Arbitration or a court of law?

How do the two procedures differ in principle?

The state courts form part of the public justice system. Their jurisdiction, the hierarchy of courts and the procedures are governed by statutory rules. The judge is appointed in accordance with the court’s allocation of cases and is not selected by the parties. Depending on the circumstances, judgements may be reviewed on appeal or, in some cases, by way of a further appeal.

Arbitration proceedings are based on an agreement between the parties. Section 1029 of the German Code of Civil Procedure (ZPO) defines an arbitration agreement as an agreement to submit existing or future disputes arising from a specific legal relationship to an arbitral tribunal. The parties may specify the place of arbitration, the language, the number and selection of arbitrators, as well as institutional rules.

Pursuant to Section 1055 of the German Code of Civil Procedure (ZPO), the arbitral award has the same legal effect between the parties as a final and binding court judgement. It is, in principle, final. There is generally no second instance for reviewing the facts of the case; such a review is only possible if the parties agree to it in exceptional circumstances.

Are arbitration proceedings really confidential?

Oral hearings before state courts are, in principle, open to the public in accordance with Section 169 of the German Court Organisation Act (GVG). Under certain legal conditions, the public may be excluded, for example to protect trade secrets. However, this happens rather rarely. Written submissions and court files are not accessible to the public. Judgements may, however, be published in anonymised form or released by the court to third parties.

Arbitration proceedings do not take place in public. However, this does not automatically mean that all parties, witnesses and advisers are bound by law to maintain complete confidentiality. Confidentiality should be safeguarded by the chosen arbitration rules and, where appropriate, by a supplementary agreement. The DIS Rules of Arbitration contain their own confidentiality provisions, the scope and exceptions of which should nevertheless be examined on a case-by-case basis.

In the case of disputes relating to company law or regulatory matters, confidentiality may also be subject to limitations. Statutory disclosure obligations, statutory audits, insurers, financiers or enforcement proceedings may necessitate the disclosure of information. Arbitration reduces public visibility but does not guarantee complete isolation of the dispute.

Which procedure is quicker?

Arbitration proceedings are often regarded as quicker, as the parties agree on a single instance and can organise the proceedings flexibly. However, this flexibility only works if the arbitral tribunal and the parties actively manage the proceedings. A three-member international tribunal, extensive submissions of documents, numerous witnesses and the coordination of the diaries of all those involved, however, can significantly prolong proceedings.

In clear-cut payment or contractual disputes, state courts can be efficient. Delays, however, arise primarily from the heavy caseload of individual courts, the extensive taking of evidence and the right of appeal. On the other hand, public courts offer statutory time limits, established procedures and judges who are immediately available. An arbitral tribunal, by contrast, must first be constituted.

It is possible to provide for specific mechanisms in the arbitration clause for cases requiring urgent action. Some institutional arbitration rules offer expedited proceedings or emergency arbitrators. Irrespective of this, German courts may order interim measures despite the existence of an arbitration agreement. Where appropriate, the parties should clarify whether they wish to make use of state emergency relief, an emergency arbitrator, or both options.

How do the costs differ?

In principle, court fees and the statutory reimbursement of lawyers’ fees in proceedings before state courts are based on the value of the claim. This makes costs predictable. The lawyers’ fees actually agreed may exceed this amount, but they are generally only reimbursable to the extent provided for by law.

In arbitration proceedings, the parties also bear the arbitrators’ fees and, where applicable, the administrative costs of an institution. Where there are three arbitrators and the proceedings are complex, this can amount to a considerable sum. Institutions such as the DIS provide up-to-date schedules of costs and calculators. As the DIS has adjusted its arbitrators’ fees with effect from 1 March 2026, older cost estimates should not be adopted without verification.

Focusing solely on fees is not enough. The greatest costs are usually incurred through lawyers, experts, the analysis of documents and the use of management time. A well-managed arbitration proceeding can be more cost-effective despite higher initial fees if it resolves the dispute in a single instance. For (smaller) standard claims, however, the state court is often significantly cheaper.

What are the advantages of the decision-makers’ selection?

In arbitration proceedings, the parties can select arbitrators with the appropriate legal, technical or sector-specific experience. This is a major advantage in complex corporate acquisitions, plant construction, energy or technology projects, or even in the automotive sector. International parties can also ensure that the arbitrators are neutral in terms of nationality, language and procedural culture.

At the same time, the selection process involves considerable effort and the potential for conflict. Independence, availability and experience must all be assessed. Furthermore, a person of outstanding professional expertise is not automatically skilled at conducting proceedings efficiently. In the case of a three-member tribunal, the coordination effort and costs increase.

State judges possess professional litigation experience and institutional independence. Whilst specific sector-specific knowledge cannot be agreed upon, specialised chambers and senates frequently deal with recurring commercial law issues. For purely legal matters, therefore, the lack of party selection is not necessarily a disadvantage. Furthermore, some regional courts now offer the option of conducting proceedings in English, which opens up new possibilities for cross-border disputes.

How does the taking of evidence work?

In state courts, the rules of evidence and procedure set out in the Code of Civil Procedure apply. The parties must allege specific facts and produce corresponding evidence. There is no general discovery procedure. Witnesses are generally examined by the court during the hearing, experts are appointed by the court, and documents are submitted by the parties or produced by order of the court.

Arbitration proceedings allow for a more flexible approach. For example, written witness statements, experts appointed by the parties, joint expert conferences or limited document production may be agreed. International tribunals sometimes follow the ‘IBA Rules on the Taking of Evidence’, provided the parties or the tribunal so stipulate. However, this does not automatically entail a comprehensive US-style discovery process.

If the arbitral tribunal lacks sovereign powers, state assistance may be required. Pursuant to Section 1050 of the German Code of Civil Procedure (ZPO), the arbitral tribunal or a party, with the tribunal’s consent, may apply for judicial assistance in the taking of evidence or other judicial acts. This additional step should be factored in where witnesses or third parties are uncooperative.

What legal remedies are available?

Subject to the statutory requirements, appeals and appeals on points of law are available against court judgements. This increases the level of scrutiny, but may also prolong the path to a final decision. Whilst an appeal may cover both points of law and, to a limited extent, questions of fact, an appeal on points of law focuses solely on errors of law.

An arbitral award is, in principle, final. No appeal on the merits is provided for against it. An application for setting aside under Section 1059 of the German Code of Civil Procedure (ZPO) allows only for limited review.

An arbitral award may only be set aside on a limited number of grounds, which are exhaustively set out. These include, for example, an invalid arbitration agreement, such as one resulting from a party’s lack of legal capacity or invalidity under the applicable law. The right to a fair hearing is infringed if a party has not been duly informed of the appointment of the arbitrators or the proceedings, or if it has been unable to raise its grounds of attack and defence for other reasons. The award may also be set aside if the terms of reference were exceeded, i.e. if decisions were made on issues not covered by the arbitration agreement. The same applies to errors in the composition of the arbitral tribunal or the proceedings, where there has been a deviation from the parties’ agreement or mandatory statutory requirements. In addition, grounds for setting aside include the subject-matter of the dispute being non-arbitrable under German law and a breach of public policy, where recognition or enforcement would be contrary to German public policy. In principle, a time limit of three months from receipt of the arbitral award applies to an application for setting aside. An application under Section 1058 of the German Code of Civil Procedure (ZPO) may extend this time limit within the statutory limits.

The state court does not examine whether it would have interpreted the contract, established the facts or assessed the evidence differently. Grounds for setting aside the award on the basis of lack of arbitrability and public policy are examined ex officio; the applicant must set out and prove the remaining grounds. Once a German declaration of enforceability has been issued, no further application for setting aside may be made under Section 1059(3) of the German Code of Civil Procedure (ZPO).

The final and binding nature of the arbitral award is generally an advantage, but it also carries a risk. On the one hand, it prevents lengthy appeals; on the other hand, it regularly allows a decision that is factually questionable to stand. In cases involving particularly fundamental legal issues or where there is a strong need for scrutiny of errors, recourse to the state courts may therefore be preferable.

Which type of judgement is easier to enforce internationally?

Within the European Union, national judgements in civil and commercial matters are, in principle, recognised and enforced in accordance with the Brussels I Regulation without the need for a specific declaration of enforceability procedure. This provides an effective and swift procedure. For other countries, this depends on international conventions, bilateral treaties and national law.

Foreign arbitral awards benefit from the 1958 New York Convention, which generally obliges its contracting states to recognise and enforce foreign arbitral awards, but allows for limited grounds for refusal. This can be a strong argument in favour of arbitration, particularly where the contracting parties or assets are located in countries outside the EU.

However, the abstract scope of a convention is not sufficient. Before concluding a contract, it should be ascertained where assets likely to be subject to enforcement are located, whether the state in question applies the convention, and how reliably its courts conduct enforcement proceedings. After all, an internationally enforceable award is only as valuable as the actual access to assets.

How are multi-party and multi-contract disputes handled?

In complex projects, obligations are often spread across several contracts and companies. An arbitration clause is, in principle, binding only on the parties who have agreed to it. If the place of arbitration, the arbitral institution or the wording differs in individual contracts, parallel proceedings may arise. The joinder of proceedings or the inclusion of additional parties is subject to the requirements of the relevant arbitration rules and the relevant agreements; as a rule, the consent of the parties is required.

State courts may deal with co-litigants and related claims in a single set of proceedings in accordance with the statutory rules. As a rule, an internal connection and relevance are sufficient for this. Consent from the party or parties is not generally required. However, international jurisdiction issues outside the EU or differing choice-of-court agreements may also lead to parallel proceedings there.

For this reason, a uniform dispute resolution framework should be developed for contract packages. The main contract, the guarantees, the side letters, the shareholders’ agreement and the financing must be coordinated with one another. A well-drafted clause should also cover the language, service of documents, the number of arbitrators and the handling of interim measures.

When is which procedure appropriate?

Arbitration is often suitable for international, high-value or technically complex disputes where neutrality, closed-door proceedings, the selection of arbitrators and enforceability outside the EU are of particular importance. Post-M&A and joint venture disputes are also often settled through arbitration.

In cases involving standardised payment claims, smaller sums in dispute, a strong need for judicial review, or where swift regulatory measures against third parties may be required, state courts are often the appropriate choice. Similarly, the development of published case law may constitute a legitimate interest.

Hybrid arrangements are possible, but must remain clear. For example, individual accounting issues may be referred to an arbitral expert, legal disputes to an arbitral tribunal and urgent measures to state courts. However, too many parallel mechanisms can lead to disputes over jurisdiction before the matter itself is heard.