The German Federal Court of Justice decided that the provisions of Sections 110 et seq. German Code of Civil Procedure („CCP”) on the obligation to provide security deposit for cost of proceedings shall apply mutatis mutandis in proceedings for a declaration of enforceability of domestic or foreign arbitral awards in Germany (Decision of January 12, 2023 – I ZB 33/22). Pursuant to Sec. 110 (1) CCP plaintiffs who do not have their habitual place of abode in a Member State of the European Union (“EU”) or in a signatory state of the Agreement on the European Economic Area („EEA”) shall provide security for the costs of the proceedings should the defendant so demand.

The decision was based on the following facts.

In the year 2019 an arbitral tribunal in Russia issued an arbitral award for damages and cost in favor of a businessman (“A”) against a group of fruit juice manufacturers (“B”) as a result of a terminated business cooperation in the Russian Federation. B sought a declaratory judgement against A from a German Higher Regional Court to declare the arbitral award unenforceable. A, who by that time lived in Moscow, filed a response to dismiss the claim and an application for enforcement of the arbitral award. The Higher Regional Court rejected the application for enforceability. It ruled that the foreign arbitral award was not to be recognized in Germany. A pursued his application on appeal to the Federal Court of Justice. After A announced that he had moved his residence to Dubai, UAE, B demanded that B be required to provide security for the costs of the proceedings.

The Court reasoned its decision as follows. The proceedings for a declaration of enforceability of a foreign arbitral award were initiated by A by an application. Therefore, the parties did not face each other as plaintiff and defendant, but as applicant and respondent and Sec. 110(1) CCP could not be applied directly. The Court, however, held that the “applicant” in proceedings for the declaration of enforceability of arbitral awards was equivalent to a “plaintiff” within the meaning of Section 110 (1) CCP. The question under which conditions Sections 110 et seq. CCP are applicable mutatis mutandis to other types of proceedings of the CCP than lawsuits, depended on whether the parties involved face each other like plaintiff and defendant and whether the sense and purpose of the proceedings speak for or against an analogous application of the provisions. The Court assumed that there was an unplanned regulatory gap which need to be filled by applying the general rules on lawsuits. The Court reasoned, the purpose of the institute of security for costs of proceedings was to protect the defendant from enforcement difficulties abroad in enforcing a claim for reimbursement of costs. The interests of the respondent in proceedings for a declaration of enforceability of an arbitral award were in this respect comparable to those of a defendant in action proceedings. 

Special features of the declaration of enforceability procedure did not prevent analogous application. Neither the CCP nor the applicable Convention on the recognition and enforcement of foreign arbitral awards of 10 June 1958 (New York Convention) contain special provisions for expediting the declaration of enforceability procedure.  The prevailing party in arbitration proceedings had not only already obtained (initial) security with the arbitral award. Since the revision of arbitration law in Germany, it also has the option of securing the subsequent enforcement of the arbitral award by filing an application for provisional protective enforcement.

Finally, the Court rejected respondents’ demand for provision of security for costs of proceedings pursuant to Sec. 110 (2) no. 4 CCP. Accordingly, this obligation does not arise in the case of counterclaims. The (counter-)application for a declaration of enforceability of the arbitral award was indeed prompted by the declaratory action brought by B. By initiating the legal proceedings B took the risk that A would move his habitual residence and that enforcement difficulties would arise in enforcing a claim for reimbursement of costs. 

With this decision the Court overturned its case law on the procedural law applicable until December 31, 1997 (Federal Court of Justice, judgment of September 22, 1969 – VII ZR 192/68) and filled a legislatory gap in the existing arbitration law. In our opinion the practical impact of this decision is limited, since Sec. 110(2) CCP provides a number of exceptions for plaintiffs (applicants) with habitual abode outside of EU and EEA:

  1. Where, due to international treaties, no such security deposit may be demanded;
  2. Where the decision as to the defendant’s reimbursement of the costs it has incurred in the proceedings would be enforced based on international treaties;
  3. Where the plaintiff possesses real estate assets, or claims secured in rem, in Germany that suffice to cover the costs of the proceedings;
  4. Where countercharges are brought;
  5. Where proceedings have been brought in the courts based on public notice given by a court.

In addition, the Hague Convention on Civil Procedure of March 1, 1954, specifically its Art. 17, provide for a large number of contracting states that no security, bond or deposit, however described, shall be required of nationals of one of the contracting states who are domiciled in one of those States and who are plaintiffs or interveners before the courts of another of those States, by reason of their being aliens or of their not being domiciled or resident in the country.