This post is based on and derived from an article published in the Journal of the Federal German Bar Association (BRAK-Mitteilungen) in August 2017. As the article is only available in German, we provide an English summary here on our WagArb Journal.
The article examines the established dispute resolution practices in German companies as well as the interaction between the various court and out-of-court dispute resolution mechanisms while analyzing the competitive drawbacks which court proceedings suffer in comparison with arbitration and alternative dispute resolution practices.
Dispute management culture of German companies
State court proceedings are very often not meeting the needs and expectations of companies given their lack of time- and cost-efficiency and their susceptibility to the rendering of surprising judgments. The cost-benefit-ratio of state court proceedings is disproportionate, if not dissatisfactory in a large majority of cases. The dispute resolution practices of companies vary greatly based on their size, the market and business sector they operate in as well as their degree of internationalization. All these factors influence the dispute resolution practices of companies, which is also why it is difficult to rigidly categorize their conflict management cultures.
Generally, small and medium sized companies, in contrast with big companies, only have a small legal department, if any, and therefore lack the resources to build up a sophisticated dispute management practice. That is also the reason why managing directors or board members of such companies are often not aware of other dispute resolution methods. They depend on external lawyers as promoters of a more diversified dispute resolution culture.
Given the degree of procedural flexibility inherent to arbitration procedures in comparison with state court proceedings, for instance, it is difficult to understand why approximately 330.000 new state court proceedings initiated in 2015 stand opposed to merely 112 new arbitration proceedings at the German Institution for Arbitration (DIS) in the same year. Negotiations are virtually the only alternative dispute resolution method utilized sustainably by German companies.
Interaction between state court proceedings and alternative dispute resolution mechanisms
In view of the landscape described above, the question arises why companies rely on out-of-court dispute resolution alternatives only in rare cases? To put it in simplified and provocative terms: If companies are not aware of the alternatives, they cannot use them in practice. Without understanding the specificities of other dispute resolution measures – whether that is mediation, conciliation, adjudication or minitrials – the dispute resolution practice of German companies will continue to remain black and white: first negotiation, then state court proceedings.
Viewed in business terms, this black-and-white approach, in general, brings no added value for companies. Rather, the rational decision would be to choose the most suitable dispute resolution method for each individual dispute. Not every method is suitable for every dispute, but there is a suitable method for every dispute. That however requires that in-house counsels are familiar with and informed about the various dispute resolution methods and able to put them into practice. What needs to be determined is to what extent a particular dispute resolution method is suited to accommodate procedural and material interests of the company. Companies follow (business) interests and not merely formal legal positions. That is why, rationally viewed, interest-based dispute resolution methods – such as negotiation and mediation – are very often much better suited to address the business issues underlying each dispute.
In this overall context, whether one of the dispute resolution method is applied in a particular case should depend on how well-suited it is to further a company’s business interests. Therefore, the conclusion is that court proceedings and out-of-court alternatives complement each other in the dispute resolution landscape instead of directly competing with each other.
Competitive drawbacks of state court proceedings
On reflection, state court proceedings suffer from several competitive disadvantages when compared to arbitration. The German civil procedure code (Zivilprozessordnung; ZPO) lacks the flexibility, user-adaptability and modernity of arbitration procedures. The influence of the parties on the progress of state court proceedings is generally very limited.
Moreover, arbitration procedures are not public, whereas court proceedings are. Legal remedies such as appeal proceedings further contribute to lengthy state court proceedings, which thus become unable to serve business interests. Cross-border legal relationships and the possible disputes arising therefrom further illustrate the competitive drawbacks of state court proceedings. Owing to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the enforcement of international arbitral awards is easier and simpler than that of national court judgments.
The dispute management culture of German companies today is not as diversified as optimists imagined it could have been following the Anglo-American ADR wave of the past centuries. It is however not as underdeveloped as pessimists feared it could be either. There are innovative companies, which use the complementary system of dispute resolution methods to their benefit – making it dependent on an individual case-by-case interest analysis. There are, however, also companies, which do not possess the knowledge and capabilities to utilize these alternatives sensibly and wisely, thereby failing to exploit their competitive advantages and the potential cost and time savings.
Indications in favor of a transition from an intuitive to a more rational dispute management approach are however evident. Statistics show that the number of newly initiated state court proceedings are in decline for a number of years now, while the number of arbitration proceedings is increasing slowly but steadily. An evolution – but not a revolution – of the dispute management culture is underway, the increasing use of mediation, adjudication and other alternative dispute resolution mechanisms being proof of this. State courts must keep up with this evolutionary process to become more flexible, adaptable and user-friendly. Companies on the other hand must take the matter into their own hands and should not wait for their in-house-counsel or external lawyers to make the first move.