4. Note on Arbitration (Schlichtungsverfahren)


    When negotiation breaks down, flight or fight is the result. Flight, i.e. walking away from the deal, is a common response. However if the parties are already doing business with one another, open conflict may break out. That in turn can lead to litigation, the only sure winners of which are the opposing attorneys. The U.S. is a particularly litigious society. Therefore book length commercial contracts seeking to cover every conceivable contingency are common. A better approach, one increasingly favored especially in the U.S., is to build conflict resolution into the initial agreement. 

    One can do this by specifying mediation and arbitration. One needs to distinguish binding from non-binding arbitration. Judicial arbitration may very well not be binding! In other words, the party dissatisfied with the decision can still elect to sue. What one wants is the binding version, which shuts the door on protracted lawsuits winding their way through the courts year after year. Two possibilities for binding arbitration are presented at the end of this note.

    A common procedure is for each party to select an arbitrator to represent his interests. These two persons in turn agree on a third arbitrator. The three review the evidence and reach a decision – which is enforceable in a court of law. Their decision is final. A major advantage is that the arbitrators selected tend to be experts in the subject of dispute. That a medical dispute, for example, is more likely to be properly understood and fairly resolved by three physicians than by adversarial attorneys with little or no medical training seems a reasonable assumption.

    Similarly a construction dispute is more likely to be understood properly and resolved fairly by a triad of architects and civil engineers, than by ferocious litigators.

    Understandably enough, attorneys tend not to recommend arbitration. In fact, they may even sabotage arbitration clauses in a contract cf. (5) Negotiation, U.S. 1992 - at “Losses” under “Testimony.” Sample arbitration clauses appear at the end of this note.


    An arbitration clause in a contract must be inserted at the proper place and in the proper manner, e.g. bolded, or with capital letters, according to the specific requirements of the relevant jurisdiction. Otherwise it may be defective in form and hence void. 

    "Let the games begin; unleash the dogs of war!"


    The very existence of arbitration is a powerful influence for the parties to resolve conflict on their own.  (“We both know construction. Do we really need to bring in outside architects and civil engineers to solve our argument with one another – and pay them for doing that? Let us take a  l o n g  break, calm down, and figure it out ourselves.”)

    Arbitration is especially recommended when the parties are of a different size. For a small company, let alone an individual “David,” to pursue a multinational “Goliath” through the courts could take a lifetime. And even if David finally wins with his righteous legal slingshot, getting Goliath to pay will not be easy. In fact, even a Goliath may have gone bankrupt in the interval!*

    A step frequently taken before formal arbitration is mediation. The arbitration associations discussed in the following paragraph all offer conciliation services. Experienced mediators are also provided by other entities, such as the Lawyers Mediation Service, J.A.M.S./Enddispute, the Society of Professionals in Dispute Resolution (SPIDR) and also the provision of third party attorney neutrals through the American Bar Association (ABA). Guidance is provided by the AAA/ABA/SPIDR Standards of Conduct for Mediators and in the U.S. by those state legislatures participating in the Uniform Mediation Act drafted by the National Conference of Commissioners on Uniform State Laws.  Sometimes government agencies and local courts will make referrals for mediators as well.

    There are a host of arbitration associations. Not all are created equal! Two U.S. associations that have received considerable bad press for poor (biased) decisions are those of the U.S. film industry and of stockbrokers. In contrast, well respected associations include the International Chamber of Commerce, the London Court of Arbitration, the American Arbitration Association (AAA), and, in Germany, the IHK.  The latter two are elaborated upon below.

1) The American Arbitration Association (AAA)

    The American Arbitration Association (www.adr.org) is a public-service not-for-profit organization founded in New York City in 1926. Just ten years later its National Panel of Arbitrators already had 7,000 members. In 1994 the publishers of Martindale-Hubbell (the standard directory of attorneys) introduced the new Martindale-Hubbell Dispute Resolution Directory. It lists approximately 70,000 arbitrators, mediators, judges, attorneys, law firms and other neutral professionals who specialize in dispute resolution.

    In 1996 the AAA established The International Centre for Dispute Resolution® (ICDR). The ICDR has established cooperative agreements with 62 arbitral institutions in 43 countries worldwide. Arbitration cases can therefore be filed and heard virtually anywhere in the world. The ICDR maintains a worldwide panel of more than 400 independent arbitrators and mediators who handle several hundred multinational cases each year. It maintains offices in Dublin, Mexico City and plans to open one in Singapore.

    An example of a standard arbitration clause follows:

"Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration    administered by the American Arbitration Association under its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof."


2) Arbitration administered by the German Chambers of Industry and Commerce (Industrie und Handelskammer, IHK)

    Disputes are handled in accordance with the Arbitration Rules of the German Institution of Arbitration: Schiedsordnung der Deutschen Institution für Schiedsgerichtsbarkeit e.v., DIS, Beethovenstraße 5-13, 50674 Köln, Tel. 0221/28 55 2-0 (www.dis-arb.de) 

    The regional chambers (IHK) are the local contact points. The IHK München  (www.muenchen.ihk.de) has published a good booklet about arbitration, “Alternative Konfliktbeilegung II” which may be ordered from the IHK, Max Joseph Straße 2, Tel. +89 51 16 0, ihkmail@muenchen,ihk.de

    A standard arbitration clause reads:

"Alle Streitigkeiten, die sich im Zusammenhang mit dem Vertrag (genaue Bezeichung des Vertrages) oder über seine Gültigkeit ergeben, werden nach der Schiedsgerichtsordnung der Industrie- und Handelskammer für München und Oberbayern (IHK München) unter Ausschuß des ordentlichen Rechtswegs endgültig entschieden".

    The translation of the above is:

“All disputes arising from the contract (exact description of contract) including its validity shall be finally settled according  to the Arbitration Rules of the Chamber of Industry and Commerce of Munich and Upper Bavaria (IHK München) without recourse to the ordinary courts of law.”


* Examples are legion. In Germany the Stinnes Imperium with 600,000 employees disappeared from one generation to the next. In the U.S. General Motors with 335,000 employees is desperately staving off bankruptcy. And smaller companies can vanish with astonishing speed. For another two American examples (which could be repeated in any developed country): First, in 1997 CFS was a $5 billion company with 3,900 employees. In 1999 the company filled for bankruptcy and by year’s end had no assets and no employees – and the company’s CEO and founder had also filed for personal bankruptcy. (The fates of CFS and Stinnes are discussed at "Strategy Repair from A to Z" at "Services.")

    Second: in 2006 Lehman Brothers was a blue chip Wall St. investment bank with billions in assets and 25,000 employees. As a result of the sub prime mortgage crisis, Lehman Brothers filed for Chapter 11 bankruptcy protection on September 15, 2008. In contrast to the CEO of CFS, Richard Fuld, who presided over Lehman’s demise, did a little better. He walked away with $480 million. When challenged about this at a Congressional hearing, he protested that it had, after all, taken him eight years at Lehman Brothers to accumulate it.


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