Third-Party Notice

Key Takeaways

1. Under German law, the third-party notice (Streitverkündung) can be used to protect against the risk of inconsistent decisions in different sets of proceedings, for example between an initial action and a later claim for contribution or indemnity by the defendant to the initial action.
2. Third-party notices make a court decision binding for later proceedings even where, under the standard German rules on res judicata, they would not usually have binding effect.
3. Parties at risk of claims for contribution or indemnity will typically have an interest in ensuring that the initial proceedings do not make findings detrimental to their position.

What is a third-party notice?

Where there is more than one set of court proceedings, there is a risk that different courts may make different findings in relation to the same facts. For parties with claims for contribution or indemnity, this can give rise to the risk they may lose an initial set of proceedings and a subsequent action for contribution or indemnity if the two courts take different points of view. Many legal systems deal with this by requiring multi-party litigation. However, involving a third party in proceedings usually causes significant additional costs. German law resolves this dilemma by allowing a party to serve a "third-party notice" on anyone against whom they believe they may have a claim for contribution or indemnity. That party will then be able to intervene in the initial proceedings; however, even if they do not intervene, the outcome of that dispute will be binding upon them. This resolves the risk of inconsistent decisions while not necessarily requiring the full cost of filing a claim against a third party.

Why do different sets of proceedings in complex disputes increase risk?

Where there are potentially several parties to a complex dispute, there can be a risk that different courts hearing related disputes will reach contradictory decisions. For example, a defendant to a claim may themselves have a claim for contribution or indemnity against a third party which falls to be decided by a different court. These different courts may reach different, mutually incompatible decisions.

The starting point under German law is that any strictly legal binding effect of judgments is limited only to the parties to the initial dispute and the actual operative part of the judgment. There are no doctrines of issue estoppel or similar. This is all considerably narrower than eg res judicata doctrines in other jurisdictions. This narrow binding effect creates risks particularly for claims for contribution or indemnity. In principle, it is possible that a defendant may be found liable in the initial proceedings, but that – when they bring their claim for contribution or indemnity against a third party – the court in subsequent proceedings finds the initial proceedings to be decided incorrectly. There is therefore a risk that the defendant to the original proceedings may lose both the initial and subsequent proceedings due to inconsistent decisions regarding liability in the initial proceedings.

What are the downsides to joining the third party to the initial proceedings?

One way of ensuring that the initial proceedings are binding against the third party, familiar to other jurisdictions, is for the defendant to directly bring a claim for contribution or indemnity against the third party and join them to the initial proceedings. However, due to German law’s front-loaded approach, drafting full statements of claim generates significant cost. Moreover, the claim for contribution or indemnity requires that the indemnified party be found liable; the defendant, however, may want to argue primarily that in any case they do not owe any money at all. Requiring a full statement of claim against the third party would thus require the defendant to incur costs even though the main line of defence may be that there is no liability to the claimant at all.

Which options exist in German law beyond joining a third party to the initial proceedings?

German law has a further possibility below the threshold of a full-scale claim against the third party. Where a party to litigation thinks that, if they lose the initial case, they will have a claim for contribution or indemnity against a third party, they can serve a short third-party notice under sec. 72 et seq of the German Code of Civil Procedure (Zivilprozessordnung, "ZPO") on that third party putting them on notice that there is litigation pending and that this may trigger claims for contribution or indemnity. The third party can then either choose to intervene in that litigation or to do nothing, but either way, any findings of fact made in the initial proceedings will be binding on them if a subsequent claim for contribution or indemnity is brought (sec. 74 (3), 68 ZPO). A German court hearing subsequent proceedings will be bound by the findings of the first court, which goes far beyond the court judgment’s usual binding of the litigating parties only. Other effects of a third-party notice include interrupting the statute of limitations (sec. 204 (1) no. 6 German Civil Code (Bürgerliches Gesetzbuch, “BGB”)) and the right for the third party to intervene in the initial proceedings (sec. 74 (1), 67 ZPO).

Which alternatives are there to joining a third party or filing a third-party notice?

As is clear from the above, the law in this area is relatively complex. Frequently, parties in Germany therefore avoid this by concluding contractual agreements that have similar effects. This helps to avoid the formalities of involving a court, instead concluding a contractual agreement that the third party will accept the outcome of the initial proceedings. Where the parties involved are international, this kind of contractual agreement can be more predictable in its effects than relying on the German third-party notice system, which not all legal systems are familiar with.

Should the third party attempt to influence the initial proceedings?

Beyond the legal aspects, in practical terms findings of fact made by courts have significant persuasive effect in later proceedings even where they are not formally binding. If the court hearing the dispute between the claimant and the defendant records facts or expert evidence detrimental to the third party, the latter will likely have significant work to do to argue, in subsequent proceedings, that those initial findings of fact were incorrect. While the third party might want to avoid incurring costs by becoming involved in the initial proceedings, it is often prudent to influence those proceedings in both the defendant’s and the third party’s favour by assisting the defendant in disputing liability and attempting to ensure that no findings detrimental to the third party are made. Where there is a third party who does not engage with the initial proceedings, there can be a certain willingness for the claimant and the defendant to agree that, in any event, it was all that third party’s fault. Even where such detrimental findings are not legally binding, it can nonetheless be wise to ensure that no such findings are made in the proceedings against the defendant.

What are the interests of the party receiving a third-party notice?

If the third party is served with a third-party notice to the initial dispute and chooses to intervene in that dispute, the third party’s primary aim will often be to assist the defendant in disputing all liability and simultaneously ensuring that no findings are made that prejudice the third party’s own position. The incentive for the defendant is to ensure that, if the defendant loses and later makes claims for contribution and indemnity against the third party in a separate set of proceedings, the third party cannot later dispute findings made in the initial proceedings. Since a third-party notice is not yet a claim, the defendant will have to bring a separate action in another venue against the third party. Even if the subsequent proceedings are served in a forum that does not consider itself bound by a third-party notice, courts and arbitral tribunals typically follow the findings of other dispute resolution fora, which makes involvement in the initial proceedings advantageous.

Conclusion

A third-party notice is a cost-effective way for parties to protect themselves against the risk of inconsistent decisions by extending the binding effect of court decisions against third parties. The third party will often have an interest in influencing the initial proceedings in their favour. A contractual agreement on binding effect can often also be a viable alternative.