Business owners who conclude contracts with foreign business partners, or who continue to run their company from outside Germany after relocating, should clarify early on how disputes will be handled. Many internationally active companies agree on an arbitration clause (Schiedsklausel) for this purpose: disputes are then decided not by a state court but by an arbitral tribunal. Whether such a clause serves its purpose depends on how it is worded. In cross-border cases, it often also determines whether a favourable decision can ultimately be enforced.
A judgment of a German court is not readily enforceable in a third country. How enforcement abroad works in detail is described in the article on enforcing German judgments abroad. For arbitral awards, by contrast, there is an almost worldwide recognition regime. This article explains the legal basis, the difference between institutional and ad hoc proceedings, the minimum content of an effective clause and the drafting mistakes that cost the most time and money in practice.
What Is an Arbitration Clause?
An arbitration clause is an agreement under which disputes arising out of or in connection with a contract are decided by an arbitral tribunal. Legally, it is an arbitration agreement (Schiedsvereinbarung) within the meaning of Section 1029 of the German Code of Civil Procedure (Zivilprozessordnung, ZPO). It can be concluded as a clause in the main contract or as a separate agreement (Section 1029 (2) ZPO). If an action is brought before a state court despite a valid arbitration agreement, the court dismisses the action as inadmissible if the defendant raises this objection before the start of the oral hearing on the substance of the dispute (Section 1032 (1) ZPO).
In purely domestic German contracts, the arbitration clause is one of several drafting options. In international contracts, a further aspect is added to the familiar features such as confidentiality, the expertise of the decision-makers and the free choice of language and venue: the international enforceability of the arbitral award.
Legal Basis: Book 10 of the ZPO and the New York Convention
German Arbitration Law
German arbitration law is set out in Sections 1025 to 1066 ZPO. It was fundamentally reformed with effect from 1 January 1998 and is largely based on the UNCITRAL Model Law on International Commercial Arbitration. Foreign contracting parties and their advisers are therefore familiar with the basic features of this framework. On 10 June 2026, the Federal Government adopted the draft of an Act to Modernise Arbitration Law, which among other things is intended to make the form requirements for arbitration agreements technology-neutral and to expressly permit video hearings. Until it enters into force, Book 10 of the ZPO continues to apply in its current version.
The key provisions for contract drafting are:
- Section 1029 ZPO: definition of the arbitration agreement for existing or future disputes arising from a specific legal relationship.
- Section 1030 ZPO: any claim involving an economic interest is arbitrable; non-economic claims only to the extent that the parties could conclude a settlement on them.
- Section 1031 ZPO: form requirements (see below).
- Sections 1059, 1060 ZPO: setting aside of domestic arbitral awards and their declaration of enforceability.
- Section 1061 ZPO: recognition and enforcement of foreign arbitral awards under the New York Convention.
The New York Convention of 1958
The basis for international enforceability is the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958. It now has 172 contracting states. The contracting states undertake to recognise and enforce arbitral awards made in other states. Recognition may only be refused on the grounds listed in Article V, for example where the arbitration agreement is invalid, the right to be heard has been violated, the scope of the arbitration agreement has been exceeded or there is a breach of the public policy of the state of enforcement.
For state court judgments, there is no comparably broad regime. Within the EU, the Brussels Ia Regulation provides for straightforward recognition; outside the EU, enforceability depends on international treaties or on the law of the respective state of enforcement. This asymmetry is the main reason why, in contracts with partners outside the EU, an arbitration clause is frequently preferred to a jurisdiction clause (Gerichtsstandsklausel).
Why Companies Agree on Arbitration Clauses
A 2020 survey by Germany Trade & Invest (GTAI) of 113 in-house lawyers and business lawyers, mostly from Germany, gives an impression of practice. For contracts with partners outside the EU, over 80 percent named arbitration as their preferred form of dispute resolution. The main reasons given were:
- Enforceability of the arbitral award (around 67 percent)
- Easier agreement in international negotiations (around 57 percent), because a neutral procedure is often more acceptable to foreign partners than the courts of the other state
- Confidentiality (around 47 percent), as arbitral proceedings are generally not public
- Choice of arbitrators (around 45 percent)
- Choice of the language of the proceedings (around 41 percent)
In addition, there is procedural flexibility: venue, procedure and the taking of evidence can largely be tailored to the needs of the parties. These advantages must be weighed against certain disadvantages. Arbitral proceedings generally have only one instance, with no appeal on the merits, the parties themselves bear the costs of the arbitrators and the institution, and for smaller amounts in dispute state court proceedings may be more economical. Moreover, since 1 April 2025, under the Act to Strengthen Germany as a Location for Justice (Justizstandort-Stärkungsgesetz), the federal states can establish Commercial Courts at the Higher Regional Courts (Oberlandesgerichte), for amounts in dispute of EUR 500,000 or more, and Commercial Chambers at the Regional Courts (Landgerichte), before which proceedings can also be conducted entirely in English. Several federal states have made use of this, including Bavaria with the Commercial Court at the Higher Regional Court of Munich.
Once a dispute has arisen, the parties are often unable to agree on anything, not even on procedural questions. The clause must therefore be so precise when the contract is concluded that it works when a dispute arises without the parties having to agree on anything further. This applies in particular where shareholders or business partners live in different states after relocating; the further questions raised by a cross-border change of shareholder are shown in the article on business succession when a shareholder emigrates.
Institutional and Ad Hoc Arbitration
Ad hoc proceedings are organised by the parties themselves. They appoint the arbitrators and govern the procedure independently or by reference to a set of rules such as the UNCITRAL Arbitration Rules. There are no administrative fees of an institution. If one party does not cooperate, however, there is no neutral body to help, for example, with the appointment of an arbitrator. A state court may then have to be involved.
Institutional proceedings are administered by a permanent arbitral institution that provides arbitration rules, a schedule of costs and mechanisms for appointing arbitrators. In the GTAI survey, the International Chamber of Commerce (ICC) was named most frequently (around 70 percent), followed by the German Arbitration Institute (Deutsche Institution für Schiedsgerichtsbarkeit, DIS). There are also other internationally active institutions, for example in London, Singapore, Hong Kong or Switzerland.
ICC Arbitration Rules
The ICC Rules of Arbitration apply in their 2021 version. Characteristic features are the Terms of Reference, in which the subject matter of the dispute and the procedural framework are recorded at the outset (Article 23), and the scrutiny of the draft award by the ICC International Court of Arbitration before it is signed (Article 34). The ICC recommends a standard clause, which in its English version reads:
“All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules.”
The model clause should be supplemented by the seat of arbitration, the language and the number of arbitrators.
DIS Arbitration Rules
The 2018 DIS Arbitration Rules have applied since 1 March 2018. Among other things, they provide for more active case management by the arbitral tribunal and instruments to expedite proceedings. For corporate law disputes, Annex 5 contains the Supplementary Rules for Corporate Disputes (DIS-ERGeS), which must be agreed separately and are tailored to the case law of the Federal Court of Justice (Bundesgerichtshof, BGH) on disputes over defective shareholder resolutions. For companies with a predominantly German-speaking environment and a seat of arbitration in Germany, the DIS is a frequently chosen institution.
Minimum Content of an Effective Arbitration Clause
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| Item | Content | Significance |
|---|---|---|
| Submission | Clear wording that disputes are finally decided by an arbitral tribunal | Avoids disputes about whether it is binding |
| Institution and rules | Correct name, such as ICC or DIS | Most common source of errors |
| Seat of arbitration | A specific place; it determines the procedural law and the competent state courts | Need not coincide with the hearing venue |
| Number and appointment of arbitrators | Usually one or three, with a rule for failure to agree | Prevents deadlock |
| Language of the proceedings | Express stipulation | Avoids disputes about translations |
| Applicable law | Choice of law for the contract, where appropriate also for the arbitration agreement itself | Coordination with the general choice-of-law clause |
| Inclusion of third parties | Exclusion or express inclusion of affiliated companies | Important in company acquisitions |
Form under Section 1031 ZPO
The arbitration agreement must be contained either in a document signed by the parties or in letters, telefaxes or other forms of communication exchanged between them that provide a record of the agreement (Section 1031 (1) ZPO). Under Section 1031 (2) ZPO, it is also sufficient if the clause is contained in a transmitted document whose content, in accordance with common usage, is deemed to form part of the contract if no objection is raised, for example in the case of a commercial letter of confirmation. Stricter requirements apply if a consumer is involved (Section 1031 (5) ZPO). A defect of form is cured by entering into argument on the substance of the dispute in the arbitral proceedings (Section 1031 (6) ZPO).
Caution is required when the clause is incorporated through general terms and conditions. If the contract is governed by the UN Convention on Contracts for the International Sale of Goods (CISG), the Federal Court of Justice requires the party relying on the general terms and conditions to send them to the other party or otherwise make them available; a mere reference is not sufficient (BGH, judgment of 31 October 2001, VIII ZR 60/01). Other legal systems sometimes impose their own requirements, which must be clarified with an adviser in the respective country. In international contracts, it is therefore usually safer to include the arbitration clause directly in the contract text.
Pathological Arbitration Clauses
Clauses that are incomplete, contradictory or unclear are referred to as “pathological”. Typical mistakes:
- Incorrect name of the institution: an institution is named that does not exist under that name, or two similar-sounding institutions are confused.
- Conflict with a jurisdiction clause: the contract provides both for an arbitral tribunal and for the exclusive jurisdiction of state courts without delimiting the two.
- Unclear seat of arbitration: several places are named without a selection mechanism.
- Undefined scope: it remains open which disputes are covered.
- Optional wording: the clause merely “allows” arbitration without a binding submission.
Not every unclear clause is invalid. If the intention to arbitrate is recognisable, arbitral tribunals and state courts generally try to uphold the clause by way of interpretation. The risk lies above all in the follow-on costs: a dispute over jurisdiction at the outset, a possible setting aside of the award because the arbitration agreement is invalid or its limits have been exceeded (Section 1059 (2) No. 1 (a) and (c) ZPO), refusal of the declaration of enforceability (Section 1060 (2) ZPO) and, for foreign arbitral awards, refusal of recognition under Article V (1) of the New York Convention in conjunction with Section 1061 ZPO. Anyone who adopts a clause from a template without checking it often only notices such defects when a dispute arises.
Special Case of Company Acquisitions: Binding Third Parties
An arbitration agreement generally binds only its parties. In international company acquisitions, however, the question frequently arises whether non-signatories can also be included, for example the seller’s parent company, which played a key role in the negotiations, or the target company, which is to benefit from a non-compete covenant.
Under the German understanding, restraint is called for when extending an arbitration agreement to third parties, because waiving recourse to the state courts generally requires the party’s own consent in view of the right to one’s lawful judge (Article 101 (1) sentence 2 of the Basic Law, Grundgesetz, GG). According to the prevailing view, mere membership of a group of companies is not sufficient. Some foreign arbitral practice includes group companies more readily under certain circumstances, for example through the so-called Group of Companies Doctrine. Whether this holds in an individual case depends on the law governing the arbitration agreement; if that is a foreign law, an adviser from the state concerned should be involved.
Disputes about the inclusion of third parties can largely be avoided by an express provision: either the exclusion of any extension to third parties or the express inclusion of specific or identifiable third parties, for example affiliated companies within the meaning of Section 15 AktG (German Stock Corporation Act), which should then give their own consent. Managing directors who themselves move abroad in the course of a transaction continue to face their own liability issues, which are dealt with in the article on managing director liability when relocating abroad.
Arbitration Clauses in the Event of Relocation and Transfer of the Registered Office
Arbitration clauses become more important when contractual relationships become international as a result of a relocation. Business owners who move abroad and continue contracts with German customers or suppliers suddenly have contracting parties in another state, and an agreed German forum loses practical value when assets are located abroad. The same applies when a company transfers its registered office, as described in the article on relocating a GmbH abroad. Existing framework agreements should then be reviewed to determine whether jurisdiction, choice of law and dispute resolution still fit the new situation. Self-employed professionals (Freiberufler) who relocate their activities abroad face similar questions, which are addressed in the article on the legal pitfalls of emigration for self-employed professionals.
Checklist for Contract Drafting
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| Step | Content |
|---|---|
| 1. Basic decision | Arbitration clause or jurisdiction clause, depending on the contracting party, the location of assets and the place of enforcement |
| 2. Determine the institution | Correct name and current arbitration rules |
| 3. Determine the seat of arbitration | Stipulate one unambiguous place |
| 4. Specify the language | Independently of the language of the contract |
| 5. Choose the governing law | Coordinate with the general choice-of-law clause |
| 6. Arbitrators | Number and appointment in the event of failure to agree |
| 7. Third parties | Exclusion or express inclusion |
| 8. Form | Section 1031 ZPO, clause preferably in the contract text itself |
| 9. Review | Check existing clauses on contract renewal, relocation or transfer of the registered office |
Example
Example: Sabine, a mechanical engineering entrepreneur, supplies plant from Bavaria to a buyer in a state outside the EU. The contract provides for Munich as the place of jurisdiction. When the buyer fails to pay, Sabine obtains a judgment from the Regional Court (Landgericht) Munich I. Since there is no agreement with the buyer’s state on the recognition of judgments, enforcement there is uncertain. Had the parties agreed on an arbitration clause with Germany as the seat of arbitration, and had the buyer’s state been a contracting state of the New York Convention, a uniform framework for recognition would have been available. For future contracts, Sabine therefore agrees on an institutional arbitration clause with a specified seat of arbitration, language and three arbitrators.
Conclusion
In international business contracts, the arbitration clause is more than an ancillary agreement. It often determines whether a claim can ultimately be enforced. The New York Convention gives arbitral awards a framework for recognition in 172 contracting states that state court judgments outside the EU do not have to this extent. Anyone who wants to use this advantage must carefully regulate the institution, the seat of arbitration, the language, the number of arbitrators, the applicable law and the inclusion of third parties, and observe the form required by Section 1031 ZPO. Unclear clauses lead precisely to the jurisdictional disputes that an arbitration clause is meant to avoid.
FAQ
Is an arbitral award easier to enforce abroad than a German judgment?
Outside the EU, frequently yes. Arbitral awards are recognised under uniform rules in the 172 contracting states of the New York Convention. For state court judgments, there is no comparably broad regime outside the EU.
What form does an arbitration agreement require?
Under Section 1031 ZPO, a signed document or exchanged letters and other communications that provide a record. Stricter requirements under Section 1031 (5) ZPO apply to agreements with consumers.
What is a pathological arbitration clause?
An unclear, contradictory or incomplete clause, for example one with an incorrect name of the institution or without an unambiguous seat of arbitration. It is not automatically invalid, but it often leads to disputes over jurisdiction and the risk of the award being set aside.
Does an arbitration clause also bind group companies?
In principle, only the contracting parties. Under the German understanding, membership of a group alone is not sufficient. If third parties are to be bound, this should be regulated expressly and agreed to by them.
When is a jurisdiction clause the better choice?
For example, in contracts within the EU, for low amounts in dispute or where the possibility of appeal is desired. The decision depends on the individual case, in particular on where enforcement would later be required.
Attorney Dr. Johannes Fiala and the Munich-based firm, with a focus on international commercial, corporate and tax law, advise business owners on drafting arbitration, choice-of-law and jurisdiction clauses in international contracts, including in connection with a relocation or a transfer of the registered office. Dr. Fiala has published extensively on commercial and asset-related legal issues. Please get in touch with the firm without obligation to discuss your plans in an initial consultation.
