Document Production in International Arbitration in Spain – a smoking gun or puff of smoke?
This is the fourth article in Clyde & Co’s international arbitration series covering document production in international arbitration. In this piece, counsel Georg Scherpf and associate Victor Gontard from our Hamburg and Munich offices, respectively, provide the German law perspective.
The disclosure of documents in German state court proceedings is characterized by an absence of discovery-like principles usually found in common law jurisdictions (Cf. “Ausforschungsverbot”). Therefore, in principle parties only disclose documents on which they intend to rely. There is no duty for a party to put “all cards on the table” or even disclose documents which could be detrimental to its own case. Where courts in common law countries tend to follow a fact-finding approach to reach a somewhat more “absolute truth” when deciding a case, German civil courts tend to rely, with few exceptions, on the “relative truth” resulting from the cross-referencing of the respective submissions and disclosures of the parties. Although the German Code of Civil Procedure (“CCP”) provides for a duty to tell the truth (“Wahrheitspflicht Section 138 CCP”), this only explicitly prohibits parties from knowingly making untrue statements or deliberately distorting facts. It does not necessarily oblige a party to disclose documents that are detrimental to their case.
Where facts are disputed, the burden of proof is usually on the party making allegations. If a party alleging facts fails to substantiate them, it will generally be considered by the court as having failed to discharge its burden of proof. That said, civil law tradition does not preclude the judge from taking an active part in the disclosure process by ordering a party to provide material evidence of its allegations. However, such powers are exercised with restraint and generally only in respect of very specific and identifiable documents (Cf. Section 142 CCP).
Cultural differences between civil law and common law procedural traditions are however less pertinent in international arbitrations seated in Germany, which are largely in line with internationally accepted principles and best practices. Indeed, document production in international arbitration proceedings is hardly handled differently in Germany relative to most other jurisdictions.
Often, parties agree to document production in accordance with or guided by the provisions of the International Bar Association Rules on the Taking of Evidence in International Arbitration (“IBA Rules”). More recently, the Prague Rules on the Efficient Conduct of Proceedings in International Arbitration (“Prague Rules”) have gained increasing traction among international arbitration practitioners as an alternative to the IBA Rules. Whereas the IBA Rules provide for broad document production mechanisms, the Prague Rules remain more in line with the restricted approach to document production characteristic of the civil law tradition. However, experience with the Prague Rules remains limited due to their relatively recent publication (December 2018) and the fact that parties often stick with the “usual suspects” that provide for more extensive requests for the production of documents - after all, it is the facts that decide cases.
However, even where an agreement on document production has not been reached, it is accepted practice in international arbitrations seated in Germany that there ought to be some form of document production to reveal those facts and ensure the legitimacy of the arbitral process.
Parties may also opt for institutional arbitration e.g. under the rules of the German Arbitration Institute (Deutsche Institut für Schiedsgerichtbarkeit, “DIS”) - the latest version of which was published in 2018 (“DIS Rules”).
Regarding production of documents, the DIS Rules grant the arbitral tribunal wide powers to request documents and information to establish the facts relevant to the determination of the case (Article 28.1). Interestingly, Article 28 provides that this power can be exercised ex officio and explicitly states that the arbitral tribunal is not solely bound by the evidence produced by the parties (Article 28.2). In brief, the arbitral tribunal can take initiatives similar to those envisaged in common law countries depending on what is appropriate in any given case. This also corresponds to the wide discretion afforded to the tribunal under 1042 (4) CCP.
German-seated domestic arbitration might – at times – be characterised by a more restrictive approach to document production where the decision is left to the tribunal in absence of specific institutional rules or agreement between the parties. That is, a tribunal might well be dissuaded from allowing the parties to request, for example, “categories of documents” and might be guided by the more restrictive approach of the German CCP regarding disclosure, even though that is not directly applicable to arbitration. The arbitrator’s discretion may even be limited when it comes to unilateral orders for extensive document production. Ordering, for example, a US-style discovery processes in a German-seated arbitration would arguably be contrary to the lex fori and the German public policy (Schütze, Schiedsgericht und Schiedsverfahren, 5th edition, p. 92).
In this context, the provisions of Section 142 CCP outlined below provide an understanding of the German legal tradition, even though it is not directly applicable to German seated arbitrations, whether international or domestic. Although the original disclosure principle of Section 142 ZPO was limited to the requirement for parties to produce documents that support their allegations, it has been broadened since its inception in 2002. It now provides that the court may order a party (or third party) to produce documents which it has in its possession and to which it or the opponent has referred, irrespective of who must discharge the burden of proof. Pursuant to Section 427 CCP, failure to comply with such a court order may result in the counterparty’s allegations being deemed proven.
However, the German Federal Court of Justice (Bundesgerichtshof) has ruled in favour of a restrictive interpretation of the practical scope of Section 142 ZPO. According to the court, this provision should only be used to obtain evidence. It cannot be used as a tool to discover new facts (see decision XI ZR 318/09 dated 15 June 2010). In this respect, the decision of the BGH remains consistent with civil law tradition limiting document production to supporting allegations of the parties.
A key practical issue – and difference – in relation to the production of documents is the status of professional privileges and the extent to which they may be raised as an objection.
Attorney-client privilege is legally recognised in Germany and enforceable before state courts and arbitral tribunals. Indeed, the German CCP explicitly recognises an exception to the obligation to produce documents for parties who are entitled to refuse to testify, notably by virtue of their professional capacity (Section 142 (2) ZPO). The attorney-client privilege is covered by this exception (Section 383 (1) Nr. 6 ZPO).
The question of whether this privilege also extends to in-house counsels was left open for a long time in Germany. Since 2016, German law has recognised that in-house counsels may invoke the attorney-client privilege to the extent they are registered with the bar and free to act for clients other than their employer. This approach departs from the one traditionally adopted in other continental civil law jurisdictions such as France or Switzerland. In those countries, the lack of independence of in-house counsels vis-à-vis their employers still precludes them, by and large, from benefitting from the attorney-client privilege.
Where international arbitration is concerned, the applicability of such provisions will depend on whether German law applies to evidentiary privileges or not. Where the IBA Rules apply, the arbitral tribunal must consider whether document production might be impacted by any legal privilege, leaving it to the arbitral tribunal to determine which rules should apply (Article 9.2(b)). In this respect, Article 9.4 provides a series of detailed guidelines aiming at guiding the arbitral tribunal in its determination. However, those guidelines do not prescribe the conflict rules that should resolve this question.
Thus, in practice, this decision rests mostly with the arbitral tribunal itself. Indeed, given that the law applicable to legal privileges cannot be automatically equated with the law applicable to the arbitration agreement, this issue is rarely settled by an express choice of the parties. Although the arbitral tribunal may utilise several methods to resolve the conflict of laws arising from this question, the “closest connection test” generally seems to prevail. When this happens, the arbitral tribunal reviews and identifies relevant factors linking the issue raised by legal privileges to one specific applicable law (e.g., seat of the arbitration, law applicable to the factual matrix of the case etc.).
The smoking gun, or lack thereof, is often raised in debates on this side of the Channel against the utility of document production in international arbitration. However, complex commercial disputes mostly deal with multi-faceted factual and legal issues. Exceptionally, such disputes or transactions involve “smoking guns” or can be boiled down into a single decisive factual allegation that might be proven or disproven by a “smoking gun”. In the authors’ view, the proper test for the usefulness of document production should therefore be whether the documents produced can make your case – or defence - more consistent and convincing. We believe it can and international arbitrations seated in Germany provide parties with the opportunity to request documents in line with international arbitral practice whilst avoiding, perhaps, an excessively broad application of, for example, the IBA-Rules, given the choice of a German seat. After all, the parties choose the seat not only because of the local food (see Schütze above). In addition, German courts provide assistance in evidentiary matters (Section 1050 CCP) (for more on this, see Scherpf, von Berlepsch, Quarterly Update 2/2021, "With a little help from my friends - court assistance in arbitration”), and do so even where a tribunal is seated in another jurisdiction (Section 1025 (2) CCP).
A new series on interim measures in international arbitration, from the perspective of various European jurisdictions, will be released from next week.