THE AUTHORS:
Georg Scherpf, Head of the German Arbitration Team at Clyde & Co
Antonios Politis, Senior Associate at Clyde & Co
Benedikt Kaneko, Attorney at Law
Complex projects and transactions can result in disputes between several parties along multiple layers of contractual relationships. The traditional structure of an arbitration proceeding between two parties can lead to lengthy recourse proceedings brought by the losing party against one or more of its other (sub-)contractors in the contractual chain. In such recourse proceedings, the arbitral award rendered as a result of the primary proceedings is generally not binding. This can lead to the unsatisfactory situation where a party has to raise the same issue before more than one tribunal, thereby risking a different outcome and irreconcilable judgments.
The German Arbitration Institute (DIS) on 15 March 2024 introduced a new set of arbitration rules to address this issue. The Supplementary Rules for Third-Party Notices (“DIS-TPNR”) use a third-party notice mechanism (Streitverkündung) based on the German Code of Civil Procedure to create a binding effect of the arbitral award for subsequent recourse claims along the contractual chain. This is particularly relevant for projects where contracts are concluded back-to-back.
This article provides a brief overview of the key features of the procedural instrument of third-party notice and the resulting participation of non-parties in pending proceedings as introduced by the DIS-TPNR.
What are the Effects of a Third-Party Notice under the DIS-TPNR?
In the accompanying Practice Note to the DIS-TPNR, third-party notices are described as a “a sub-category of third party participation in an arbitration” that is based on a “minimally invasive approach”. This characterization follows from the third-party notice recipient’s limited role in arbitral proceedings, which is designed to keep the impact on the primary proceedings to a minimum while ensuring consistency in subsequent recourse proceedings.
Both parties to the primary proceedings have the right to issue a third-party notice to a non-party, provided that the non-party has agreed to be bound by the DIS-TPNR. Upon receipt of the third-party notice, the non-party has the right to join the arbitration as an intervening party – or “intervener”. If it joins, it will not be a full party to the arbitration, as would be the case in the event of a regular joinder, but will only have limited procedural rights. While it may submit pleadings and evidence in support of the party issuing the third-party notice, the intervener may not contradict the party issuing the third-party notice. Furthermore, the intervener will not be able to bring any claims of its own in the arbitration. At the same time, no claims may be brought against the intervener in the primary arbitration.
The crucial aspect of the introduced legal instrument lies in the ensuing binding effect (“Interventionswirkung”). In subsequent recourse proceedings, the recipient of the third-party notice is generally bound by the findings of the primary proceedings – regardless of whether it joined the primary proceedings as an intervener or not. It is only entitled to contest the outcome of the primary proceedings to the extent that it is based on issues that the recipient of the third-party notice was prevented from raising in the primary proceedings.
Third-Party Notice Procedure under the DIS-TPNR
A third-party notice under the DIS-TPNR is admissible only if the issuing party believes that it will “be able to assert a claim for warranty or indemnification against a third party, or is concerned that such a claim may be brought against it by a third party” if the outcome of the dispute is not in its favor (Article 2 DIS-TPNR). The third-party notice may be submitted to the DIS, which in turn will inform the other party to the arbitration as well as serve the third-party notice on its intended recipient.
Third-party notices may be issued before the constitution of the arbitral tribunal in order to allow potential interveners to participate in the constitution of the arbitral tribunal. After the constitution of the arbitral tribunal, a third-party notice is admissible only if the recipient accepts the constitution of the arbitral tribunal.
The recipient of the third-party notice may intervene for the sole purpose of challenging the validity of the third-party notice. Any objection to validity shall be raised in the arbitration and shall be decided by the arbitral tribunal. A finding that a third-party notice is valid is not binding on a subsequent recourse claim and may be relitigated based on new circumstances and objections.
Application of the DIS-TPNR and Practice Note
For the DIS-TPNR to apply, the parties and third-party notice recipients must agree to them. This can typically be done by referencing the rules in an arbitration agreement in the contractual framework between the parties. Within a contractual chain, all parties may agree to the same multi-party arbitration framework, thereby including third-party recipients within the scope. While this may offer the greatest legal certainty, particularly with regard to enforcement, the DIS-TPNR state that it is sufficient for the parties to only agree to the application of the DIS-TPNR, thereby consenting to the inclusion of third-party recipients as intervenors. The third-party recipient will only have to accept the effects of the third-party notice under the DIS-TPNR by way of a (possibly separate) agreement with the party issuing the third-party notice, without necessarily involving the other party to the arbitration.
The DIS-TPNR are relatively concise, consisting of 15 articles. As their name suggests, they are intended only to supplement the DIS Arbitration Rules. At the same time, the DIS-TPNR provide a comprehensive framework that governs all aspects of the third-party notice mechanism. Along with the DIS-TPNR, the DIS has published model clauses for their incorporation into an arbitration agreement. These model clauses include an alternative model clause in the event that the parties and the recipient of the third-party notice wish to include the DIS-TPNR without agreeing to arbitration under the DIS Arbitration Rules for potential subsequent recourse proceedings.
As mentioned, the DIS has also published a Practice Note on the DIS-TPNR, which provides detailed information on the third-party notice mechanism and how the drafters envision the application of the DIS-TPNR in practice. The Practice Note thereby provides helpful information for parties, counsel, and arbitrators who are not (yet) familiar with the DIS-TPNR or the concept of third-party notices. It also includes an article-by-article commentary on all provisions of the DIS-TPNR.
Conclusion
Incorporating a third-party notice mechanism into arbitration has been discussed extensively in Germany in recent years and even led to various proposals for contractual implementation. For example, the 2021 Munich Rules on the Participation of Third Parties in Arbitration Proceedings aim to incorporate third-party notice mechanisms by way of additional agreements between the parties, “in addition to and taking precedence over” any arbitration rules otherwise chosen or any existing arbitration agreement. Another possibility discussed – and already used – is inclusion through the drafting of complex and bespoke arbitration and intervention agreements. The DIS-TPNR now provide a set of institutional rules that the parties can opt-in, and it will be interesting to see their acceptance and implementation in practice.
ABOUT THE AUTHORS
Georg Scherpf is Head of the Arbitration Team in Germany and part of Clyde & Co’s Global Arbitration Group. He advises both private and State parties on complex arbitrations and cross-border litigations. His commercial arbitration work covers a broad range of legal issues and sectors including international trade (CISG), corporate disputes (joint venture and post-M&A), and energy (particularly offshore wind). His public international law experience includes advising clients in relation to bilateral investment treaties (BITs) and multilateral investment treaties including the Energy Charter Treaty (1994) (“ECT”).
Antonios Politis is a Senior Associate in Clyde & Co’s Global Arbitration Group in Hamburg, Germany. He advises and represents both private and State parties in domestic and international arbitration proceedings as well as in complex cross-border disputes before German courts. He is admitted to practice law in Germany (Rechtsanwalt) and in New York (Attorney at Law).
Dr Benedikt Yuji Kaneko is admitted to the New York Bar (Attorney at Law) and his application to the German Bar is pending (Ass. iur.). He has experience acting in commercial and investment arbitrations under various rules (ICC, SIAC, KCAB, UNCITRAL, and ICSID).
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.