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Arbitration Update – Security for Cost applies in Enforcement Proceedings in Germany! en

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On 12 January 2023, the German Federal Court of Justice (Bundesgerichtshof - FCJ) decided that the German civil procedure rules on Security for Cost (Sections 110 et seqq. of the German Code of Civil Procedure - Zivilprozessordnung) also apply in enforcement proceedings for arbitral awards (file no. I ZB 33/22). This comment provides a quick overview of the decision and discusses implications for plaintiffs when developing the strategy for their arbitration case, particularly the enforcement phase.

Background

According to the rules on security for cost in litigation, a court can, upon request of the defendant, order a foreign plaintiff (meaning a national from a state which is neither a member of the European Union nor a member of the European Economic Area) to provide security for cost to the court. The purpose of this deposit is to safeguard the defendant’s potential adverse party claim against the plaintiff should the plaintiff not be granted the declaration of enforceability of the arbitral award.

Lady justice-3

Whether or not the court orders such a security, and at what nominal value, will depend on a number of factors, such as the financial situation of the party, the complexity of the case, and the nominal amount of the claim. Parties will usually provide this security either in cash or by means of a bank guarantee.

For foreign parties considering to conduct litigation in Germany, this potential order is a relevant factor when planning and financing the overall litigation strategy. As an example, for a claim value of EUR 15 million, the adverse party risk for the 1st and 2nd instances would amount to more than EUR 320,000. Depositing this amount with the court may leave a cash gap for the plaintiff, and while procuring a respective bank guarantee is viable for solvent companies, such a guarantee also comes with a significant fee.

So far, it had been unclear whether this particular regime also applies in the enforcement proceedings for a (domestic or international) arbitration award. Formally, these rules only apply for claim proceedings, where the parties are considered to be the plaintiff and the defendant, and the result of the action will be a court judgment. The proceedings for enforcement of an arbitral award, however, are not considered a regular claim proceeding, the party seeking enforcement is considered to be an “applicant”, the opposing party is a “respondent”, and, therefore, the rules on security for cost do, technically, not directly apply.

The Decision by the Federal Court of Justice

The FCJ has, in its order dated 12 January 2023, decided that the abovementioned rules also apply in enforcement proceedings for arbitral awards by means of an analogy:

“The principle of security for legal costs serves the purpose of protecting the defendant from enforcement difficulties abroad when enforcing a claim for reimbursement of costs […]. The interests of the defendant in proceedings for a declaration of enforceability of an arbitral award are in this respect comparable to that of a defendant in legal proceedings. The provision of security for costs of proceedings is suitable in the same way as in legal proceedings, the enforcement of a possible claim for reimbursement of costs by the defendant against a claimant with habitual residence outside the European Union or the European Economic Area.”

The court also clarified that the specific role of the party as a plaintiff in this sense is not defined by who filed for the enforcement proceedings, but rather by who stroke the first “hit”. This is of high relevance in enforcement proceedings where the (losing) defendant of an arbitration requests negative declaratory judgment on the enforceability of an arbitral award: If the initial plaintiff from the arbitration then defends himself against the claim for declaratory relief and, on top of that, by means of a counter-claim, requests the award to be declared unenforceable, it is considered the defendant in this sense. The party ordered to pay security for costs can only be the party that relies on a substantive claim against the other party/parties.

Practical Implications

The decision is highly relevant for foreign parties planning to initiate arbitration proceedings against a defendant whose main assets are located in Germany.

Bundesgerichtshof

A well-advised plaintiff needs to consider this risk when planning the arbitration and enforcement, and should make provisions for it.

For plaintiffs seeking litigation funding for the pursuit of their case, this cost risk is a relevant factor in determining the required budget. A funder will often also have access to preferred rates with insurance companies or banks that could potentially be involved in procuring the security.

If you want to discuss the implications of the decision for a funded arbitration campaign, and what Deminor can offer in this regard, please do reach out to a member of our Arbitration practice group.

 

Dr. Malte Stübinger

Written on July 5, 2023 by

Dr. Malte Stübinger

General Counsel Germany - Legal analysis of German litigation funding, recovery, and antirust cases - Managing European recovery cases - Client relations with German-speaking European countries

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