The declaratory model action might gain momentum as more and more legal tech solutions and providers enter the legal market in Germany making the pursuit of small claims more attractive.
Eight declaratory model actions have been registered against German car manufactures, banks, an insolvency administrator and against a rental company.
A scheme similar to the declaratory model action is in place for claims resulting from violations of certain securities laws in connection with inside information, market manipulation or prospectus liability.
Third parties can join or be joined to a litigation
Third parties can join the proceedings if they have a legal interest in its outcome. No consent of the original parties is required. A typical example is a third party that fears that it will be liable to recourse from the losing party. Such interested interveners (Nebenintervenient) join the proceedings on claimant's or respondent's side and can actively take part in the proceedings provided that they do not contradict the supported party.
The risk of the joining party is that if the case is lost it will be bound by the unfavourable decision in a potential subsequent litigation against the supported party. Conversely, a party may file a request for a third party to be joined to the proceedings (Streitverkündung) if it believes that it can take recourse against or can be liable towards that third party in case the pending litigation is lost.
The third party can decide whether to join the proceedings or not. Either way, if the case is lost the third party will be bound by the unfavourable decision in a potential subsequent litigation against the party that filed the joinder request. These procedures are often used in construction cases with subcontractors or in supply chains.
Third party funding is possible under certain circumstances
Pursuant to the German Law on Legal Services (Rechtsdienstleistungsgesetz), extrajudicial legal services as well as debt collection services may only be provided by authorised persons. Third Party Funding in its traditional sense does not qualify as legal service or debt collection service within the meaning of this statute and, thus, funders are not required to obtain a licence or registration in Germany.
However, funders have to make sure that they do not de facto provide legal advice to the funded party in connection with the funded claim. Legal advice to the funded party has to be provided by its legal counsel.
If the funded claim is assigned to the funder not only as a security but for collection purposes and the funder does not bear the full collection risk, probably because the price for the assigned claim is to be paid out of the proceeds or is pre-agreed but only payable if the funder succeeds with the claim, the funding would qualify as a debt collection service and the funder would require a registration as a provider of debt collection services. A funding agreement with a funder who is not registered is considered null and void.
Promoted by the legal tech boom, in recent years, a new business model is being developed by providers of debt collection services to make it easier and economically more appealing for consumers to pursue claims which either have a low value or arise out of the same or similar factual setting.
This model combines a traditional debt collection service with third party funding. The permissibility of this approach was hotly debated with the academia nearly split due to a potential conflict of interest on the part of the provider. In November 2019, in a landmark decision the German Federal Court of Justice (FCJ) confirmed the general legality of this business model with the caveat that a case by case analysis of the respective business model is necessary.
The FCJ also provided general guidelines on the necessary elements for such agreement to be valid. Following this judgment, several courts of first instance have assessed different business models, with different outcomes. The legality of claim bundling by means of a special-purpose vehicle paired with legal tech solutions was among others called into question in connection with the 'truck cartel' as well as the 'sugar cartel' where a large number of claimants seek damages from the cartel participants and more cases are to come:
The District Court of Hannover had to decide a damage claim in relation to the 'sugar cartel' which was filed by a foundation as an assignee of damage claims of several group entities. The court dismissed the claim and held that the assignments were invalid as the assignee had not taken over the full economic risk. Also, the foundation had never tried to achieve an out of court settlement which should be the main purpose of a debt collector.
The District Court of Munich I dismissed a claim in relation to the truck cartel due to conflicting interests of the assignors, the third party funder and the debt collector and is likely to do so again in a parallel case brought by Deutsche Bahn (District Court of Munich I, docket number 37 O 18602/17). Deutsche Bahn had set up a subsidiary as registered debt collection service provider which should then pursue several damage claims as assignee.
The District Court of Braunschweig decided in April that a concept combining a traditional debt collection service with third party funding is inadmissible if services are provided in relation to a jurisdiction in which the debt collector is not qualified and admitted.
Further information is available in a manual covering practical issues particularly relevant to foreign parties which you can request from Johanna Weißbach or Michèle Heil.