® 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. 708 Vol. 94 TMR 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. 712 Vol. 94 TMR 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. Vol. 94 TMR 719 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. 720 Vol. 94 TMR 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). 722 Vol. 94 TMR 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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