Originally from Handbook on Third-Party Funding in International Arbitration, Second Edition

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GERMANY

PART I.  THE THIRD-PARTY FUNDING LANDSCAPE

1.   The TPF market in Germany

1.1.  Please shortly describe the TPF market in your Jurisdiction

In Germany, there are some traditional forms of litigation financing. For example, a party who is unable to afford the costs of litigation due to its personal and financial circumstances will receive legal aid from the state upon application, if the intended legal action or legal defense offers sufficient prospect of success and does not appear to be frivolous.   Another form of litigation financing, which is particularly widespread among consumers, is taking out legal expenses insurance, which covers the costs and cost risks of a lawsuit in the event of a dispute. Over 40% of German households have such insurance. In arbitration proceedings, however, these two traditional forms of litigation financing do not play a significant role.

However, in commercial and other disputes a third form of litigation financing is becoming increasingly important: Litigation funding in return for a share in the success. Practically, this means that a funder (the “Funder”) will provide a (potential) claimant with the financial means to enforce a disputed claim in return for a success fee. In addition to the claimant’s own legal costs, the Funder typically also bears the defendant’s legal costs to be reimbursed if the case is lost. This form of litigation funding is referred to below when we talk about third-party funding (“TPF”) in Germany.

Funders regularly carry out a type of due diligence before they commit to financing a lawsuit. The (potential) claimant does not have to pay a fee for this. However, the (potential) claimant must provide the Funder with all relevant information and documents. In addition, the Funder will often require the potential claimant’s lawyer to provide information, e.g., on the key legal issues and the prospects of success of the litigation project.

If the Funder decides to finance the enforcement of the claim, it concludes a funding agreement with the claimant. The funding agreement will often stipulate that the claimant assign the claim in dispute to the Funder by way of an undisclosed assignment by way of security.   The assignment serves to secure the Funder. The claimant then conducts the litigation on behalf of the Funder in an arbitrary capacity.   Furthermore, the claimant and the claimant’s lawyer regularly agree to information obligations towards the Funder; in this respect, the claimant’s lawyer is released from his duty of confidentiality towards the Funder. The funding agreement may further provide, for example, that the lawyer of the claimant act as paying agent for payments by the opposing party and that the lawyer set up a trust account in the name of the Funder for this purpose. However, the lawyer remains exclusively the lawyer of the claimant and does not also become the lawyer of the Funder.