While third-party notices are common in state courts, their use in arbitration proceedings has been limited. Recognizing the practical importance of third-party notices in arbitration, the German Arbitration Institute (“DIS” in German) introduced Supplementary Rules for Third-Party Notices, effective as of March 15, 2024 (“DIS-TPNR” published at https://www.disarb.org/en/tools-for-dis-proceedings/dis-rules). The DIS-TPNR enable a third-party notice similar to the provisions of the German Code of Civil Procedure (“CCP”) used by state courts in civil proceedings, while also considering core arbitration principles such as the principle of consent and the principle of equal treatment.
The applicability of the DIS-TPNR can also be agreed upon for arbitration proceedings not based on the DIS Arbitration Rules. Furthermore, the DIS-TPNR are also applicable if the subsequent proceedings are governed by different arbitration rules or involve state court proceedings.
The ability to include third parties, against whom recourse claims may exist, is of great interest in dispute resolution proceedings where numerous parties and complex contractual structures are involved. This is especially true in supply chains, disputes involving general contractors, subcontractors, planners, and executing firms, as well as disputes arising from insurance and consortium agreements with joint liability.
The concept of including third parties to legal proceedings by third-party notices is primarily aimed at promoting procedural efficiency and legal certainty by involving third parties to prevent multiple lawsuits and contradictory decisions on the same matter.
Under Section 72 CCP, a third-party notice (“Streitverkündung” in German) is permissible when an ongoing legal dispute (the main proceedings) involves a party who believes they have a warranty claim or a claim for indemnity against a third party in case of an unfavourable outcome, or when they fear a third party’s claim may be brought against them. The consent of the third party is not required; they may choose to participate in the main proceedings, abstain, or remain absent. Regardless, the intervention effect ensures that the outcome of the main proceedings is binding – in relation to a main party – on the third party.
This mechanism offers significant benefits for both the notifier and the recipient of the third-party notice. The notifier is safeguarded against the risk of facing defeat in both the main proceedings and a subsequent lawsuit since the third party is bound by the main proceedings’ outcome. Additionally, according to Section 204 (1) No. 6 German Civil Code (“CC”), any potential recourse claims are protected from expiration due to the suspension of the limitation period. Conversely, the third party gains the opportunity to actively participate in the main proceedings and support the notifier, potentially avoiding further litigation. The opposing party in the main proceedings remains unaffected by the third-party notice.
The DIS-TPNR in essence, adapt the rules on third-party notices from the CCP and the requirements of the German Federal Supreme Court, i.e., judgment 06.04.2009, II ZR 255/08 “Schiedsgerichtsfähigkeit II”, and provide a legally secure solution tailored to the specific characteristics of arbitration. These rules differ from a ‘joinder’, which is already recognized in various other arbitration rules, primarily in that a joinder involves the additional person being considered a full party to the proceedings. The DIS-TPNR also present advantages over similar rules, e.g., Swiss Rules or Munich Rules, which shall however not further been discussed herein.
Below is a brief overview of the new rules in the DIS-TPNR with regard to (1.) the requirement of qualified consent, (2.) the legal instruments to record the qualified consent, (3.) the status and effect of third party notice and (4.) potential scenarios where DIS-TPNR may be used in practice.
- Unlike state court proceedings, the applicability of the third-party notice rules requires the qualified consent of both the third party and all parties to the main proceedings (Art. 1.1 DIS – TPNR). To ensure the third party’s participation rights in the formation of the arbitral tribunal, Art. 4 DIS – TPNR stipulates that a third-party notice must be issued before the constitution of the tribunal. Exceptionally, a later third-party notice is permitted if the third party raises no objections to the composition of the tribunal and accepts the proceedings in their current state (Art. 4.4 DIS-TPNR). However, since the third party does not have any influence on the selection of the arbitrators and their defence opportunities could be limited by procedural decisions already made, they will often withhold their consent. Thus, the timing of third-party notices under the DIS-TPNR is more restricted compared to state court proceedings, where third-party notices can be issued at any time without the third party’s consent.
- To facilitate the pre-requisite of the qualified consent of both the third party and the parties to the main proceedings, the DIS has published two model clauses for agreements between the parties to the main proceedings, as well as between the notifier and the third party. Thus, the DIS-TPNR must either be agreed upon in both contractual relationships or the third party must consent to the DIS-TPNR in the event of a third-party notice, which, as explained, must occur before the appointment of the arbitrators, unless the third party raises no objections to the composition of the arbitral tribunal and accepts the proceedings in their current state (Art. 4.4 DIS-TPNR). The DIS recommends including relevant provisions when drafting the arbitration agreement or concluding the contract,
- The DIS-TPNR regulate the legal status of the third party in the main proceedings. Unlike a joinder, the third party does not assume the position of an additional party but acts as an intervener according to the model of Section 67 CCP (“Nebenintervenient” in German). They may provide support but cannot assert their own claims or be a defendant themselves (Art. 6.4 Sentence 2 DIS-TPNR). The effect of the third-party notice under the DIS-TPNR is also modelled after the CCP (Sec. 68). The third party, in relation to the notifier, is not heard in subsequent recourse proceedings with the argument that the legal dispute was decided incorrectly (Art. 11.1, 11.2 DIS-TPNR), meaning there is a genuine intervention effect. Furthermore, the statute of limitations for any potential recourse claims is suspended (Art. 11.4 DIS-TPNR).
- Practical scenarios where the parties to an arbitration may have an interest to include a third-party in the arbitration and to ensure that this third-party cannot challenge the outcome of initial arbitration in a subsequent dispute has been indicated by the DIS Practice Note as including particular scenarios in which the potential inclusion of the third party is already foreseeable from the outset, e.g., in a supply chain or in subcontractor agreements. Particularly in construction disputes, there will be cases where parties have an interest in a potential third-party notice against a third party (for example, a planner engaged by the client, as well as in a general contractor and subcontractor relationship), but also cases where the opposing party of the notifier has no interest in involving a third party (in the example, the client). Obtaining qualified consent from all parties is much more difficult, if not practically impossible, in cases of joint and several liability (e.g., architect, construction company), where the applicability of the DIS-TPNR has not been agreed upon due to the absence of a contractual relationship and only one jointly liable party is sued (e.g., by the client).
In summary, the introduction of the DIS-TPNR represents an important option to adapt arbitration procedures to the needs of parties involved in complex disputes. The main obstacle for its application remains the qualified consent requirement. It remains to be seen how these regulations will be implemented in practice. Our law firm offers comprehensive legal services related to this area, including advising on the incorporation of arbitration clauses, navigating third-party notice procedures, and representing clients in national and international construction and contractual disputes.