Germany: Disputes Between Corporations In the US and Germany

Arbitration in Switzerland As An Acceptable Solution
Last Updated: 1 February 2000

INTRODUCTION

The following fact pattern will serve as a basis for illustrating some of the practical issues that arise regarding governing law and dispute resolution.

A German company produces and sells machines to a New York corporation. The German company uses an affiliate in the United States through which to pass the contract. The contract is in English. On the request of the purchaser, a clause is inserted in the agreement that the laws of the State of New York are applicable and that any dispute will be decided by the New York courts.

The machine is delivered but, before handing over the product to the customer, it is to undergo a testing period. The complex machinery is controlled by special computer software. Unfortunately, during the testing period, an explosion occurs. The damage amounts to US$3million.

THE GRAY ZONE

This chapter concentrates on the crucial period between the signing of the contract and the commencement of litigation. The time between those two periods provides an opportunity to review certain details under a magnifying glass. Often, new aspects emerge. This may be turned into an initiative to renegotiate the terms of litigation proceedings. It goes without saying that the goal of such an exercise should be to abbreviate the procedure and to improve the mechanism for a more sophisticated outcome as to the substance.

Frequently, too few opportunities are seen in the "Gray Zone". Consequently, many problems burden the litigation process.

In the fact pattern, the German vendor takes the view that the purchaser handled the control devices improperly. The defendant believes that there is a product liability case. The American company was cautious enough to enter an all-risk insurance contract covering this purchase. Of course, the American insurance company is keen to find out whether it has a case or not. It can take recourse only if there is a product liability case.

The German affiliate of the vendor turns out to be a shell company, incorporated under the laws of the State of Nevada. It becomes clear that a judgment given by a New York court against the United States affiliate of the German company would not be enforceable in practice.

It also becomes clear that an American court would have great difficulties in establishing the facts for a product liability case. The machine was invented and developed in Germany. All the complex technical paperwork is in German. The costs of translation and getting expert witnesses to New York appear to be prohibitive.

Growing Importance of Arbitration

There is a general consensus in the Anglo-Saxon countries and in Europe that arbitration has become increasingly attractive for companies to resolve their differences. In the United States, there is a growing acknowledgment that alternative dispute resolution brings better and quicker results. In recognition of a growing need for arbitration, a number of European countries have introduced new legislation on arbitration proceedings.

PROFILE OF AN ARBITRATION JUDGE

National courts have judges with national training. In most cases, too little training and experience is added to deal sufficiently with foreign jurisdictions and to equip the judge to deal efficiently with an international dispute.

An arbitration judge, therefore, should be carefully selected to suit the needs of a particular case. Obviously, the appropriate selection process saves enormous time and costs in later proceedings. The choice of arbitrator with appropriate qualifications must be made from among, e.g, professors, lawyers, professional judges, accountants, public notaries, other personalities with special competence, such as bankers, and those recommended by the Chamber of Commerce for a particular case.

Particular knowledge of a foreign legal system is frequently a "must", and a good knowledge of any relevant foreign languages is helpful. The arbitrator also must have sufficient availability. An overly busy arbitrator will delay the case. The parties should negotiate beforehand whether they want to carry out the arbitration on a day-to-day basis (the Anglo-Saxon example) or agree on other specific terms.

It also is useful to determine whether the arbitrator has professional insurance and, if so, the limits of such coverage. The purpose of this exercise is not to sue the arbitrator afterwards but to increase the awareness of responsibility for the arbitrator himself.

The selection of a properly qualified arbitrator often leads to the consequence that both parties waive any appeals procedure to save time and costs. In most cases, it also is sufficient to have a sole arbitrator.

PARTIES AS MASTERS OF THEIR OWN PROCEDURE

Impact of Civil Procedures

If prospective litigating parties wish to be the masters of their own fates, they should scrutinize the procedure to which they intend to submit. The laws of civil procedure have been designed to prevent manipulation. In most countries, procedural rules have been "inflated", with the result that the procedure itself can slow the dispute resolution process. Too much attention is devoted to procedure instead of to the substance of a case. To avoid such dangers in arbitration, it appears to be prudent that the parties at least consider an agreement on the following points:

  1. A confidentiality clause;
  2. The appointment of an expert;
  3. The use of translations and interpreters;
  4. A time limit for the procedure;
  5. A jurisdiction clause; and
  6. A provision relating to extraterritorial discovery.

Confidentiality Clause

The parties should enter a confidentiality clause, assuring no publication at any point of the proceeding and no contact with third parties or the press.

Expert

The common conflict between a court-appointed expert and an expert appointed by one party can be overcome by some creative thinking. ORen, the traditional ways of appointing experts lead to a stalemate between the parties. Almost inevitably, a second expert must come in.

When both parties choose an expert together while they are still in the "Gray Zone" between the signature of the contract and start of the litigation, the chances are that the parties will stay with one expert.

Translations and Interpreters

In most instances, the translation issue is underestimated or ignored at the beginning of a contractual relationship. During the procedure, it is identified as a growing concern. By deciding on one court language, each party must know the consequences of hearing witnesses in court. The parties must distinguish between witnesses who need an interpreter and those who do not. In other words, the first category of witnesses enjoys perhaps twice as much time before answering in any cross-examination.

The background example referred to above shows clearly that the translation of technical material could result in huge costs. Furthermore, it is most probable that there will be mistakes in the translation, at least where translations of technical materials are involved. Finally, the parties should be aware of and deal with that issue beforehand, to streamline the evidence.

If the litigation is between an Anglo-Saxon lawyer and a continental lawyer, the conflict inevitably intensifies during the proceedings. While the Anglo-Saxon lawyer is used to a word-for-word transcript of the testimony, a European lawyer would he used to a short summary, prepared by the judge. The philosophical and practical differences between having pre-trial discovery can hardly be underestimated. Therefore, unpleasant surprises can be avoided if the lawyers handle these sensitive questions while still being in the "Gray Zone".

Time Limit

It may be wise to agree on a time limit for the dispute resolution procedure. The time element may become even more important than a decision on the substance itself.

A decision delivered too late may have become obsolete for one or both parties and may have lost its practical value. In unfair competition cases, the parties have often taken this into consideration by limiting themselves to injunction proceedings.

Jurisdiction Clause

In the fact pattern, the parties submitted themselves to the laws of New York. It may be in the interest of both parties to turn to another legal system once the issues of the dispute have become transparent. In fact pattern, it may be reasonable to submit the litigation to German law.

As a general consequence, it may be advisable to add a clause in international contracts in general that another law may apply if this appears to be reasonable at a later stage. Although such an agreement would not be binding, it could be used as a tool for negotiation.

In the context of selecting a different legal system, forum shopping may become equally important. The lawyers involved with service of process abroad should consider informal service between lawyers only.

Extraterritorial Discovery

Finally, the parties may want to consider the problems of extraterritorial discovery. Sometimes, questions of foreign sovereign immunity play an important role. The decision-making in the fact pattern, while the parties are in the "Gray Zone", could be as follows:

  1. The parties turn to arbitration;
  2. The parties agree on the application of Swiss Law;
  3. The parties agree on an expert beforehand; and
  4. German as a court language avoids prohibitive and possible faulty translation costs.

EXECUTION OF THE JUDGMENT

Arbitration would not be complete if enforcement of the arbitration ruling was not effective and this had not been considered at the beginning of the process. In many cases, the enforceability is guarantied by the New York Convention of 1958. As of 1 March 1995, 103 countries and territories have signed the New York Convention.

In each case, it must be examined whether the New York Convention or other multinational or bilateral treaties will allow a satisfactory enforcement of the arbitration award in the particular circumstances.

The parties involved should not only look at the enforceability procedure but also at the practical mechanisms of how to enforce a particular arbitration ruling in a particular country. Part of these considerations should be devoted to locating the assets of the defendant. This should be done as an ongoing process next to the arbitration proceedings, namely, before arbitration (is it worth it?), during arbitration, and possibly after arbitration. The role of a competent international investigator can help the plaintiff to avoid unnecessary frustrations.

Conclusions

  1. The weak position of a US judge can be explained historically, but are out of date today
  2. Discovery Procedure takes too long in the US, which is not in the interest of both litigating parties
  3. Due to different cultures and legal orders it is difficult in a German-American business dispute to accept the application of US Law or German Law. Each party making a concession to accept the foreign legal order feels insecure about a potential litigation: the fear of the unknown.
  4. An acceptable solution appears to be the neutrality of a corruption-free Arbitration Court in Switzerland

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