relevant courts of that country will be competent.33
     In cases with a foreign connection, if the parties have not
agreed upon the place of arbitration or a procedure whereby it will
be fixed by a third party, considerable problems may arise relating
to jurisdiction, especially where there are competing jurisdictions.
For example, if Germany is the place of residence of a party or, in
the case of a legal entity, is the place where it has its legal seat,
German courts will have jurisdiction over such party in the
domestic domain pursuant to ZPO § 1025(3). If the other party is
at the same time a resident of or established in a country which,
like Germany, has adopted an arbitration law based on the
UNCITRAL Model Law34 or resembling it in content, its court
would also have jurisdiction by reason of place and subject
matter.35
     Likewise, the courts will have jurisdiction by reason of place
and subject matter under the legal procedure at the place of
arbitration that will hear challenges to, or the replacement of,
arbitrators, unless the parties have agreed otherwise.36 Questions
concerning whether a third party’s decision relating to a challenge
or request for replacement may be reviewed by the competent
court are similarly determined in accordance with the arbitration
law binding upon the court to which the matter is referred,
together with the court’s own procedural law. Even when the


   30. See supra note 25.
   31. See Art. 8 ICC Arbitration Rules [http://www.iccwbo.org/court/english/
arbitration/rules.asp]; Arts. 5-6 WIPO Arbitration Rules [http://arbiter.wipo.int/
arbitration/rules/index.html]; Art. 14 UNCITRAL Arbitration Rules [http://www.
uncitral.org/english/texts/arbitration/arb-rules.htm].
   32. See, e.g., § 1062(1) No. 1 ZPO; FAA (US) Chap. 2 Sec. 204.
   33. E.g., § 1025(3) ZPO.
   34. Supra note 25.
   35. International multi-forum litigation is a very thorny topic. The settings may vary
greatly and answers as to how such a situation can be resolved may only be given having
due regard to the procedural laws of the involved countries (e.g., §§ 1025, 1062 ZPO; FAA
(US) Chap. 2, Sec. 204/205) and the existing international treaties to which the countries
have subscribed (in Europe, e.g., Council Regulation (EC) No. 44/2001 of December 22, 2000,
On Jurisdiction and the Recognition and Enforcement of Judgments in Civil and
Commercial Matters—OJ. L 011, 16/01/2001 p. 50-52 and its transpositions into state law).
   36. See supra note 29; cf. ZPO §§ 1036, 1037 and 1062(1) No. 1.
Vol. 94 TMR                                                                        707

parties have not agreed upon a place of arbitration and have not
designated a third party to fix the place, the question of
jurisdiction may still arise on rare occasions at the stage of
proceedings when challenges and requests for the replacement of
arbitrators are generally made. Where the ZPO is applied, the
arbitral tribunal will normally already have fixed the place of the
arbitration proceedings pursuant to ZPO § 1043(1). Similar
provisions may be found in the arbitration laws of other countries.
     Decisions over applications for the setting aside of awards are
also normally taken by the courts that have jurisdiction by reason
of place and subject matter under the legal procedure at the place
of arbitration. Such decisions will be taken on the basis of the
relevant arbitration law, as can be seen from ZPO § 1059,
combined with § 1062(1) No. 4.37
     Decisions over applications for the recognition or performance
of awards in the international field are not the exclusive
prerogative of the competent court at the place of arbitration. This
is quite natural because the compulsory fulfillment of awards,
which are likened to judgments, lies exclusively in the hands of the
judicial bodies of the state in whose territory the award is to be
performed. An arbitral tribunal has no power of enforcement for
this purpose.
     Foreign38 (international) awards are better suited than foreign
judgments when it comes to enforcing performance in a particular
country because foreign judgments must also be declared
enforceable in a given country. As regards both awards and foreign
judgments, the conditions for enforceability are laid down in the
law binding the competent court in the country of performance
(e.g., ZPO §§ 722-723, 1059-1061). In international legal relations,
considerable difficulties may be encountered in connection with the
enforcement of foreign judgments, unless the country in which the
judgment was delivered and that in which it is to be enforced have
entered into a treaty, which may also take the form of a
multilateral international convention. An example in Europe is the
Brussels EEC Convention on Jurisdiction and the Enforcement of
Judgments in Civil and Commercial Matters of 27 September
1968.39 However, it cannot be assumed that there will be a treaty
of this kind when the relationships extend further afield. For
private international arbitration, on the other hand, the situation
is more favorable, thanks to the United Nations Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (known



    37. See, e.g., § 1062 ZPO; FAA (US) Chap. 2 Sec. 204s; New York Convention 1958 Art.
VI and V.1 (e); UNCITRAL Model Law Art. 6.
   38. See, e.g., Art. I.1, Art. III New York Convention 1958.
   39. As revised; see supra note 35.
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as the New York Convention 1958) of 10 June 1958.40 To date, 129
countries including Germany and all other major industrial
nations are parties to this convention, under which the recognition
and performance of foreign arbitral awards can be refused only on
the grounds of specific and important procedural defects.41 There is
no provision for a review of the decision on the merits.42 This
unification of the conditions of enforcement for international
arbitral awards represents a substantial advantage for
international arbitration. The mere knowledge of relatively easier
enforceability of awards abroad may induce parties to fulfill
international awards without resort to enforcement mechanisms.

               2. Court Support for Arbitral Tribunals
     Arbitration laws sometimes include provisions authorizing the
competent courts at the place of arbitration, at the request of a
party or sometimes also the arbitral tribunal, to lend support when
specific steps need to be taken in the course of the proceedings. As
arbitrators do not have any power to compel (e.g., the appearance
of witnesses), the court to which an application is made may be
authorized to summon the witness to appear as if before a state
court. In many countries this admittedly presupposes that the
witness is to be found in the country where the application is
made, which would be the exception rather than the rule in an
international arbitration. Alternative regulations apply in this
matter in Germany, for example, where ZPO § 1050, combined
with § 1025(2), allow foreign arbitral tribunals or parties engaged
in foreign arbitral proceedings to apply to German courts for such
support.

      3. Competing Jurisdiction for Provisional Measures
    In some circumstances, state courts are empowered to take
provisional measures even when it has been agreed that an
arbitral tribunal should otherwise have exclusive jurisdiction.
Whether or not arbitral tribunals are authorized to take such
measures varies considerably from one country to another.43 There
is often no legal provision for provisional orders made by an
arbitral tribunal to be enforceable even within the country where
they are made. This applies in particular to decisions that take the
form of an order but, irrespective of the applicable procedural law,


   40. See supra note 28.
   41. For contracting states, see http://www.arbiter.wipo.int/arbitration/ny-convention/
parties.html.
   42. See supra note 28.
   43. For Germany, see §§ 1033, 1041 ZPO.
Vol. 94 TMR                                                                            709

also to provisional measures in the form of awards. Moreover, even
an award that is admissible will need to go through the legal and
sometimes lengthy and costly recognition or enforcement
procedure. There is also the practical problem that provisional
measures may be necessary before the arbitral tribunal has been
constituted. The time required for the constitution of the arbitral
tribunal and setting in motion of the arbitration procedure is
normally irreconcilable with the urgent need for quick solutions.
Thus, national arbitration laws that allow arbitral tribunals to
take provisional measures also provide that an arbitration clause
does not prevent making a provisional application to a state court,
even when the arbitral tribunal otherwise retains exclusive
jurisdiction over the principal issues.

       4. Limits to What May Be Submitted to Arbitration
     If issues relating directly or indirectly to the validity of a
registered trademark or other registered intellectual property
right are submitted to arbitration, the question arises whether the
arbitral tribunal has the power to decide the validity issue or
whether it must decline jurisdiction. This question may be
examined differently at the place of arbitration under the laws of
the country where an arbitral award will be enforced. This issue
may arise because registered intellectual property rights are
granted by act of government after an examination procedure
whereas the laws of numerous countries reserve annulment
proceedings to the exclusive jurisdiction of state courts. A country
may allow such an issue to be decided by an arbitration panel with
effect only inter partes, i.e., for the parties to the arbitration.
Because national laws differ in this regard, this issue should be
examined on a case-by-case basis.44 In Germany, the issue is still
undecided insofar as patent validity issues are concerned because
there is no decision by the German Federal Court that could serve
as precedent. Twenty years ago it was generally believed that
validity issues were excluded from arbitrability.45 Some
commentators still adhere to this opinion.46 However, increasingly
other commentators adopt the view that arbitrators may decide



    44. See, e.g., David W. Plant, “Resolving International Intellectual Property Disputes,”
ICC Publishing S.A. 1999, at pp. 26-39; Swiss Arbitration Association - ASA Special Series
No. 6, 1994 (Geneva) “Objective Arbitrability—Anti Trust Disputes, Intellectual Property
Disputes” especially the report by Julian D.M. Lew at p. 44ss.; Bernard Hanotiau
“L’arbitrabilité des litiges de propriété intelelctuelle: une analyse comparative,” ASA
Bulletin Vol 21, No. 1, 2003, Kluwer Law International, 2003, pp. 3-16.
   45. The legal basis under the new German arbitration law would be § 1030(3) ZPO.
    46. E.g., Baumbach/Lauterbach/Albers/Hartmann “Zivilprozessordnung,” § 1030, No.
8.a) (61st ed. 2003,); Musielak “Zivilprozessordnung” § 1030, No. 3 (by Voit) (3d ed. 2003).
710                                                                        Vol. 94 TMR

such matters inter partes.47 However, even if the issue remains
open until the German Federal Court has given a ruling, the
absence of reported precedents for Germany seems to confirm that
the arbitrability issue does not arise often in disputes that are
submitted by the parties to arbitration. Taking into consideration
that such issues normally arise in infringement proceedings where
no contract and—consequently—no agreement to arbitrate exists,
this appears to be expected. Moreover, intellectual property
related disputes under contractual agreements tend to center
around breaches of warranties and/or contractual obligations,
which are arbitrable.

                C. Arbitration Compared to Other
            Out-of-Court Methods of Dispute Resolution
     Arbitration is often closely associated with conciliation. This is
not entirely inaccurate because experience shows that a large
number of arbitration proceedings end with the parties agreeing to
settle. However, as mentioned above, arbitration differs in its
culmination in a final decision, which is basically equivalent to a
judgment rendered by a state court. Although the parties must
agree to submit to arbitration, the award in itself does not require
the consent of the parties. In deciding the case, the arbitration
panel must apply the rules agreed upon by the parties or
determined by the panel pursuant to applicable provisions. A
panel may go beyond applicable substantive rules of law and make
a decision based solely on equity only if the parties have
empowered it to do so.48

       D. Arbitration in International Legal Transactions
     There is no international court system for private disputes
with foreign connections. Only national courts are available in
such cases. Courts examine the issue of whether they have
jurisdiction under the relevant procedural law, which will contain
special provisions for matters involving parties located in other
countries and/or other international connections, such as a foreign


    47. E.g., Lüke/Wax (ed.) “Münchener Kommentar zur Zivilprozessordung,” § 1030, No.
18 (2d ed. 2001); Stein/Jonas (ed.) “Zivilprozessordung,” § 1030, No. 3 (22d ed. 2003);
Schwab/Walter,      “Schiedsgerichtsbarkeit,”     p.   39,    No.    11   (6th  ed.   2000);
Geimer/Greger/Gummer/Herget/Philippi/Stöber/Vollkommer “Zöller Zivilprozessordnung,”
§ 1030, No. 13 (23d ed. 2002). In this regard, an award rendered by three German
arbitrators, the president being a retired federal judge, published in The ICC International
Court of Arbitration Bulletin, Vol. 4/No. 2, October 1993, at p. 76-79 (ICC Case No. 6097
(1989) retaining jurisdiction inter partes, is of particular interest because German patent
law was concerned. The place of arbitration was in Switzerland.
   48. Section 1051(3) ZPO; Art. 28(3) UNCITRAL Model Law; Art. 17.3 ICC Arbitration
Rules; Art. 59 (a) WIPO Arbitration Rules; Art. 33.2 UNCITRAL Arbitration Rules.
Vol. 94 TMR                                                                             711

trademark in dispute. In any event, proceedings in the competent
national court will be subject to the legal procedures and official
language applicable in that court.
     On the other hand, subject to certain restrictions, one may
speak of international arbitration. One characteristic feature of
international arbitration is that there is no legal requirement for
the place of the arbitration to coincide with the jurisdiction of the
court in whose territory one of the parties is located. More often, a
“neutral” place is chosen. However, because international
arbitration cannot be completely removed from the context of
national laws, the choice of the place of arbitration is crucial
because the laws or court practice applicable at that place may
allow local courts to intervene to a greater or lesser degree in the
conduct and result of the arbitration.49 This may have a significant
effect on the outcome of an international arbitration.50 Moreover,
national law may differ as to what provisions apply to
international proceedings rather than “local” arbitrations involving
parties domiciled in that country.51 The place of arbitration may
also be significant because national laws may differ as to the
enforcement of a foreign award, that is, an award to be enforced in
a foreign jurisdiction. Another typical feature of international
arbitration is that the arbitration panel is not automatically
integrated by nationals or residents of the country where the place
of arbitration is situated.52 The nationalities of the arbitrators and,
sometimes, their places of residence may generally be
requirements agreed upon by the parties in their agreement to




   49. International arbitration proceedings will normally not be disconnected from
national law insofar as the rules of law governing (international) arbitration at the place of
arbitration agreed upon by the parties or fixed by the arbitrators. The local courts will be
competent for matters such as motions to set the arbitral award aside, or—if not delegated
by the parties to an arbitration institution—challenges, replacements and substitute
appointments of arbitrators on behalf of a defaulting party, etc. Arbitration laws will
usually also comprise certain rules on minimum procedural standards. Furthermore,
arbitral awards are not self-enforceable. They need to be recognized by a court of law in the
country where enforcement is intended. This will normally be governed by the New York
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (UN 1958).
   50. Matters that always must be considered in relation to the place of arbitration are
non-derogable public policy laws, such as antitrust law.
   51. For example, in Switzerland international arbitration is governed by the 12th
chapter of the Private International Law Statute 1987, while domestic arbitration is
governed by the Swiss Intercantonal Concordat on Arbitration of August 27, 1969.
    52. Municipal arbitration laws may contain certain requirements as to professional
qualifications and the nationality of arbitrators [e.g., Spain—Art. 12(2) ley 36/1988 of
05.12.1998 or Chile—Art. 225 Código Orgánico de los Tribunales require arbitrators who
decide according to the law to be members of the (local) bar]. However, whenever such
requirements exist, it must be ascertained on a case-by-case basis whether they also apply
to international arbitration taking place in such country.
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arbitrate or in the arbitration rules to which their agreement
refers.53
    International arbitration proceedings cannot, however, be
completely removed from the context of national systems of law. In
Germany, the most important connection is with the place of
arbitration because the law that prevails at such place will contain
provisions allowing courts to review proceedings and an award if
an enforcement proceeding is brought. If requested to do so by a
party, the courts confirm an award but do not conduct a
substantive review of that award.54 In such situations, national
law may require different provisions to be applied to international
proceedings from those applicable to purely domestic matters. This
will need to be clarified in each individual case. The place of
arbitration is also important because national arbitration laws
usually make the recognition and enforcement of domestic awards
subject to different provisions from those applicable to foreign
awards. An award is deemed to be foreign when it has not been
made in the territory in which it is to be enforced.55

              E. Conduct of the Arbitration Proceedings
     Proceedings in economic and commercial arbitration comprise
two phases. The first, during which the arbitral tribunal is
constituted, is followed by the actual proceedings before the
arbitrator(s). The standard situation contemplated in arbitration
statutes is a procedure without the involvement of an arbitration
institution or “permanent” arbitral tribunal. If the parties have not
agreed upon any provisions beyond the minimum details that law
requires from an arbitration agreement, the applicable arbitration
law will fill the gaps. Such an arbitration is referred to as ad hoc.
If the parties and/or the arbitral tribunal have laid down
regulations for a procedural issue, the applicable arbitration law
will come into play only to the extent that its provisions are
mandatory.

                 1. Commencement of Proceedings and
                   Constitution of an Ad Hoc Tribunal
    An ad hoc procedure is initiated by the claimant informing the
respondent that it is starting arbitration proceedings and thereby
taking the steps laid down for this purpose in the arbitration


    53. See, e.g., Art. 9(1) and (3) ICC Arbitration Rules; Arts. 19, 20 WIPO Arbitration
Rules which, while respecting any different agreement of the parties, favor the appointment
of a national not coming from the country of any of the parties, if the institution is to select
and appoint her/him.
   54. See supra note. 27.
   55. See supra notes 28 and 38.
Vol. 94 TMR                                                                            713

agreement or the applicable arbitration statute. If, for instance,
the arbitration agreement provides for the creation of a three-
member arbitration tribunal and does not contain any indications
that depart from the normal rule whereby each party appoints an
arbitrator, the claimant will name an arbitrator in its
communication and request the other party to do likewise within a
given time limit. Once this has been done, it is common practice for
these two arbitrators to name the arbitrator who will chair the
tribunal. Of course, it may also be provided that the parties begin
by trying to agree on the chair. If it has been agreed that the
tribunal shall consist of a sole arbitrator, the claimant will usually
suggest one or more persons in its communication, so that an
agreement can be reached with the respondent on the appropriate
person, unless the parties have provided otherwise in their
arbitration agreement.
     If problems arise in connection with the constitution of the
arbitral tribunal, e.g., because the required agreements have not
been achieved, then indications on how to proceed will be sought in
the arbitration agreement or, in absence of the necessary
provisions therein, in the applicable arbitration statute. For
instance, if no agreement has been reached on the number of
arbitrators, ZPO § 1034 will come into play if German law is being
applied. It provides for a three-member arbitral tribunal.
     When the arbitrators have been appointed, they will generally
need to enter into a contract with the parties, confirming the
arbitrators’ acceptance of their appointment and settling the
question of their remuneration and the reimbursement of their
expenses. It may also contain other essential provisions relating to
the ensuing proceedings. However, the conclusion of such a
contract is not a pre-condition for the proceedings, preventing
them from taking place if a party refuses to participate or
cooperate. In this case, the applicable arbitration law will come
into play.56
     On the basis of the aforementioned contract or the arbitration
statute, the arbitral tribunal normally then asks the parties to
pay, in equal proportions, an advance toward fees and costs,
covering the total expected fees and expenses.57 The arbitral



   56. See Part IV.B.1. Interrelationship Due to Disturbances or Irregularities.
    57. See, e.g., Art. 41 UNCITRAL Arbitration Rules. Under Institutional Rules referred
to in the following section, the arbitration center may request the advance on costs/deposit
and manage all financial aspects (see Art. 30 ICC Arbitration Rules and Art. 1 of their
Appendix III; Art. 70 WIPO Arbitration Rules. If the advance on costs/deposit proves to be
insufficient when the award is made, an unpleasant situation may arise. Many arbitration
rules or arbitration laws allow the arbitrators or the institution to withhold the arbitral
award until and up to the moment when a supplementary deposit is paid as requested. The
arbitration rules referred to in this article allow a case to be deemed as withdrawn without
714                                                                          Vol. 94 TMR

tribunal will not start work on the case until this payment has
been made.

                          2. Institutional Arbitration
     Institutional arbitration differs from ad hoc arbitration in that
the parties include in their arbitration agreement a reference to
the arbitration rules of an institution.
     Arbitration institutions are either legally independent bodies,
for example organizations that make the required infrastructure
permanently available in accordance with their by-laws and the
rules adopted for this purpose. Alternatively, they may be units
within bodies such as chambers of commerce. The ICC
International Court of Arbitration and WIPO’s Arbitration and
Mediation Center are examples of such institutions.58
     Institutional arbitration rules are characterized by their
inclusion of provisions that supplement the minimum
requirements of an arbitration agreement. A further characteristic
is that the arbitration institution is entrusted with the measures
that need to be taken to constitute the arbitral tribunal once a
dispute has arisen if a party refuses to cooperate or the necessary
agreement is not reached. Because parties can form their arbitral
tribunal themselves, they can also empower a third party to take
the corresponding decisions for them failing an agreement. In the
case of ad hoc arbitration, on the other hand, the parties would
have to agree upon detailed contractual rules or turn to the
applicable arbitration statute (see above). They would also have to
ascertain that the third party they choose is willing and in a
position to take the necessary decisions if required. Because of the
necessary expense this entails, it is generally uncommon for
parties to formulate such rules.
     Few arbitration institutions confine themselves to offering
support for the appointment and replacement of arbitrators. Their
rules usually cover procedure and are intended for the arbitral
tribunal, too. The reason for this scope of coverage is that national
arbitration statutes are mainly aimed at state courts and contain
few provisions relating to the procedure before an arbitral
tribunal, and such provisions—except those that enshrine basic
procedural rights—may be modified or overridden. Furthermore, it


prejudice if any deposit is not paid in full. Ideally, any such “last minute” difficulty should
be avoided by securing a sufficient advance on costs/deposit early on during the proceedings.
    58. The following examples may be given: the International Court of Arbitration of the
International Chamber of Commerce—http://www.iccarbitration.org; the German
Arbitration Institution (DIS)—http://www.dis-arb.de/; the London Court of International
Arbitration (LCIA)—http://www.lcia-arbitration.com/lcia/; the American Arbitration
Association (AAA)—http://www.adr.org/; the WIPO Arbitration and Mediation Center—
http://www.arbiter.wipo.int/center/index.html.
Vol. 94 TMR                                                     715

is preferable to detach international arbitration proceedings,
where the place of arbitration is usually in a third country, as far
as possible from domestic procedural law by agreeing upon special
rules because the domestic procedural law in question will often be
foreign to the parties and the arbitrators. Because parties have no
wish to waste time discussing such rules when finalizing their
contract and may indeed sometimes be overstretched, they may
wish to agree upon a neutral body of provisions by referring to a
set of arbitration rules. Many such sets of rules also regulate the
financial relations between the parties and the arbitral tribunal in
the form of a fee schedule.

         3. Proceedings Before the Arbitral Tribunal
                       (a) General Principles
     Arbitration proceedings are not subject to the legal procedure
incumbent upon state courts but only to the law relating to
arbitration procedure in force at the place of arbitration, unless
otherwise agreed upon by the parties. For Germany, this is
Chapter 10 of the ZPO. These laws allow considerable latitude in
the organization of the procedure.
     Such flexibility is due to the fact that arbitration cannot be
equated with a civil trial in a state court even if, as explained
above, an arbitral award has the same status as a judgment
delivered by a state court. The framework of minimum procedural
requirements is found in the facts justifying the refusal and
replacement of arbitrators and the setting aside of awards. The
grounds upon which the recognition and enforcement of awards
may be refused may also play a role here, but only insofar as the
place of possible enforcement has been established. As this is
usually not known for certain, it will be necessary to rely upon the
requirements of the New York Convention. Above all, the law
relating to arbitration proceedings in force at the place of
arbitration, also known as lex arbitri, will have a decisive role
here. Given that the content of such laws varies and that, even
when they contain similar provisions, there may be differences in
the way such provisions are applied, only general tendencies can
be described.
     According to all the arbitration statutes known to the author,
an arbitral tribunal must give the parties the full opportunity of
presenting their case. This means that the parties must have
adequate opportunity to present the facts underlying the dispute
and the legal issues related thereto, insofar as these are essential
to the award. The arbitral tribunal must assess these submissions
when making its decision, which presupposes that the parties have
had an equal opportunity to present their cases. For instance, they
716                                                                   Vol. 94 TMR

must be treated alike when deadlines are set for submitting
documents.
     Late submission is a problem that arises in practice, as both
arbitration statutes and arbitration rules fail to address (or do so
insufficiently) the question of when such submissions should be
rejected and therefore not taken into consideration. In principle,
an arbitral tribunal is justified in rejecting such submissions
whenever the parties have previously had adequate opportunity to
make their statements and the proceedings between them have
been closed. At earlier stages of the proceedings, such rejection
raises problems. At the end of proceedings, on the other hand, it
does not, if it has been expressly stated that no further
submissions may be made once the deadline for doing so has
passed. The arbitral tribunal is also, in principle, entitled to
disregard irrelevant evidence that may have been produced.
However, arbitrators generally act with circumspection in this
respect, as they do not want to answer the charges of denying a
fair hearing or unequal treatment that are likely to ensue.59
     Further, arbitration proceedings must, in principle, be
conducted in accordance with the agreements reached between the
parties, provided such agreements do not violate mandatory
provisions in the lex arbitri or the principle of due process. Thus,
for instance, parties may specify in their arbitration agreement
that certain methods of obtaining evidence are excluded, such as
pre-trial discovery (a procedure for obtaining proof that originates
from U.S. procedural law whereby the parties must exchange great
quantities of documents). However, it is unusual to find such
detailed agreements in individual cases.
     It is also the arbitral tribunal’s duty to guide the proceedings.
In international arbitration, the arbitrators will be well advised to
consult with the parties when deciding how the proceedings will be
conducted because parties from different backgrounds will
frequently have different conceptions that may lead to
misunderstandings and complications relating to such important
matters as the production of evidence by witnesses or the manner
in which questioning is carried out. For instance, in many
countries it is common for parties to call their own experts,
whereas elsewhere experts are commissioned by the courts. Also,
the question of who can and cannot be a witness is handled in
various ways. Furthermore, arbitral tribunals are not subject to


    59. See, e.g., §§ 1042(1), 1059(2)1.b) ZPO; FAA (US) Chap. 1, Sec. 10.3; Arts. 18,
36(1)(a)(ii) UNCITRAL Model Law; Art. V.1(b) New York Convention 1958. The following
and other German cases may be found in the online German arbitration cases database of
DIS—German Arbitration Institution with English abstracts for members at
http://www.dis-arb.de [select “German Case Law online” on the main page]: BayObLG 4Z
Sch 50/1999 of 16.03.2000; Hanseat OLG Bremen (2) Sch 04/99 of 30.09.1999; Hanseat OLG
Hamburg 1 Sch 02/99 of 15.05.1999; OLG Stuttgart 1 Sch 5/00 of 15.03.2001.
Vol. 94 TMR                                                                         717

the same duties relating to advice and clarification as are German
judges, for instance.60 Nor, unlike the latter, are they limited solely
to assessing the evidence produced by the parties. That is to say,
arbitral tribunals can order that essential evidence be produced
and may introduce into the proceedings facts known to them.
However, international arbitral tribunals are generally reluctant
to do so. In purely German arbitration proceedings, orders limiting
the scope of taking evidence to certain facts are not always made,
and they are certainly uncommon in international arbitration,
whereas in German state court proceedings, the evidence is limited
by a court order to relevant topics.

                  (b) Written Submissions and the
                      Preparation of the Hearing
     The arbitral tribunal will order the exchange of preparatory
documents, usually during the period allowed for payment of the
advance to cover fees and expenses. A deadline will be set for filing
the claim, if this has not already been submitted when notice of
the introduction of proceedings was given. Otherwise, the answer
will be requested. In international arbitrations, the manner in
which the procedure begins and the form and content of the
documents may vary as they are dependent on the legal
background of the parties’ counsel and the arbitrators. This is due
to the flexibility of arbitration in relation to procedural matters. It
also has important implications for the conduct of the ensuing
proceedings as a whole.
     Once the claim and answer have been submitted, the hearing
will be prepared with one or two, and occasionally even more,
exchanges of documents. The number of exchanges of documents
and the deadlines for submitting them, as well as other procedural
matters, will usually be settled in consultation with the parties,
although this is not compulsory. In major cases, a pre-hearing
conference will be held for this purpose.
     It is normally at this stage of arbitration proceedings taking
place in a common law environment that discovery will take place.
German civil procedure as well as many other countries do not use
discovery. This affects as well practice in international arbitration
in which such countries are involved. The IBA Rules on the Taking
of Evidence in International Commercial Arbitration try to strike a
cross-cultural balance in this regard.61


   60. See § 139 ZPO that applies to German state courts and for arbitration § 1042(4)
ZPO.
    61. International Bar Association 1st June 1999: http://www.ibanet.org/pdf/rules-of-
evid-2.pdf. The 10th Book of the German Code of Civil Procedure that contains the
arbitration law would—in the opinion of the author—allow “common law style” discovery for
an arbitration taking place in Germany. However, it remains to be seen whether a German
718                                                                          Vol. 94 TMR

                              (c) Hearing
     As a rule, hearings are held in arbitrations. If one of the
parties has requested a hearing, it cannot be refused.62 It is
common practice in international arbitration nowadays for
hearings to be thoroughly prepared in writing. Like other aspects
of the proceedings, the conduct of the hearing will be strongly
influenced by the national procedural law experiences of those
involved. Although the arbitral tribunal always directs the
hearing, the parties—through their counsel—will have a more
influential role if they hail from common law jurisdictions than
would be the case, for instance, for German, Spanish or Latin
American parties. These differences also have an impact on the
length of the hearing.
     It is possible for a decision to be made without a hearing, on
the basis of documents, if a party fails to take part and no request
has been made for a hearing. However, it is not the case in
arbitration that all facts that are not challenged are deemed to
have been accepted. Therefore, if a party fails to participate, the
arbitral tribunal must ascertain the essential facts through its
appreciation of the evidence,63 which it may possibly investigate ex
officio.

                              (d) Award
    When the arbitral tribunal is convinced that the parties have
had sufficient opportunity to present their case and it has finished
taking evidence, the proceedings are closed and the arbitral
tribunal discusses the award. The arbitral tribunal may make
several awards where appropriate. The awards may, for instance,
relate to the question of jurisdiction or the grounds and the
amount of the claim(s). In that event, they are referred to as
partial, interim or final awards. When the arbitral tribunal
consists of a panel of arbitrators, a unanimous decision will be
made, if possible. If not, the decision will be made by a majority. If


state court, when seized by the arbitral tribunal with a request to enforce its broad order for
the production of documents, would fully enforce such order (see Part IV.B.2 Court Support
for Arbitral Tribunals). Because the Code of Civil Procedure was recently modified allowing,
inter alia, broader orders for the production of specific documents (under the old law this
was limited to specific documents in exceptional circumstances), there is still no case law on
this issue.
   62. See § 1047(1) ZPO; Art. 20(1) ICC Arbitration Rules; Art. 53(a) WIPO Arbitration
Rules.
     63. See § 1048(2) ZPO. In many countries the rules applicable to state court procedure
contain a provision that a party that was duly summoned and fails to appear is deemed to
have conceded the factual contentions of the other party. Depending on the specific context,
it is not entirely clear whether arbitrators using their powers may also rely on such a rule.
However, the majority of arbitration practitioners seems to lean in favor of the solution
adopted by the German legislator.
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the parties have so decided in their arbitration agreement or the
lex arbitri so provides, the decision could also be made by the chair
of the tribunal alone, if it proves otherwise impossible to reach a
consensus. However, this almost never occurs.
     To be held enforceable and avoid being set aside, awards
should deal only with the issues that the parties ask to be decided
pursuant to their arbitration agreement, which usually means
their claims. Awards should also deal with all issues or claims. The
decision is made in accordance with the substantive law chosen by
the parties as applicable. If no such law has been chosen, it will be
determined by the arbitral tribunal on the basis of the conflict-of-
law provisions in the rules of arbitration that the parties may have
chosen or in the lex arbitri. If this is the case, no legal action may
be brought in respect of any mistakes in the application of the law
that do not violate applicable public policy (mandatory state law).64
Contrary to a widely held view, arbitral tribunals cannot decide
according to what they feel to be fair (ex aequo et bono) unless the
parties have expressly allowed for this.65
     In addition to determining the principal issues, the final
award also contains a decision on the procedural costs, i.e., the
possible reimbursement of the parties’ legal expenses and how the
arbitral tribunal’s costs are to be borne.66 With regard to
international arbitrations, the rules and statutes do not contain
any provisions like those of the ZPO for German Courts,67 which
make it compulsory for costs to be distributed in accordance with
the outcome of the dispute. In this respect, much will depend on
the widely differing practices under the procedural laws with
which the arbitrators are familiar.
     Arbitral proceedings need not end with a final award. It is not
uncommon for a settlement to be reached during the proceedings,
with or without the tribunal’s involvement. In this case, the
proceedings may end with the withdrawal of the claims.
Alternatively, the arbitral tribunal may be requested to make an
award with agreed wording, whereby the obligations arising from


   64. See supra notes 27 and 28.
   65. See supra note 48.
    66. See, e.g., § 1057 ZPO; Art. 31 ICC Arbitration Rules; Art. 71-72 WIPO Arbitration
Rules; Art. 38 UNCITRAL Arbitration Rules. It is a German peculiarity that the arbitral
tribunal may not determine in the award the amount owed by the parties as arbitrators’
fees because they may not be judges in their “own matter” (see Zöller, supra note 47, § 1057
No. 3). However, if their fees result from their agreement with the parties or if the latter
have agreed on arbitration rules that contain a fee schedule that applies and/or allows the
institution to fix the arbitrators’ fees, this difficulty does not arise. This also applies under
the UNCITRAL Arbitration Rules if there is an appointing authority (Art. 39(2)). In other
ad hoc arbitrations under German arbitration law, the arbitrators will seek agreement on
their remuneration early on.
   67. See § 91 ZPO.
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the settlement will be transformed into an enforceable ruling. In
this way, the parties acquire a judgment that can be enforced like
any other award.

        V. STATE JUSTICE VIS-A-VIS ARBITRATION
                           A. Procedure
    It is not the purpose of this article to discuss civil procedure or
describe the method of determining which German or other
national court is most appropriate for subject matter and location.
What can be said in relation to arbitration is that when
proceedings are limited to one court instance the costs are
generally lower than an arbitral tribunal’s fees and refundable
expenses. This often changes if the case is taken to appeal or is
submitted to a third instance court for review of points of law. The
overall costs will rise at each stage, especially on account of
lawyers’ fees.
    In comparison with arbitration, a complete review of the first-
instance decision and the review of legal issues on appeal offer a
certain guarantee of obtaining a legally-correct decision. This is
not the case in arbitration. In general, the arbitrator’s decision on
the merits of the case is not subject to review at higher levels in a
way that would alter it.
    Given the possibility of a case being remanded back to a lower
court after appeal, the greater security that court actions offer is at
the expense of possibly very lengthy proceedings, even in
comparison with relatively long arbitration proceedings. On the
other hand, serious procedural mistakes in arbitration may cause
an award to be set aside or arbitrators to be replaced, leaving the
parties with their hands partly or completely empty after a
possibly lengthy and expensive procedure. A foreign state court to
which application for enforcement of an award is made may also
refuse enforcement for the same reasons and with similar
consequences.

                  B. Advantages of Arbitration
    Arbitration may have the following advantages over state
court proceedings.

                         1. Greater Speed
    The advantage of speed applies when the parties collaborate
constructively in the proceedings, particularly when they quickly
constitute the arbitral tribunal. Even so, arbitral proceedings—
especially those involving technically-complex disputes—can easily
Vol. 94 TMR                                                                             721

last more than a year. The time advantage is often realized only
when an action in the state courts goes to the highest level.

         2. The Possibility of Choosing One’s Own Judges
     This can be a considerable advantage, provided the parties
make their choice first and foremost on the basis of objective
criteria, and take into account competence and the availability of
the persons chosen. The interests of arbitral tribunals, unlike
those of state courts, are also not bound up with the requirements
of any administrative department or judicial authority.

                  3. Confidentiality of the Proceedings
     Arbitration proceedings are not public.68 Arbitrators and any
arbitration institution that may be involved are generally believed
to have a professional obligation to preserve confidentiality.69 It is
not so easy to say whether the same obligation binds the parties,
especially in the international domain.70 In matters where secrecy
is required, notably in the field of technological information, it is
therefore advisable to make special arrangements for secrecy when
agreeing on an arbitration clause.
     To ensure the secrecy of technical as well as commercial
information, special arrangements may also be provided for in the
arbitration agreement or, as is more common, under the arbitral
tribunal’s direction, for handling of confidential evidence in
relation to the other party. This is not possible in a German civil
trial.

                 4. The “Least Common Denominator”
                      in the International Domain
    For understandable (although not always rational) reasons,
parties to a contract often wish to avoid the risk of having to
pursue their claims in the state of the other party to the contract
when a dispute arises. Arbitration offers parties an alternative
through the international make-up of the arbitral tribunal and by
allowing them to fix the place of arbitration in a neutral state,
which the parties often choose. In addition, the parties are



    68. See, e.g., Art. 25(4) UNCITRAL Arbitration Rules; Art. 21(3) ICC Arbitration Rules;
Art. 53 (c) WIPO Arbitration Rules.
    69. The ICC Arbitration Rules, Appendix II, Art. 1; Art. 76 WIPO Arbitration Rules.
Insofar as arbitrators are concerned, the issue is less clear, except for the WIPO Arbitration
Rules (Art. 76). However, many arbitrators are practicing lawyers who are bound to keep
professional secrets by ethical rules of conduct or equivalent rules of law of their country.
   70. As far as known by the author, only the WIPO Arbitration Rules contain elaborate
confidentiality rules applicable also to the parties (see Arts. 52, 73-75).
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generally free to decide whether or not they wish to be represented
by a lawyer and who the lawyer should be. In state courts, this
choice is mainly limited to lawyers who have been admitted to
practice at the bar in question. This flexibility also extends to
procedural arrangements, meaning that there is no automatic
connection with a less known procedural law for one or all parties,
even if in individual cases flexibility can lead to unpleasant
surprises for one or other of the parties.

                   C. Disadvantages of Arbitration
    Arbitration may have the following disadvantages:
        (a) greater likelihood of dilatory tactics on the part of a
    recalcitrant party, especially in connection with the
    constitution of the arbitral tribunal, where the cooperation of
    such party is necessary;
        (b) risk of mistakes by the parties when choosing the
    arbitrators, i.e., they might choose arbitrators who do not have
    the necessary knowledge and experience in directing the
    proceedings or in the subject matter of the dispute or who,
    because of their many different duties, cannot devote
    sufficient time to bringing the proceedings swiftly to a close;
        (c) risk that the parties will be unable properly to handle
    the greater flexibility with respect to procedural matters, i.e.,
    to conduct proceedings optimally;
        (d) potential risk in intellectual property related matters
    that mandatory laws may declare as non-arbitrable certain
    issues related to the validity of contentious intellectual
    property rights.71 In many countries, such issues may be
    decided by arbitration at least with effect inter partes.72
    Nonetheless, the arbitrability issue should be kept in mind
    and examined on a case-by-case basis when contemplating an
    agreement to arbitrate, depending on the applicable
    substantive law and the place of arbitration and the country
    where enforcement would likely occur.
    However, the risks identified above are rarely realized. They
can be greatly minimized or completely neutralized through an
appropriate arbitration agreement and informed advice from a
representative experienced in arbitration matters.
    It should be added that it has become common for parties to be
represented in arbitration proceedings by lawyers, with the result
that the original informal nature of arbitration practices has


  71. See Part IV.B.4. Limits to What May Be Submitted to Arbitration.
  72. See supra notes 44 to 47.
Vol. 94 TMR                                                       723

become strongly marked by legal features, leading to proceedings
more akin to state justice.

                             VI. CONCLUSION
     This article presents an overview of the various methods of
alternative dispute resolution, but it is not exhaustive. The
essential point to note is that, functionally, arbitration alone is an
equal alternative to state justice, as it leads to a legally-
enforceable decision by the arbitrator(s). In contrast, conciliation
and mediation in their various forms consist of discussions with
the participation of a neutral third party leading to a negotiated
settlement. They will most usefully be applied before arbitration or
court proceedings, although there is no reason why they should not
be used at the same time as such proceedings. Where, above all,
long-term contracts and complex plans are involved, such methods
may help to resolve conflicts at an early stage. Interestingly, under
German law, the “arbitration expert,” as a third party, may
determine the parties’ contractual rights and obligations.73
     Mediation in its various forms should and can be used at an
earlier stage in the development of the dispute. It offers an
alternative to the binding and enforceable decision of an arbitral
tribunal or court only when it has been successfully concluded,
which is not always the case.
     It is impossible to give any general recommendation regarding
the choice of method of dispute resolution—whether “alternative”
or otherwise—that would allow a satisfactory result to be achieved
in every or at least most situations within reasonable time and at
justifiable cost. In international legal relations, especially outside
the European Union, arbitration nonetheless seems the
appropriate method of dispute resolution when one considers the
alternative to be referral to state courts, which will generally be
unfamiliar to one of the parties and confront such party with a
proceeding in a foreign language.




  73. See Part III.C. The Traditional Approach.

								
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