German Arbitration Institute issues new supplementary rules for third-party notices

Until now, parties involved in arbitration proceedings were not able to notify a third party of the dispute and bind that party to its outcome, as permitted by the German Code of Civil Procedure for proceedings before the German state courts. This applied equally to arbitration proceedings conducted by the DIS and to proceedings conducted by other leading arbitral institutions.

Under the new supplementary rules (9-page / 171KB PDF), a third party – for example, a supplier – may now be notified of the proceedings and be bound by the outcome of the arbitration between party A and party B for the purpose of subsequent proceedings between the notifying party and the third party. Importantly, the third party does not have to join the proceedings for the binding effect to occur. In addition, the binding effect of the award does not depend on whether the subsequent proceedings between the notifying party and the third party is an arbitration or litigation in state courts.

The DIS is the first arbitral institution to offer supplementary rules (DIS-TPNR), with aims of bridging the gap between the traditional approach to arbitration as a bilateral dispute resolution mechanism, and the growing need for more efficient proceedings for disputes involving multiple potentially affected stakeholders.

“These rules can be described as a milestone in efficient conflict management for complex commercial transactions,” said Sandra Gröschel, dispute resolution expert at Pinsent Masons. The new rules enable parties to arbitration proceedings to bind a third party to the outcome of their dispute, irrespective of whether the third party joins the proceedings. “This is always of interest if arbitration proceedings are part of a more complex economic context. For example, if one party believes that the first arbitration proceedings may result in potential recourse claims against third parties,” Gröschel said.

The new rules are designed to be a coherent framework that works neatly within the ordinary DIS arbitration rules, which the parties may adopt instead of costly tailor-made solutions. They provide a framework for the notification of third parties, the submission of statements, and the participation of third parties in the proceedings. By allowing for participation of third parties, the new rules aim to improve the effectiveness and efficiency of arbitration proceedings, and to avoid contradicting decisions.

The DIS has published a comprehensive practice note (15-page / 271KB PDF) to increase user-friendliness of the new rules.

The third-party notices are subject to special features due to the nature of arbitration proceedings. For the rules to apply, the parties to the initial arbitration and at least one of them and the third party must agree on their applicability.

Unlike the common provisions on joinders, a third-party notice does not result in the third party becoming a party to the arbitration process itself, but instead provides an option to become an intervening party, the same situation as occurs in German state court proceedings. The third party can then support the party which issued the third-party notice but cannot assert its own claims against it or other parties within the process.

If the third party joins the arbitration proceedings, the DIS-TPNRs ensure that the third party is involved in the constitution of the arbitral tribunal and has the opportunity to make its own factual and legal submissions. “This right of the third party to participate in and influence the course of the arbitration justifies the third party being bound by the findings of the arbitral award even if it does not join,” said Alexander Shchavelev, arbitration and litigation expert at Pinsent Masons

In addition, the DIS-TPNRs ensure that the party which did not issue the third-party notice does not have to bear the costs of the third party and the fees for the third-party notice. “Businesses will therefore be more willing to agree to any third-party notice in the arbitration agreement by agreeing to the DIS-TPNRs,” said Sandra Gröschel.

There are also narrow time limits in relation to third party notices. They can only be issued at the beginning of the arbitration process carried out by DIS. In German state civil proceedings, a third-party notice can be made at any time until the dispute is decided.

“This development may be of particular interest for suppliers, contract manufacturers, licensors, or licensees, for example in the automotive, energy, life sciences, medtech and IT sectors. It may also be of interest to businesses involved in large-scale construction projects, such as the construction of offshore wind farms. These projects often have different contractual relationships between the developer, lead contractor and its subcontractors, as well as joint ventures,” Alexander Shchavelev said.

Editor's note 17/04/24: This article was updated after publication to clarify some points around the application of the new rules. We regret the error.