German Federal Court of Justice: providing security for costs of legal enforcement of domestic and foreign arbitral awards in Germany

As of recently, it was not clear whether security for legal costs in proceedings to declare domestic or foreign arbitral awards enforceable in Germany must be provided by foreign applicants at the request of the respondent as is the case for foreign claimants in court actions. The German Federal Court of Justice (Bundesgerichtshof – “Federal Court”) answered in the negative under previous procedural law and, until recently, left this issue open under currently applicable procedural law. In a ruling dated 12 January 2023 (I ZB 33/22), the Federal Court declared sections 110 and onwards of the German Code of Civil Procedure (Zivilprozessordnung – “Civil Procedure Code”) regarding an obligation to provide security to be analogously applicable to legal costs for enforcement of arbitral awards. Thus, entities and individuals that are confronted with enforcement of an arbitral award by foreign creditors in Germany have the option of requiring security for legal costs. The obligation to provide security for legal costs applies to applicants who do not have their habitual place of residence in an EU Member State or a signatory state of the Agreement on the European Economic Area.

Background of the Federal Court decision

The applicant is a German entrepreneur who worked in the Russian Federation for many years. The respondents are several independent companies belonging to a group of fruit juice companies that previously cooperated with the applicant.

In 2019, the applicant won against the respondents in ad hoc arbitration proceedings in Moscow, and the respondents were ordered to pay compensation for damage amounting to a figure in the mid-eight-figure range. The respondents filed an action with the Koblenz Higher Regional Court for a negative declaratory judgment that did not recognise the foreign arbitral award. By way of countersuit, the applicant sought declaratory judgments including that the arbitral award is enforceable. The respondents then unilaterally declared that there was no longer a need to adjudicate their action for a negative declaratory judgment and requested that the court reject the application for enforceability of the arbitral award. The Koblenz Higher Regional Court (Koblenz Higher Regional Court, decision dated 31 March 2022 – 2 Sch 3/20) rejected not only the respondents’ application for a declaratory judgment that there was no longer any need for adjudication but also the applicant’s application for a declaratory judgment of enforceability and decided that the foreign arbitral award was not to be recognised in Germany. The applicant continued to pursue his applications in the form of an appeal on a point of law. The respondents applied for rejection of the appeal on a point of law and opposed the rejection of their application for a declaratory judgment of no need for adjudication with an appeal on points of law of their own.

In November 2022, the applicant reported that he had changed his place of habitual residence from Moscow to Dubai (UAE). The respondents then demanded that he provide security for legal costs. In January 2023, the applicant reported that he had given up his address in Dubai and now had a residence and the geographical focus of his living situation in Italy.

Federal Court decision: analogue applicability of the provisions on providing security for legal costs in declaratory proceedings regarding enforceability

The Federal Court held that the respondents’ application for provision of security for legal costs was admissible but rejected its merits. The court based its decision on the following reasons:

• Proceedings to declare an arbitral award enforceable are initiated with an application (not an action), so strictly speaking the parties are not in the procedural positions of plaintiff and defendants but rather of applicant and respondents. However, the court found that, the applicant was in a position equivalent to a claimant within the meaning of section 110(1) of the Civil Procedure Code.
• The court ruled that under the currently applicable procedural law, sections 110 et seq. of the Civil Procedure Code are analogously applicable to application proceedings for a declaration of enforceability of German and foreign arbitral awards. It deemed the prerequisites for analogous applicability to be given. There is an unintentional gap in legislation because section 1063 of the Civil Procedure Code only contains individual procedural provisions. Thus, the general provisions regarding first-instance evidence-gathering proceedings are to be supplementally applied, which includes sections 110 et seq. of the Civil Procedure Code.
• The meaning and purpose of providing security for legal costs was also an indication in favour of analogous application to proceedings for a declaration of enforceability of German and foreign arbitral awards. Its intent is to protect the defendant from enforcement difficulties abroad when enforcing a claim to reimbursement of costs. The nature of the respondents’ interests in proceedings for declaration of enforceability of an arbitral award is thus comparable with that of a defendant in a lawsuit.
• No special procedural aspects speak against the analogous application of sections 110 et seq. of the Civil Procedure Code because neither the Civil Procedure Code nor the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards contain special rules to expedite proceedings for a declaration of enforceability.
• There could likewise be no presumption of a comparable need for alacrity as in proceedings for temporary injunctions and seizure, in respect of which it was held that sections 110 et seq. of the Civil Procedure Code are not applicable. In an arbitration, the winning party has already achieved (initial) security in the form of the arbitral award. The winning party also has the option of securing the subsequent enforcement of the arbitral award via an application for precautionary attachment according to section 1063(3) first sentence of the Civil Procedure Code.
• However, in the applicant’s favour, the exception for countersuits (section 110(2) no. 4), according to which there is no obligation to provide security for legal costs in the event of countersuits, applied. The privileged position of the countersuing party was justified by the fact that filing a countersuit was caused by a previous attack by the claimant. In addition, filing a complaint against a debtor who had his/her habitual place of residence outside the EU and the European Economic Area showed that the claimant had accepted the difficulties involved in enforcement. A defendant in a countersuit was not entitled to the same type of protection as was a defendant in an original action.
• The applicant’s role was not at all affected by the fact that he was also the appellant on a point of law. The first-instance role was the factor that determines who was a claimant. Likewise, the respondents’ unilateral declaration of no need to adjudicate did not affect the parties’ roles in the least.
• The party that sought a declaration of enforceability of the arbitral awards was not automatically to be seen as the attacker. The respondents had precipitated the applicant’s application for a declaration of enforceability when they filed their action for a negative declaratory judgment.
• The issue of the applicant’s change of place of residence to Italy – and thus back to a Member State of the EU – was therefore no longer a decisive factor.

Relevance of the Federal Court’s decision for recognition and enforcement of arbitral awards in Germany

The Federal Court has strengthened the rights of debtors in cases involving enforcement in Germany of German or foreign arbitral awards by creditors that do not have their habitual place of residence in an EU Member State or a signatory state of the Agreement on the European Economic Area.

It is important to note that security for legal costs is not automatically ordered by German courts, and it depends on the party’s formal role in the first instance. Countersuits are exempt from the obligation to provide security for costs. r Respondents must formally request security for costs in the  enforcement proceedings.

The respondent’s nationality is irrelevant. Even if the respondent has the same nationality as the applicant, he remains entitled to security for costs. In other words, not only Germans but also foreign individuals or entities can apply for security for costs.

Any questions? Feel free to contact: Lucie Gerhardt
Practice Group: Arbitration