I INTRODUCTION TO DISPUTE RESOLUTION FRAMEWORK
The Federal Republic of Germany is a federation consisting of 16 states. While, in theory, the competence for enacting legislation lies with the federal states, federal law governs almost all areas of private law.
Germany has a civil law system characterised by codified legal provisions. Comprehensive statutes and regulations cover nearly all aspects of law. Nevertheless, court rulings, in particular rulings by the federal courts, play a significant role in the development and interpretation of the law.
Courts in Germany can be classified into five categories: ordinary courts including civil and criminal courts, which are competent for all lawsuits unless a specific rule provides for the competence of one of the following courts: labour courts competent in all matters related to labour issues; administrative courts dealing with lawsuits between a state authority and a citizen in matters of administrative law comprising, for example, municipal law, public construction law, trade concessions and environmental law; social courts in cases involving specific social law matters; and financial courts in tax matters.
In addition, the jurisdiction of the Federal Constitutional Court and the European Court of Justice play an important role.
In cases involving matters of civil law, the court of first instance is either a local court or a regional court. Local courts have jurisdiction for disputes regarding claims in an amount of up to €5,000, for disputes between a landlord and a tenant and for matters of family law. In any other case, proceedings commence before a regional court. Matters before local courts are handled by a single judge and matters before regional courts by chambers consisting of one presiding judge and two associate judges (with the possibility of assigning a case to one of the judges). Regional courts may also establish special chambers for commercial matters consisting of one professional judge and two lay judges from the business community. These chambers have jurisdiction over most commercial disputes if applied for by one of the parties.
The court of second instance is either the regional court (in cases commencing before a local court) or the higher regional court. In principle, these courts decide on appeals based on both factual and legal issues, although it must be observed that the parties to a lawsuit are to submit all relevant facts in the proceedings of first instance, leaving them only limited means to introduce new facts in appeal proceedings. Senates of the higher regional court consist of one presiding and two associate professional judges.
In certain cases, a party may submit a further appeal against a decision of a higher regional court with the Federal Supreme Court, which will review the legal aspects of the case only and will neither examine factual issues nor take evidence. Senates of the Supreme Court comprise five professional judges.
Jury trials and lay judges – with the exception of commercial law matters as described above – are alien to German civil litigation proceedings. It is solely the (professional) judge’s task to decide matters of law and of fact.
A court will always render a decision as to which party is to bear the costs of the proceedings, comprising court fees as well as the other party’s expenses. The general rule is that each party is to bear the costs to the extent it loses the lawsuit. For example, if A pursues a claim in the amount of €1,000 against B and obtains a ruling providing for the payment of €750, A is to bear one-quarter of the costs, whereas B is to bear three-quarters of the costs. The total reimbursable amount is subject to, and limited by, statutory law.
II THE YEAR IN REVIEW
i Arbitrability of disputes among partners of a limited partnership
The Supreme Court ruled on 6 April 2017 that disputes regarding the validity of resolutions of the partners of a German limited partnership may be submitted to arbitration.2
Previous judgments have addressed the arbitrability of shareholder disputes in limited liability companies. In 1996 the Supreme Court held that disputes arising from a limited liability company’s shareholders’ resolutions are generally not arbitrable.3 The court reversed course in 2009,4 and held that disputes regarding the validity of shareholders’ resolutions are arbitrable, provided that the arbitration agreement and the arbitral proceedings meet minimum legal requirements intended to safeguard the rights of shareholders. These safeguards include the right of every shareholder to receive such information about the initiation and conduction of the arbitration proceedings as is necessary to decide whether to join the proceedings, the right of every shareholder to take part, including by way of majority decision, in the selection and nomination of the arbitrators, and the consolidation of all disputes concerning the same subject matter into the same proceedings before one and the same arbitral tribunal. With its judgment from April 2017 the Supreme Court has extended these principles to limited partnerships.
The dispute arose from a resolution by which a majority of partners had ousted several limited partners from a German limited partnership. The ousted limited partners, on the basis of an arbitration clause in a previous partnership agreement, commenced arbitration proceedings against the majority partners who had deposed them. The arbitration clause in the previous partnership agreement referred to a separate arbitration agreement, which itself, in turn, specifically referenced the previous partnership agreement. By contrast, the current partnership agreement contained no arbitration clause and made no reference to the separate arbitration agreement.
The majority partners challenged the validity of the arbitration agreement as well as the jurisdiction of the arbitral tribunal. The arbitral tribunal confirmed its jurisdiction in an interim decision. The majority partners subsequently filed a request with the Higher Regional Court of Oldenburg for a declaratory ruling that the arbitral tribunal lacked jurisdiction. The application was denied. The court found that the original arbitration agreement had not been terminated by virtue of the partners’ resolution to adopt the new partnership agreement.
The majority partners appealed this decision to the Supreme Court. The Supreme Court granted the appeal and ruled that, although disputes arising from limited partnerships were arbitrable in principle, the arbitral tribunal lacked jurisdiction in this case because the arbitration agreement did not meet the minimum legal requirements for procedural fairness it had already established for limited liability companies in its 2009 decision.
ii Requirements for a valid arbitration agreement under German law
The Higher Regional Court of Munich ruled on 13 July 2017 that a provision in a contract pursuant to which the parties merely undertake to conclude an arbitration agreement does not by itself constitute an arbitration agreement.5 The judgment serves as a reminder of the formal requirements for the conclusion of an arbitration agreement under German law.
The parties had entered into a contract wherein they provided that they would conclude a separate arbitration agreement that would govern all disputes arising under or out of the contract. The parties ultimately did not conclude a separate arbitration agreement. The claimant commenced litigation before the Regional Court Munich. The Regional Court interpreted the aforementioned contractual provision as an arbitration clause and, accordingly, held that it lacked jurisdiction to hear the dispute. The claimant appealed the decision.
The Higher Regional Court of Munich reversed the Regional Court’s decision and ruled that the provision did not constitute a valid arbitration agreement. The clause merely established a contractual obligation to enter into an arbitration agreement. Since the parties had not concluded an arbitration agreement, the defendant could not in good faith expect that the claimant would initiate arbitration proceedings rather than bring the dispute before a state court. The court held that clauses of this type do not exclude the jurisdiction of the state courts, nor do they prove any intention of the parties to refer disputes to the exclusive jurisdiction of an arbitral tribunal.
iii Vacation of arbitration award due to non-disclosure of potential bias of appointed expert
The Supreme Court held in a recent decision that in certain circumstances an arbitral award may be set aside if an expert appointed by the arbitral tribunal does not disclose all circumstances that potentially raise concerns about his or her impartiality or independence.6
In this case, the arbitral tribunal appointed a technical expert who stated that he had no professional or private relationship with either of the parties. The expert did not disclose the fact that his employer had a business relationship with the claimant in the arbitration. Subsequent to the evidentiary hearing, the respondent made an unsuccessful bias challenge against the expert that referenced, inter alia, doubts as to the independence and impartiality of the expert. The tribunal ultimately issued an award that relied on the expert’s opinion.
The respondent challenged the award at the Higher Regional Court of Karlsruhe, claiming, inter alia, that its procedural rights had been violated, as the expert had failed to disclose all circumstances that may have given rise to doubts as to his impartiality and independence. The court declared the award enforceable.
The respondent then appealed to the Supreme Court. Although in this case the award was not set aside, the Supreme Court held that the appointment of an expert by the arbitral tribunal may be challenged by the parties if circumstances give rise to reasonable doubts as to his or her impartiality or independence. Moreover, the award is subject to challenge if the tribunal-appointed expert violates his or her duty to disclose such circumstances, thereby depriving a party of the opportunity to address concerns regarding the expert’s impartiality or independence during the arbitral proceedings, and if the tribunal subsequently renders an award relying on the expert’s opinion.
iv Seizure of legal documents from law firm conducting internal investigation for client
The Federal Constitutional Court, in an interim ruling from 25 July 2017, found that German state prosecutors cannot, at least for the time being, use documents they seized from a law firm that had conducted an internal investigation for one of its clients.7
Munich regional courts had initially granted the state prosecutors permission to seize documents the law firm had created in the context of an internal investigation it had carried out on behalf of one of its clients.8 The internal investigation was carried out before the client was formally charged in criminal proceedings, but under the expectation that it might be. When the German prosecutors initiated proceedings against said client, it seized the results of the law firm’s internal investigation to use as evidence in its own investigation.
The respondent, the law firm, applied for interim relief from the Federal Constitutional Court on the basis that such a seizure violates German law on attorney–client privilege (see more below). Attempts to receive relief from lower federal courts had failed.9 The protection provided by the Constitutional Court is, however, only provisional. A final ruling by the Court is still pending on whether attorney–client privilege indeed applies to documents that were prepared in expectation of a potential investigation by state authorities, but before such an investigation was formally initiated.
III COURT PROCEDURE
i Overview of court procedure
The principal statute governing private law proceedings is the German Code of Civil Procedure. The Code contains rules governing proceedings before state courts as well as ad hoc arbitration proceedings. Further, it deals with the enforcement of judgments of German and foreign courts, as well as of arbitral awards.
Other relevant civil procedure laws are the Act on the Constitution of Courts, the Act on Enforcement of Claims with respect to Real Estate, the Lawyers Remuneration Act, the Court Fees Act and the Act on the Remuneration of Expert Witnesses, Witnesses and Others.
Finally, several EU directives and regulations on the matter of civil procedure apply and supersede domestic German law.
ii Procedures and time frames
Any ordinary proceeding starts with the filing of a statement of claim. The timing mainly depends on the applicable limitation period, which is a matter of substantive law. The general limitation period is three years and commences on the last day of the year in which the claimant became aware of the existence of the claim and the identity of the debtor, or would have been aware had he or she not shown gross negligence. In principle, this period applies to claims for the performance of contracts, damages, tort, restitution or unjust enrichment. The filing of a statement of claim suspends the applicable limitation period.
The German judicial system requires the parties to submit all facts supporting their case and there are only limited means to have the opponent produce documents (see below). The concept is that each case should be dealt with within one single oral hearing, although it is not unusual that more than one hearing is held, for example to allow for the taking of evidence or the discussion of issues pointed out in an earlier hearing. To prepare the hearing, a judge may either give the parties the opportunity to present their case in a preparatory oral hearing or – as is more often the case – order the parties to submit their arguments in written briefs.
Although the Code of Civil Procedure provides for the principle that the decision of a court shall be based on the statements made in the oral hearing, the focus in almost all cases is on the written submissions of the parties (with the exception of the taking of evidence). The parties should always ensure that they plead all factual and legal submissions relevant to their case in writing. Written submissions are to be filed within the time limits set out by the judge in his or her discretion. If parties fail to comply with such time limits without proper excuse, late submissions may be precluded.
Court proceedings must be conducted in German. Since the beginning of 2010, proceedings can, however, be conducted in English before specific courts in certain areas of Germany. Accordingly, complaints and other written submissions by the parties may be in English, and the court’s decisions would also be rendered in English. This pilot project is an initiative to establish special ‘chambers for international commercial matters’ at the regional court level. The initiative is aimed at increasing the attractiveness of German courts as a forum for international commercial litigation.
Oral hearings often take a surprisingly short time, during which the parties primarily refer to their written briefs. Means of evidence are documents, inspection by the court, witness statements, expert opinions and, to a rather limited extent, party testimony. As a general rule, written witness statements do not qualify as evidence.
At the conclusion of a hearing, the judge usually sets a specific date on which he or she will render a decision, be it a judgment or an order as to the further procedure.
It should be noted that the Code of Civil Procedure provides that the court shall consider at all times during the proceedings whether a settlement can be reached. In particular, courts are required to inquire whether an amicable solution is an option prior to the first oral hearing. It is at the discretion of the judge how far he or she goes with such an enquiry. Whereas some judges merely ask whether the parties wish to settle the case and, if this is denied, promptly enter into the proceedings, other judges discuss their preliminary evaluation of the case with the parties in detail and make concrete proposals as to what the terms of a settlement could be.
While the duration of any litigation depends on the complexity of the case and, to a large extent, is subject to the discretion of the court, the average duration from the initiation of an action until the issuance of a judgment is in the range of seven months (local courts) to 15 months (regional courts) in the first instance and between 22 months (regional courts) and 27 months (higher regional courts) in the second instance.
In addition to regular court procedures, a party may initiate a number of alternative proceedings. Summary collection proceedings provide for a rapid procedure by which the applicant may obtain a collection order without an oral hearing if the subject matter is the payment of a certain sum of money. The evaluation by the court is limited to whether the claim appears to be plausible. Upon written objection of the defendant, the dispute is transferred to the competent court and the matter turns into a regular lawsuit. Generally speaking, a collection procedure is only an option if the defendant is likely to pay immediately or fail to respond, or if a limitation period needs to be suspended on short notice.
Further, a plaintiff may initiate summary proceedings that allow for documents or a bill of exchange as the only means of evidence. If a judgment is rendered against the defendant, the latter may ask for the judgment to be set aside in subsequent proceedings. If the defendant makes use of this right, the dispute remains pending as a regular lawsuit, entitling both parties to resort to regular means of evidence.
Along with these options, a party may initiate ancillary proceedings, such as a procedure for the taking of evidence independent of a pending lawsuit or proceedings for interim measures.
Two different kinds of interim measures exist: attachment orders and preliminary injunctions.
Both an attachment order and a preliminary injunction are provisional court orders issued in summary proceedings to obtain security for the future execution of a claim. While an attachment order secures satisfaction of monetary claims, a claim for payment of a purchase price or damages, for example, a preliminary injunction may be issued with regard to a non-monetary claim, for example a claim for the omission of a contractual violation.
To support a motion for interim measures, the applicant must submit facts establishing the jurisdiction of the court, the potential claim and the reasons why interim relief is required. In doing so, the applicant – unlike in regular proceedings – is not required to provide full evidence but may rely on prima facie evidence. In contrast to regular proceedings, this includes the submission of written affidavits regarding the facts of the case, be it by the applicant or by third parties.
The execution of interim measures follows, in principle, the same rules as the enforcement of a regular judgment. The enforcement is restricted, however, to measures that safeguard the applicant’s interests without fully satisfying the claim.
Proceedings concerning provisional remedies are handled with priority and can be extremely fast. In urgent cases, a judge may decide without an oral hearing. Thus, in practice, it may take no longer than a few days, sometimes only hours, to obtain a court order or injunction.
In any case, the defendant may oppose the order of the court. Upon such a motion, the court will decide by judgment. Appeals against such judgments follow the general rules.
iii Class actions
In Germany, class actions in a formal sense are not permissible. It is a fundamental principle of German law that a litigant must appeal to the court as an individual to benefit from, or to be bound by, a civil litigation.
The Capital Market Model Case Act, however, provides for an option to establish certain factual or legal aspects of claims on behalf of a group of plaintiffs. The Act is designed for certain capital market mass disputes, claims for damages due to false or omitted public capital markets information or claims based on an offer under the Securities Acquisition and Takeover Act. In these disputes, the court of first instance may initiate a model case before the higher regional court upon motion of the plaintiff or the defendant, seeking the establishment of the existence of certain conditions or even the mere clarification of specific legal questions. The decision of the higher regional court will only be binding for the parties whose cases are already pending. The mere registration of a claim with the higher regional court is sufficient to suspend the running of the statute of limitations if the claim is based on the same facts as the model case proceedings.
Currently, the German government is discussing the introduction of model case proceedings without a limitation to capital market mass disputes. If such proceedings are introduced, it will give plaintiffs the opportunity to register their claims in a ‘claim register’ (opt-in). Subsequently a representative, for instance a consumer protection organisation, may bring a model case in which specific legal and factual aspects will be established before the regional court or, in specific cases, the higher regional court. The plaintiffs who registered their claims may afterwards file individual suits against the defendant in which the competent court will be bound by the previously established legal and factual aspects of the model case. In contrast to the Capital Market Model Case Proceeding, the decision will be binding for all registered claims, irrespective of whether individual suits were already pending prior to the filing of the model case. Furthermore, the registration of the respective claim in the ‘claim register’ will suspend the limitation period.
In addition, multiple parties may, and in some cases must, jointly file or defend a claim in one single court proceeding. They may join voluntarily if they are either legally connected or their claims are based on the same factual or legal grounds, for example if the parties are ‘joint and severable debtors’ or ‘debtor and guarantor’. The parties must join if the subject matter of the dispute calls for a single decision in respect of all parties concerned, for example an action by several shareholders for a declaration that a stock corporation was not validly founded.
Moreover, some specific statutes provide for actions by organisations on behalf of groups of individuals: under the Act on Actions for Injunctions (UKlaG), certain qualified representative organisations, such as consumer protection associations and chambers of commerce, may initiate actions in the interests of consumers. In 2016, the German legislator decided to add the possibility of such an action based on specific data protection law violations.
Further, in the framework of proceedings to determine the fair compensation of minority shareholders in relation to the transformation or reorganisation of companies, the conclusion of a control agreement, or a squeeze-out under the Stock Corporation Act, the court may appoint a representative to protect the rights of non-participating shareholders.
iv Representation in proceedings
The question of whether a party must be represented by a lawyer or whether it is entitled to represent itself depends on the court with which the case is pending. In all lawsuits before a regional court, a higher regional court or the Supreme Court, as well as in family courts, a lawyer must represent the parties. In all other legal proceedings the parties may represent themselves.
v Service out of the jurisdiction
Service Regulation No. 1393/2007 of 13 November 2008 governs the service of documents within the EU. The Hague Service Convention, the Hague Civil Procedure Convention and further bilateral treaties apply in the case of service of documents from Germany to any other foreign country.
Under the Service Regulation, each Member State must establish ‘transmitting and receiving agencies’ responsible for the transmission and receipt of the relevant documents. The transmitting agency issues the documents accompanied by a standard form to the foreign receiving agency. In Germany, the transmitting agency is the competent court initiating the service, and the receiving agency is the local court located in the district in which the document shall be served. The receiving agency located in the state of the defendant will examine the request and take all necessary steps to serve the document as soon as possible. It will serve the document in accordance with its domestic law or, if possible under its domestic law, by the method requested by the German courts.
Under the Hague Convention, each contracting state must designate a ‘central authority’, which, in Germany, is typically the Ministry of Justice of the respective federal state. Thus, a German court will first send the request for service to the Ministry, which in turn will transfer the request to the competent authority of the foreign state. The foreign central authority will then effect service in the same manner as under the Service Regulation.
Within the scope of the Hague Convention, the procedure described above applies to the service of statements of claim and initial court orders. For any subsequent document, the German court will request that the defendant nominate a service agent or attorney in Germany. If the defendant fails to comply with the order, the court will send the documents to the defendant’s foreign address by regular mail. This does not apply, however, under the Service Regulation. The Supreme Court declared that the service of documents within the EU must adhere to the requirements provided for therein (until a domestic service agent or attorney is nominated).10
These rules apply regardless of whether the recipient is an individual or a corporation.
vi Enforcement of foreign judgments
With effect from 10 January 2015, Regulation No. 1215/2012 (Brussels Ia Regulation) replaced Enforcement and Recognition Regulation No. 44/2001. Main features of the recast Regulation are the abolition of exequatur, changes to the lis pendens provisions addressing the problem of ‘torpedo actions’ as well as amendments to the rules relating to jurisdiction agreements. In addition, the Lugano Convention on Recognition and Enforcement applies to judgments of the Swiss, Norwegian and Icelandic courts. German domestic law may apply, either if these rules do not apply, or if it necessary to apply German law in order to complete the provisions of bilateral treaties. The relevant provisions are contained in the Code of Civil Procedure and in the Recognition and Enforcement Implementation Act.
Under the Brussels Ia Regulation, a creditor seeking enforcement of a foreign judgment must present a copy of the judgment and a standard certificate issued by the court that rendered the decision to the enforcing court. It is no longer necessary to file a request for execution as it was under the exequatur procedure. This process is in line with Regulation No. 805/2004, which abolished the exequatur proceedings for uncontested claims in 2005 and introduced a uniform European enforcement order that is directly enforceable in all EU Member States (for which a creditor may apply with the competent court of its own jurisdiction).
The grounds for non-recognition of a judgment under both the Brussels Ia Regulation and the Lugano Convention are essentially the same as under the Code of Civil Procedure. They are listed in Article 45 of the Brussels Ia Regulation, Article 34 of the Lugano Convention and Section 328 of the Code of Civil Procedure. The only difference is that under the Code recognition is also denied if reciprocity is not guaranteed or if the foreign court has no jurisdiction in accordance with German law.
vii Assistance to foreign courts
Service of foreign documents follows the same rules as service of German documents abroad. In addition, under the Brussels Regulation No. 1206/2001, any court of a Member State may request a German court to take evidence in Germany. In doing so, it may directly approach the competent German local court.
German authorities will also execute requests for the taking of evidence under the Hague Evidence Convention and the provisions of various bilateral treaties. Under the Hague Evidence Convention, the foreign authority sends a letter of request to the designated German central authority (usually the Ministry of Justice of the respective German federal state). Such a letter must comply with several substantive and formal requirements and be accompanied by a certified translation. The German authority may refuse execution only on limited grounds.
Requests of foreign courts for information on German law are subject to the European Convention on Information on Foreign Law. The foreign court will send its request to the Federal Ministry of Justice in Berlin.
viii Access to court files
In principle, oral hearings, including the court’s decision and final judgments, are public (exceptions apply to proceedings before family courts). Only the parties to the litigation, however, may inspect the court files. Any other person seeking inspection of files must demonstrate a legally recognised interest to inspect all or part of the court records of a particular case. Another possible way for third parties to gain access to the files is to intervene in the pending action if the requirements of a third-party intervention are met.
ix Litigation funding
Third-party litigation funding by specialised litigation financing entities, usually insurance companies, has been permitted since the late 1990s.
According to one model, the insurer covers all court and attorneys’ fees in exchange for a share of up to 50 per cent of what is recovered in successful claims or settlements. According to a more recent model, companies solely founded for such a purpose may acquire the entire claim.
In principle, lawyers must not fund actions by means of contingency fees or conditional fees. Following a judgment of the Federal Constitutional Court from 2007, the legislator introduced an exception into the Lawyers Remuneration Act pursuant to which contingency fees are permissible in exceptional circumstances, if otherwise a plaintiff would be unable to pursue a claim.
IV LEGAL PRACTICE
i Conflicts of interest and Chinese walls
According to the Federal Lawyers Act, a lawyer may not represent parties with conflicting interests. In contrast to many other jurisdictions, the prohibition against prevarication does not apply merely when the representation of one client may impair another client’s (legal or commercial) interests. A conflict of interests is rather only deemed to exist where a lawyer advises or has advised another party (or is or has been active in another capacity, for example as a judge, arbitrator, public prosecutor or notary) in ‘the same legal matter’.
Under certain circumstances, a lawyer must disclose potential conflicts of loyalty with existing clients, even if no conflict of interest is given: the Supreme Court held that a lawyer must inform a new client if the new client’s opponent frequently retains that lawyer or law firm in other legal matters.11 This duty applies, in particular, where the lawyer is not willing to represent the new client in court or arbitration proceedings against the opponent.
The scope of the prohibition against prevarication is further defined by the Rules of Professional Practice. According to the Rules, where a lawyer is or has been active for a party in a legal matter, the prohibition extends to all lawyers who work in the same law firm as, or who share office space with, this lawyer. When a lawyer moves to a new law firm, the prohibition against prevarication also extends to all lawyers who work in the new law firm with respect to all matters in which the lawyer advised a party at his or her former law firm.
The prohibition does not apply, however, if the clients have been comprehensively informed of the conflict of interest and have expressly agreed to be represented by different lawyers of the same law firm, provided that the representation does not impair the competent administration of justice.
The majority of legal scholars and legal practitioners seem to agree that establishing ‘Chinese walls’ or similar measures to limit the flow of information within a law firm does not, in and of itself, redress an existing conflict of interests. Where the clients have agreed to be represented by the same law firm, however, Chinese walls are widely regarded as a permissible means of safeguarding the confidentiality of a client’s information. There are, however, no clear guidelines in German statutory or case law, or in the Rules, as to what Chinese walls must entail to be considered effective. In practice, Chinese walls are typically implemented by identifying teams of lawyers and staff who will work on the matter for one client, restricting access to a client’s confidential information to the team working on the matter for that client (e.g. by implementing access control mechanisms in the law firm’s IT system) and limiting interactions with the team working on the matter for another client (e.g. by arranging for each team’s work space to be located in a different office of the law firm or, if in the same office, on a different floor or in a separate area).
ii Money laundering, proceeds of crime and funds related to terrorism
Under the Money Laundering Act, lawyers are subject to certain obligations aimed at detecting and preventing money laundering and financing of terrorism. These obligations apply where a lawyer is involved on behalf of a client in the planning or execution of transactions related to the purchase or sale of real property or businesses, the administration of money, securities or other assets, the opening or administration of bank accounts, the establishment, operation or management of trust companies, companies or similar entities or structures and the procurement of funds required for such purposes.
Most importantly, lawyers must determine and verify the client’s identity and, where the client is acting for the account of a third party beneficiary, also the beneficiary’s identity. The Money Laundering Act, inter alia, imposes the following further obligations on lawyers: to implement adequate internal safety measures to prevent the lawyers’ involvement in money laundering and terrorism financing, to continuously monitor the relationship with the client for suspicions of money laundering and terrorism financing, and to report such suspicions to the competent authorities. Certain exceptions apply where an ongoing relationship with the client exists if the lawyer has already complied with the identification and verification requirements in connection with a previous mandate for that client. Since 2011, however, lawyers have a general obligation to determine and verify the identity of all clients and continuously monitor the relationship.
iii Data protection
The data protection requirements applicable to private data controllers are set out in the Federal Data Protection Act. As a general rule, the collection, processing and use of personal data is prohibited except to the extent permitted by the Act. There are no provisions in the Act that expressly deal with, or generally permit the collection, processing and use of personal data for purposes of court proceedings. Whether and to what extent the access to and review of material containing personal data by legal counsel and the processing of such material by legal outsourcing service providers are permissible in the absence of consent by the data subjects depends on the circumstances of the individual case.
Since there is in principle no pretrial discovery, the access to, and review by legal counsel of, material containing personal data will typically not relate to material in the possession of the other party to the court proceedings, but to material in the possession of the lawyer’s own client. As a general rule, the collection, processing and use of personal data (or material containing personal data) for purposes of asserting claims of the data controller or defending the data controller against claims by third parties is only permissible to the extent required to protect a legitimate interest of the data controller. Furthermore, no reason must be given to assume that the data subject’s interest in prohibiting the processing or use of personal data outweighs the data controller’s interest.
Where a third party reviews the material on behalf of the data controller, the rules governing data processing by agency may apply (which require the implementation of additional contractual, operational and technical safeguards). This will typically not be the case where legal counsel reviews the material for purposes of the representation of the client in court proceedings. Review of the material by a legal outsourcing services provider is, however, generally considered to constitute data processing by agency. Where the legal outsourcing services provider is located in a country outside the European Economic Area (EEA), whose laws do not provide for an adequate level of data protection, the data controller will have to ensure by contract that the service provider adheres to data protection standards that are equivalent to those applicable within the EEA.
V DOCUMENTS AND THE PROTECTION OF PRIVILEGE
German law protects communications between a lawyer and the client by recognising a lawyer’s right to refuse to testify in court with respect to matters to which the lawyer’s professional duty of secrecy extends, namely all matters of which the lawyer becomes aware in the exercise of his or her profession. This ‘lawyers’ privilege’ also applies to the production of documents in the lawyer’s possession. It does not, however, apply to documents in the possession of third parties, including the client, even where the documents have been prepared by a lawyer.
In criminal proceedings, the courts are prohibited from ordering the seizure of written communications between the defendant and his or her lawyer as well as the lawyer’s files. By extending the application of certain provisions of the Code of Criminal Procedure, the German legislator promoted equal treatment of the counsel of defence and all other lawyers in criminal proceedings. These rules apply, mutatis mutandis, to administrative proceedings, for example investigations by the Federal Cartel Office or other regulatory authorities.
Lawyers’ privilege also applies to foreign lawyers practising in Germany, provided that they have become a member of the Bar association at their place of business in Germany.
In the past, courts have been reluctant to apply the lawyers’ privilege to in-house lawyers, while scholars and practitioners have generally advocated that the privilege be extended to them. In 2010, the European Court of Justice held that the lawyers’ privilege does not apply to communication with in-house lawyers due to the fact that they are not independent of their clients.12 The court elaborated that a coherent interpretation and application of the lawyers’ privilege throughout the European Union is crucial to ensure equal treatment for all companies subject to inspections by the Commission in antitrust proceedings.
ii Production of documents
Under the rules regarding burden of proof, each party to a court proceeding is responsible for pleading and proving all facts relevant to support its claim or defence. As a general rule, litigants do not have to disclose information enabling the opponent to plead and prove its case. General pretrial discovery proceedings are alien to the German judicial system. Consequently, an obligation of the opponent or a third party to produce documents at a litigant’s request only exists where the litigant has a right to demand the production of such documents under contract or statutory law. In the absence of such a right, a litigant must obtain all information required to support its case from publicly available sources or from documents in its possession or to which it has access.
The court may, ex officio, order litigants and third parties to produce documents (including documents stored electronically) in their possession that either party has referred to in the proceedings. The obligation to produce documents is independent of the allocation of the burden of proof among the litigants. The Supreme Court held that, where the party who bears the burden of proof has referred to documents in the other party’s possession, the court may order the other party to produce the documents.13
In practice, the courts tend to exercise the sweeping power afforded them by the new rule rather cautiously. To avoid ‘fishing expeditions’ by the litigants, courts will only order the production of documents where it is required in light of a party’s conclusive and specific assertion of concrete facts. The Supreme Court has eased these stringent requirements for claims based on an alleged infringement of intellectual property rights. Acknowledging the difficulties a plaintiff typically faces in proving that the defendant infringes its intellectual property rights, the Court held that the defendant or a third party may be ordered to produce documents where an infringement of the plaintiff’s intellectual property rights appears likely.14
A court may not order the production of documents if such an order would constitute an undue and disproportionate burden. Moreover, third parties are not required to produce documents to the extent they are entitled under statutory law to refuse to testify as witnesses.
As regards documents located abroad, a court may, in principle, order a litigant or a third party to produce documents regardless of where they are located. Such an order is not regarded as an infringement of the sovereignty of the foreign state in which the documents are located, provided the court does not impose, or threaten to impose, sanctions in the event that the addressee does not comply with the order.
Where it is not possible to obtain the documents from abroad for legal or practical reasons, the court may instead request that the competent authorities in the foreign state assist with the taking of evidence in accordance with the procedures set out in Regulation (EC) No. 1206/2001, the Hague Evidence Convention, bilateral treaties and the Code of Civil Procedure.
The 9th Amendment of the German Act against Restraints of Competition (GWB) will implement EU Directive No. 2014/104/EU on Antitrust Damages Actions and introduce pre- and in-trial discovery proceedings with regard to actions for damages in antitrust cases. The German cabinet agreed on the relevant amendment on 28 September 2016 which will probably enter into force within the first quarter of 2017.
The revised law will provide litigants with pre- and in-trial discovery claims against the other party or third parties that are in possession of evidence required to establish a cartel-damage claim or defence. Litigants will be able to obtain a court order for the disclosure of documents. A plaintiff must prove to the court’s satisfaction that he or she is entitled to a cartel-damage claim, and specify the documents that shall be produced as exactly as possible on the basis of the facts accessible with reasonable effort. A defendant must show that a cartel-damage-litigation is pending against him or her and also sufficiently specify the documents.
The judge concerned will have to ensure that disclosure orders are proportionate and that confidential information is protected. He or she must also balance a party’s interest in favour of disclosure against the other party’s interest in keeping the documents undisclosed. Thus the court must pay particular attention to the protection of company secrets as well as to the scope and content of the documents demanded, and the costs of the production. Further, specific documents such as leniency statements and settlement documents shall not be disclosed, and the opposing party may deny the production of documents if its entitled to a statutory right to refuse testimony.
VI ALTERNATIVES TO LITIGATION
i Overview of alternatives to litigation
German corporations increasingly accept out-of-court means of dispute resolution such as arbitration, mediation and conciliation.
The rules governing arbitration proceedings in Germany are contained in the Tenth Book of the Code of Civil Procedure. To promote domestic and international arbitration, the German legislator essentially incorporated the provisions of the UNCITRAL Model Law into the Code of Civil Procedure. Consequently, the same set of rules governs proceedings in Germany as in any other major arbitration venue around the globe.
The following arbitration-friendly features of German law are noteworthy.
- a Arbitrability extends to any domestic or foreign dispute unless it concerns residential lease agreements or matters that are not at the parties’ disposal (e.g., marital, child custody or guardianship matters).
- b Certain statutory presumptions facilitate the fulfilment of the form requirements for arbitration agreements in commercial transactions.
- c Before the constitution of an arbitral tribunal, the parties may obtain a binding decision by a state court regarding the admissibility of arbitral proceedings.
- d If the arbitration agreement places one party at a disadvantage regarding the composition of the arbitral tribunal, that party may request that a state court appoint the arbitrator regardless of what the arbitration agreement stipulates.
- e If the parties have not designated the substantive law applicable to the dispute, the tribunal must apply the law of the country that is most closely connected with the subject matter of the dispute.
- f Assistance by state courts (e.g. by ordering interim measures) is not restricted by the principle of territoriality and, in addition to the taking of evidence, extends to ‘other judicial acts’ that the arbitral tribunal is not authorised to take (e.g. service of process).
- g Domestic arbitral awards, namely awards rendered in Germany, have the same effect between the parties as a final and binding judgment of a state court.
- h Arbitral tribunals must decide on the allocation of the costs of the proceedings taking into account the circumstances of the case and the outcome of the proceedings.
- i If an arbitral award is set aside by a state court, the arbitration agreement will continue to apply to the subject matter of the dispute unless the parties agree otherwise.
Germany is a signatory to various international agreements relating to arbitration: the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 (the New York Convention); the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965 (the ICSID Convention); the European Convention on International Commercial Arbitration of 21 April 1961 (the 1961 European Convention); and the Protocol on Arbitration Clauses of 24 September 1923. In addition, Germany has concluded numerous bilateral treaties on international arbitration.
The principal arbitral institution in Germany is the Deutsche Institution für Schiedsgerichtsbarkeit (DIS), which provides parties with a comprehensive set of rules, the DIS Arbitration Rules of 1 July 1998, applicable to both national and international proceedings. The DIS also rendered a set of supplementary rules for expedited proceedings designed to enable the arbitral tribunal to issue an award within six to nine months. Such ‘fast-track’ proceedings are increasingly used in connection with M&A transactions, for example to determine whether a party may withdraw from the agreement under a material adverse change clause. The DIS also adopted supplementary rules for corporate law disputes to implement decisions of the Supreme Court confirming the arbitrability of disputes regarding the validity of shareholder resolutions.
Further arbitral institutions are the Schiedsgericht der Handelskammer Hamburg, the Waren-Verein der Hamburger Börse, the German Maritime Arbitration Association, the Schlichtungs- und Schiedsgerichtshof Deutscher Notare and the Deutsche Börse AG/Frankfurter Wertpapierbörse.
As in most countries, parties to arbitration proceedings in Germany may appeal an arbitral award on very limited grounds only. An appeal to a German state court against an award rendered abroad is not possible.
The reasons for setting aside an award are, in principle, limited to procedural irregularities. A court may not review the award on its substance. The procedural irregularities that may form the basis of setting-aside procedures correspond to those set out in the UNCITRAL Model Law: invalidity of the arbitration agreement, violation of due process, lack of subject-matter jurisdiction or the improper composition of the tribunal, and non-arbitrability of the subject matter. In addition, the appellant may base a request on the violation of public policy.
The recognition and enforcement of foreign arbitral awards is governed by the New York Convention. In addition, bilateral and multilateral treaties apply if they are more favourable to the applicant. In 2010, the Supreme Court held that, according to the principle of most-favoured treatment provided for in the New York Convention, German courts must enforce a foreign arbitral award if the underlying arbitration agreement meets the formal requirements under German law (but not those provided for in the New York Convention).15
There is a clear trend towards arbitration in Germany, in particular in complex and international cases requiring a highly skilled tribunal with particular knowledge of foreign languages and law as well as of the subject matter of the dispute. Its arbitration-friendly legal framework and the increasingly recognised competence and effectiveness of its arbitral institutions makes Germany an attractive place for arbitration, even for those who are less familiar with the German language or legal system. The Supreme Court has furthered this development through several rulings reinforcing the independence and effectiveness of arbitral proceedings in Germany. According to the statistics of the DIS, the number of cases filed per year has more than trebled from 1998 to 2015.
The Mediation Act of 2012 transforms Directive No. 2008/52/EG into German law. The Act is confined to fundamental provisions, so that the mediator is free to organise the mediation proceedings at her or his discretion (unless provided for otherwise by the parties). The Act defines mediation as a confidential and structured procedure in which the parties, assisted by one or several mediators, voluntarily and on their own responsibility seek an amicable resolution of their dispute. It contains provisions aimed at ensuring the independence and impartiality of the mediator as well as the confidentiality of the mediation.
Provisions regarding the enforcement of agreements achieved in mediation proceedings were included in earlier drafts but not included in the Act. Given the limited scope of the Act, it is doubtful that it will have the positive impact on the acceptance of mediation as a means of dispute resolution expected by many proponents of the earlier, more ambitious bill.
The DIS Mediation Rules correspond to international standards and provide a detailed and comprehensive framework for mediation proceedings. Several other national and regional institutions have also adopted mediation rules, for example the Bundesverband Mediation in Wirtschaft und Arbeitswelt, the European Institute for Conflict Management, the Centrale für Mediation and several local chambers of commerce. The European Institute for Conflict Management has acquired a leading position in the field of business mediation in Germany.
In recent years, corporations and individuals alike have increasingly accepted mediation as a means of resolving disputes. Notwithstanding its rising acceptance, mediation still plays a relatively small role. The reason may lie within the court system. As described above, judges are obliged to initiate conciliation hearings prior to regular hearings and to foster amicable solutions at all stages of the court proceedings. Thus, the incentive to take recourse to alternative forms of dispute resolution outside the courtroom is small.
The Introductory Law to the Code of Civil Procedure authorises the federal states to require obligatory mediation procedures for certain types of claims (e.g., claims of up to €750, disputes between neighbours) as a prerequisite for access to state courts. Some federal states have made use of this option, and the results vary as to their success.
iv Other forms of alternative dispute resolution
Other forms of ADR in Germany are expert determinations and dispute resolution boards (DRBs).
Parties commonly resort to expert determinations for disputes regarding technical or accounting questions, for example in connection with the determination of the purchase price in M&A transactions. They typically request the expert to produce a written opinion which may, depending on the parties’ determination, be either binding or non-binding.
DRBs are particularly popular in the field of construction law. They are project-specific, stand-by dispute resolution mechanisms established by contract between the parties to avoid the escalation of disputes. Although the mechanism has proved very successful in practice, there are no specific regulations in Germany.
The EU directive on consumer ADR of 2013 and the regulation on consumer online dispute resolution (ODR) are aimed at providing consumers and traders with a simplified, quick, low-cost, out-of-court procedure to settle their disputes. The directive has been directly applicable in the EU Member States since January 2016 and was implemented into German Law in February 2016.
VII OUTLOOK and CONCLUSIONS
The possibility of a collective redress mechanism for consumers recently regained political traction in Germany. In July 2017, the Federal Ministry of Justice published a draft bill for a ‘model case declaratory action’. Because the bill was not passed before the general elections in September 2017 and the end of the most recent legislative period, its future is uncertain at best. The bill does, however, showcase which questions have arisen in the context of collective legal redress for consumers in Germany and therefore serves as an indication of how these questions may be answered in the future. The draft bill pursued two main goals: firstly, to provide injured parties with an effective collective redress mechanism in cases of widespread damages and secondly, to avoid the introduction into German law of a collective redress mechanism akin to US class actions. The draft bill replicated in large part the framework for the model procedure for claims arising from capital markets disputes in Germany. Unlike a traditional class action lawsuit, a claim would not have been asserted by a single claimant on behalf of every class member. Instead, legal and factual issues relevant to all of the claims were to be addressed and ruled on in a judicial model proceeding. The assertion of the individual claims was to remain the responsibility of each individual claimant. Asserting those claims would, however, have been eased significantly by the fact that the common issues that were already subject of the model proceedings would not have to be decided again in the subsequent proceedings between individual consumers and the company. The draft bill left open the question of whether a decision in the model proceedings would be binding only for the company against whom the claims have been brought or also for the consumer claimants.
The draft bill offered a further advantage to consumers. Under the bill, consumers would have been able to register their claims in an electronic claims register at a low cost, thereby suspending the statute of limitations and preventing their claims from becoming time-barred while the model proceedings were pending. Consumers who registered their claims could, therefore, have awaited the outcome of the model proceedings and then decided whether to assert their individual claims in court.
According to the draft bill, only certain consumer protection associations would have been allowed to initiate model proceedings. This was seemingly to ensure that model case declaratory actions would only be initiated in the interest of injured consumers and to thereby prevent the emergence of a ‘claims industry’ in which the interests of lawyers ultimately would decide which actions were filed. Experience has shown, however, that consumer associations, due to their limited financial and personnel resources, are usually unable to commence litigation that entails a significant cost risk for them anyway, thus calling into question whether limiting the initiation to only certain associations is necessary.
The draft bill further provided for the possibility of having a settlement between the consumer protection association and the company approved by a court. If fewer than 30 per cent of the consumers who registered their claims opted out of the settlement, the court-approved settlement would have become binding on all registered claimants.
It remains to be seen what form the bill will ultimately take if a new German government, as and when it is constituted, continues pushing for the introduction of a model case declaratory action at all.
1 Henning Bälz and Carsten van de Sande are partners at Hengeler Mueller Partnerschaft von Rechtsanwälten mbB.
2 Docket number I ZB 23/16.
3 Docket number II ZR 224/95.
4 Docket number II ZR 255/08.
5 Docket number 23 U 1260/17.
6 Docket number I ZB 1/16.
7 Docket number 2 BvR 1562/17.
8 Docket number ER II Gs – 2238/17.
9 Docket numbers ER II Gs – 2811/17 and 6 Qs 5/17.
10 Docket numbers VIII ZR 114/10 and VIII ZR 190/10.
11 Docket number IX ZR 5/06.
12 Docket number C-550/07.
13 Docket number XI ZR 277/05.
14 Docket number X ZR 114/03.
15 Docket number III ZB 69/09.