Litigation Funding Comparative Guide -

1 Commercial legal finance basics

1.1 How is commercial legal finance defined in your jurisdiction?

There is no universally accepted legal definition of ‘legal finance' in Germany, which is unsurprising given the wide variety of different instruments that fall within the ambit of the term. At its core, the term denotes the provision of funds to a party to a legal dispute by a third party (which is not itself a party to the dispute) in exchange for a share of the proceeds in case of a successful outcome. ‘Commercial' legal finance describes the funding of business-to-business disputes as opposed to the funding of consumer claims.

At the same time, the perception of what legal finance is – and what it can accomplish for its users – is rapidly evolving and expanding, with the market gradually moving towards a broader understanding that includes the full scope of more innovative risk management and dispute risk hedging tools. This broader understanding also applies to the funded party: while previously only claimants could realistically hope to receive legal finance, legal finance providers increasingly explore the feasibility of defence funding – that is, the funding of the costs incurred by a defendant in legal proceedings.

1.2 How does commercial legal finance differ from consumer litigation finance and contingency agreements?

‘Commercial' legal finance describes the funding of business-to-business disputes. The most obvious difference between commercial and consumer litigation finance lies in the quantum of the individual cases, which tends to be significantly lower in consumer cases. This lower individual quantum creates an economic incentive for consumer litigation finance providers to bundle cases and to automatise processes in order to benefit from economies of scale. This in turn has led to an increased focus on specific areas of law where large quantities of similar cases arise, allowing lawyers to generate and analyse large data pools (eg, the claims of tenants or aviation passengers). Conversely, the commercial sector tends to focus on a smaller number of individual cases from a broader spectrum of areas of law.

Moreover, consumer litigation finance often operates based on the assignment of claims from claimants to the funder, which then enforces the claims acting in its own name. By contrast, an assignment of claims is less often agreed in commercial legal finance.

Contingency fee agreements can only be offered by lawyers in extremely limited circumstances. Additionally, they are much more limited in scope than legal finance solutions since they only cover attorney's fees. Professional regulations largely prevent lawyers from funding other costs of a legal dispute such as court or administrative fees.

1.3 What are the major legal finance products/solutions in your jurisdiction? (a) Single case fees and expenses; (b) Portfolio fees and expenses; (c) Monetisation of claims; (d) Monetisation of judgments and awards and (e) Other

While no conclusive statistical data exists on the prevalence of any particular product or solution throughout the industry, it can reasonably be estimated that funding solutions covering single case fees and expenses are the predominant legal finance product in Germany. That said, a distinction can be drawn here based on experience: less well-to-do litigants are often mainly interested in funding for fees and expenses, accepting the inherent risk transfer as a by-product, but not the principal purpose of the funding solution. By contrast, more financially stable litigants focus on the risk transfer that comes with the funding solution and therefore often add a monetisation component on top of the funding.

1.4 In what areas of law is litigation finance most prevalent in your jurisdiction (eg, competition, insolvency, patents, contracts)?

Parties use litigation finance across a broad spectrum of commercial disputes, ranging from contract law to corporate law (eg, post-M&A or directors' and officers' disputes) and competition law (eg, cartel damages claims). Additionally, due to the high number of patent claims filed before the German courts, patent infringement claims feature prominently in the litigation funding space. Moreover, funders active in Germany also receive a fair share of funding requests concerning investor-state dispute settlement.

1.5 Who are the major players in the industry (eg, pure players, multi-strategy firms, start-ups)?

The main players active in the German market are pure players. Start-ups in the legal tech scene play an important role in the purchasing/funding of consumer claims.

2 Legal framework

2.1 How mature is the market for legal finance in your jurisdiction? What types of commercial litigations and/or arbitrations may be funded by a third party?

The German legal finance market can be characterised as rapidly evolving and growing. In terms of the volume and variety of funded cases, the market is not yet as developed as those in some other jurisdictions (particularly common law countries). However, this is not due to an unfavourable legal environment. In fact, there are hardly any legal restrictions as to the types of proceedings that may be funded by a third party, save for a few very specific exceptions developed by the courts. An example of claims that become inadmissible due to funding are claims for the disgorgement of profits under the Unfair Practices Act brought by non-profit consumer protection organisations against companies that engage in unfair competition practices. The Federal Court of Justice has held that the funding of an action by a third-party funder constitutes an impermissible exercise of rights because the awarded proceeds are by law to be collected by the state in their entirety, leaving no room for a funder's success fee.

2.2 Is there a dedicated legal finance regime in your jurisdiction? What other laws and regulations have relevance to legal finance in your jurisdiction?

There is currently no dedicated legal framework governing legal finance in Germany. However, this might change in the mid to long-term future. At the EU level, the (perceived) lack of regulation and regulatory oversight led to criticism from a member of the European Parliament who in 2021 issued an own-initiative report on responsible private funding of litigation (the ‘Voss Report'). The Voss Report also contained a proposal for a directive to be adopted by the European Parliament and the European Council. The author argued that the European Commission should introduce a comprehensive and restrictive regulation of third-party funding.

The European Parliament largely adopted the recommendations contained in the Voss Report in September 2022, albeit with some amendments and partially watered-down language. Currently, it is unclear whether the European Commission fully agrees with the assessment contained in the Voss Report and what steps it will take as a consequence.

2.3 Which public sector bodies and authorities are responsible for enforcing the applicable laws and regulations? What powers do they have?

The fact that there is no designated legal regime for legal finance is also reflected at the institutional level: there are no public sector bodies or authorities that are tasked specifically with the oversight of legal finance providers. To the extent that German law firms and German lawyers are now permitted to conclude contingency fee agreements, the bar associations act as regulatory bodies.

2.4 Do the rules and codes of any self-regulatory organisations or professional associations have relevance to legal finance in your jurisdiction? What powers do such organisations and associations have?

The institutional picture that can be observed in the public sector is complemented by that in the private sector. In Germany, there are no independent self-regulatory organisations like the Association of Litigation Funders (ALF) in England and Wales. It is also unclear whether Germany would establish a comparable ‘soft law' self-regulatory organisation if litigation funding were to be comprehensively regulated, or would rather assign this task to a public body. However, indirectly, the standards set by organisations such as the ALF have an effect on the German market, since internationally active funders that are doing business in Germany are also members of the ALF.

Moreover, several of the internationally operating litigation funders that are active in Germany are members of international trade associations such as the International Legal Finance Association or the European Association of Litigation Funders. The powers that these institutions wield are not coercive, but stem from the shared values of their members. They uphold best practice standards to which all members have committed.

2.5 What is the general attitude towards legal finance in your jurisdiction among the courts and other relevant bodies?

The attitude towards legal finance among public sector stakeholders can generally be described as increasingly open minded. While Germany is not yet as mature a market for legal finance as other jurisdictions, various provisions enacted in Germany show that, as a rule, the legislature accepts legal finance provided that funders comply with certain safeguards (eg, by ensuring freedom from conflicts of interest).

2.6 Is legal finance considered consumer credit and is it captured by the relevant protective regulations in your jurisdiction?

The provision of legal finance to consumers is not regarded as consumer credit. This is because typically funding is provided to consumers in the form of non-recourse funding, meaning that the funder's investment need not be repaid by the consumer if he or she loses the legal dispute. By contrast, consumer credit such as a loan would have to be repaid in full at some stage, regardless of the outcome of the dispute.

3 Other risk-sharing models available to litigants and law firms

3.1 Are conditional (contingent or success) fee agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

Contingency fee agreements used to be viewed with scepticism in Germany. The main concern has always been that the ‘no win, no fee' arrangement might affect a lawyer's ability to provide independent legal advice. It is due to this concern that the courts held that such agreements went against public policy (contra bonos mores) and were hence legally invalid. At times, conditional fee arrangements were explicitly prohibited by law.

The current law allows for agreement on a contingency fee in limited circumstances. For the purposes of commercial litigation, the most relevant scenario in which they are permitted is where a party would otherwise – from a reasonable point of view – be prevented from enforcing its rights.

Contingency fee agreements can facilitate access to justice for less wealthy litigants as they enable claimants to enforce their rights even if they lack the financial means to pay attorneys' fees. Law firms can accept cases that are interesting from a legal perspective, which they might otherwise be unable to accept for financial reasons. Nevertheless, many corporate law firms in Germany have internal guidelines that prevent them from concluding contingency fee agreements, which limits their practical relevance in commercial disputes.

3.2 What is the maximum contingency that is permitted (ie, up to 100% of hourly fees or something less)? Is there a cap on the amount of success fees lawyers can receive under such arrangements?

Statutory law does not expressly stipulate such a cap. The law requires only that the contingency fee agreement balance the payment of a fee below the statutory rate in case of a loss with an agreement on a ‘reasonable surcharge' on the statutory rates in case of a win. Whether a surcharge is reasonable must be established by taking all aspects of the case into consideration.

Nonetheless, a contingency fee agreement may be held invalid if it offers the attorney an excessive share of the proceeds. Whether a share of the proceeds is considered excessive cannot be answered in an abstract manner, but only with regard to an individual case, considering all relevant circumstances.

3.3 Are damages-based agreements permitted in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

Damages-based agreements are permitted only to the very limited degree that contingency fee agreements are allowed in Germany.

3.4 What other funding and/or risk-sharing options are available to litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages for clients and for law firms?

The scope for additional risk sharing between litigants and lawyers/law firms besides contingency fees is limited to non-existent, since professional rules largely prohibit lawyers from funding legal costs other than their own fees.

3.5 Are law firms in your jurisdiction allowed to have non-lawyer owners or non-lawyer shareholders?

Generally, lawyers are only allowed to form professional partnerships with members of certain designated professions (eg, tax consultants). Beyond that, non-lawyer ownership of law firms is all but excluded, or at least severely restricted.

In 2021, the ruling coalition in Germany announced its intention to "strengthen the legal profession by … reviewing the ban on third-party ownership". However, so far, no amendments to the ban on third-party ownership have been implemented.

3.6 How do the available funding and risk-sharing options impact on the attitudes of corporate litigants about affirmative recovery programmes or the pursuit of high-value commercial claims more generally?

Given the legal restrictions, contingency fee agreements or comparable risk-sharing options do not play a central role for German corporate litigants when assessing the enforcement options of their claims.

By contrast, corporate litigants are increasingly aware that broader legal finance solutions (of which ‘classic' litigation funding is just one) offer an effective means to manage dispute risks, improve balance sheets and – most importantly – channel financial resources towards the litigant's core business.

3.7 How do the range of funding and risk-sharing options available impact on the attitudes of law firms about their own business?

The feedback that we have received in funded cases indicates that law firms appreciate funders that take a strictly hands-off approach to funded cases. At the same time, law firms welcome the possibility to approach the funder for a discussion on the case strategy or for an added review of the submissions to be filed with the court.

4 Collective actions

4.1 Is it possible to bring collective actions in your jurisdiction? If so, can they be funded by third parties? In those circumstances, how is the amount of the funder's return determined? Are there caps or other restrictions? Do such agreements require court approval?

Collective actions are, historically speaking, alien to German legal thinking. Germany's longstanding opposition to this instrument has been driven by the fear of creating a ‘US-style' litigation industry.

However, in the wake of legal scandals that produced many individual disputes with virtually identical subject matter (eg, ‘Dieselgate'), Germany began tiptoeing towards establishing collective actions in 2018 by introducing the so-called Musterfeststellungsklage (‘model declaratory action').

This new type of action aims to facilitate the enforcement of consumer claims against companies in cases of mass damages by allowing actions on behalf of groups of consumers. These may only be brought by so-called ‘qualified institutions', with consumers having to register in advance (‘opt-in'). A decision in these proceedings only establishes liability in a declaratory manner, with a separate action required to obtain an enforceable title (eg, damages).

However, the actual breakthrough for collective redress in Germany might come at the European level. The Collective Redress Directive, approved by the European Parliament in 2020, obliges member states to establish a mechanism for collective redress for breaches of EU consumer protection law by late December 2022. Third-party funding of collective actions is permitted under the directive, with restrictions in place to prevent conflicts of interest.

Germany has issued a first draft bill that would implement the directive. This bill still requires approval by different levels of government. The main novelty of the bill is that it would establish a genuine suit for performance (rather than just declaratory relief) in class actions.

4.2 How significant is the funding of collective actions in your jurisdiction relative to the use of legal finance by individual commercial litigants?

There is no industry-wide statistical data that shows the number of collective and single claims that are funded. Still, it may be inferred from experience that individual commercial litigants receive the lion's share of the funding provided by funders in Germany. Since collective redress is still in its infancy in Germany, the funding of collective redress has played a minor role thus far, even though the few collective actions that are funded are widely discussed in the press and receive a lot of attention.

Nevertheless, it can be observed that funders increasingly fund claims that do not fall under the qualification of a collective action, but are rather claims that have been bundled in a special purpose vehicle or claims of a large group of individuals. The bundling of claims is a phenomenon that is often used in follow-on cartel damage claims. Legal tech providers, on the other hand, attempt to use economies of scale by involving automated processes in the review, collection, bundling and enforcement of consumers' claims. It can be reasonably expected that in the long run, the funding of collective actions will play an even more important role in the German market.

5 Securing financing

5.1 What factors will a funder generally consider when evaluating whether to fund a case?

A funder will take into consideration a wide variety of factors in its funding decision, depending on the individual case. These include, but are not limited to (with no particular order of priority):

the overall impression of the party requesting funding;
the merits of the case;
the attractiveness of the forum, including available statistical data on the duration and probability of success of certain types of actions;
the envisaged timeframe of the legal dispute;
the case budget, the claim size (quantum) of the case and the ratio between the two;
the reputation and track record of the case team (ie, the legal counsel representing the party seeking funding and potentially the damages experts relied upon);
the solvency of the parties to the dispute (the defendant must be financially stable to pay the damages awarded to the claimant; at the same time, the claimant must be and remain solvent for the duration of the proceedings as an insolvency would carry the risk of termination of the legal finance agreement by the insolvency administrator);
the probability of successful enforcement of a favourable judgment or arbitral award;
the effect of the proposed funding on the funder's case portfolio; and
any potential reputational or environmental, social and governance (ESG) risks

5.2 What should a litigant or litigant's counsel look for in a legal finance partner?

Litigants seeking funding should be selective when choosing a funder and focus mainly on the following questions:

Does the funder have sufficient funds available throughout the lifecycle of the case?
Is it a passive funder that will let counsel do their job or will it attempt to influence the proceedings to an extent that is not acceptable to the litigant?
What is the background and experience of case team and is this experience relevant to the client's case? In particular, is the funder rooted in the civil law or the common law tradition?
Can the funder offer an in-house after-the-event (ATE) insurance solution without having to broker the case to an external insurance provider?

Overall, and since there is no ‘one size fits all' solution in legal finance, a litigant should take into account the willingness of the legal finance partner to tailor its commercial terms and procedures to meet the specific needs of the litigant.

5.3 What is the typical process for concluding the legal finance agreement?

This process can vary between different funders. This is because some funders actively look for cases (especially in the area of cartel damage claims). Once a case is established, they conduct beauty contests between law firms in order to decide which to engage for the legal representation. These funders take a very active approach in handling the case.

Differences also exist regarding whether and how external due diligence is conducted. Some funders review the funding request only internally, while others obtain a second opinion on selected legal questions from external experts (at least in complex cases that require specific expertise), which may prolong the process.

Despite these differences, each process is driven by the aim of assessing a potential claim and establishing a working relationship with claimant and lawyers. Accordingly, it is possible to identify certain stages that a funding request will likely go through at most funders (some of which may take place simultaneously):

signing of a non-disclosure agreement and exchange of information;
a know-your-customer (KYC) and anti-money laundering (AML) check;
an internal review of the funding request;
development and discussion of a pricing model;
conclusion of a term sheet containing the commercial terms;
external due diligence (if applicable); and
funding decision and conclusion of the legal finance agreement.

5.4 What terms does the legal finance agreement typically include?

The terms of an LFA can vary greatly as each LFA is tailored to the individual case. However, apart from the standard contractual clauses, the following provisions are included in most LFAs:

representations and warranties of the funded party (eg, regarding the facts of the case and ownership of the disputed claim);
a provision governing any future dispositions over the disputed claim (eg, its assignment);
the amount committed by the funder to the claim and provision for drawdown of the funds;
the commercial terms (eg, pricing model, waterfall and share of proceeds);
the obligations of the funder (payment of the costs of the legal dispute);
the obligations of the funded party (regarding the pursuit of the funded case, the disbursement of proceeds and information rights);
security rights regarding the proceeds;
provisions governing the potential settlement of the case; and
a provision governing the prerequisites for termination of the LFA and its consequences.

5.5 Do any caps apply to the funder's fees?

Typically, funders structure their return as either:

a percentage of the recovered proceeds (percentage model); or
a multiple on the amount invested (multiple model).

Sophisticated funders funding large claims typically use the multiple models in combination with a cap and a floor, since a flat percentage of a large damages amount may be held to be excessive despite being a low percentage amount.

Apart from the above (self-imposed) caps on returns, there are no statutory caps that apply to the funder's fee.

In 2015, the Higher Regional Court of Munich confirmed that a funder had the right to claim a share of 50% of the proceeds obtained by the claimant. It noted that the determination of whether there is an imbalance between the funder's performance and its return depends on the circumstances of the individual case. In any case, the risk assumed by the funder must be taken into consideration.

Regardless of this, funders take great care to ensure that scenarios in which they receive a disproportionate share of the proceeds are avoided.

It remains to be seen whether and to what extent the European Union will implement the Voss Report, which proposes that the claimant in a funded claim receive at least 60% of the gross proceeds, which would limit the funder's return to a maximum of 40% of the proceeds. Depending on whether the litigation costs are recoverable or whether they must be borne by the funder, the factual percentage due to the funder may be far lower.

5.6 Can the funder terminate the legal finance agreement before the litigation has ended? If so, under what circumstances and what are the implications?

German law does not prevent a funder from terminating the LFA before the end of the funded legal proceeding. The precise requirements depend on the terms of the individual agreement.

The most relevant ground for a termination is a breach of a contractual obligation by the funded party. The preconditions for termination vary depending on whether the breach is remediable or irremediable. LFAs may also permit termination on economic grounds. This is a matter of last resort, exercised by the funder only if the lawyers handling the case confirm that the funder will be unable to recover even the amounts invested in the case.

A valid termination by the funder for breach of the LFA that is not remedied will usually trigger an obligation to reimburse the funder's investment. Further legal consequences may be stipulated.

5.7 Under what circumstances (if any) must funding be approved by the court in advance?

The use of third-party legal funding need not be approved by a court or other authority.

5.8 Have there been notable disputes arising from legal finance agreements, and if so, what can a litigant or counsel do to avoid such disputes?

There have been few noteworthy publicly known legal disputes in Germany that have arisen from LFAs. However, many LFAs provide for dispute resolution by means of arbitration – that is, proceedings in a private hearing and without publication of the arbitral award. It thus cannot be ruled out that decisions on the interpretation of LFAs may exist without being publicly known.

5.9 Is the funder bound to fund any counterclaims arising from the funded litigation?

Whether a funder is bound to provide funding for a defence against counterclaims again will depend on the terms of the individual LFA. In the course of the negotiations of the LFA, funders often request that the claimant declare that it is not aware of any pending or future counterclaims by the opposing party. Also, typically funders will want to agree that they are not obliged to pay any costs arising from potential counterclaims since the funder has an inherent interest in being able to quantify and limit its exposure. However, provided that the case is financially sound, the funding of a defence against a counterclaim is possible.

6 Purchasing a litigation claim, judgment or award

6.1 Can the funder purchase legal claims?

Yes.

6.2 How does a funder purchase a claim out of an insolvency?

Any such purchase must be approved by the insolvency administrator of the entity in question, as well as the committee of creditors.

6.3 Are final judgments and/or mere causes of action assignable in your jurisdiction and is there a regulatory framework governing this?

Final judgments can be assigned in Germany in accordance with the Code of Civil Procedure and the Civil Code.

7 Role of the funder

7.1 Can the funder influence the litigant's choice of counsel?

Sophisticated funders do not influence the choice of lawyers. However, the quality of the case-handling lawyers is a factor considered in the due diligence process and may lead to declining a funding opportunity should this aspect raise doubts. Equally, in a funded case, funders have no interest in changing counsel as this may disrupt the proceedings.

7.2 Can the funder attend and/or participate in the court proceedings?

Court hearings in Germany are generally open to the public, including representatives of the funder. Additionally, some funders explicitly stipulate a contractual right vis-à-vis the funded party to attend court hearings and access court records, as well as other procedural documents. However, there is no statutory right to active participation in the sense that the funder itself can file motions or otherwise influence the outcome.

7.3 Can the funder influence the acceptance or terms of a proposed settlement agreement?

From a legal point of view, a funder may influence the acceptance or terms of a proposed settlement if this right has been agreed in the litigation funding agreement. Nevertheless, various funders in Germany request only a right to be consulted before the litigant starts settlement negotiations or concludes a settlement.

7.4 In what other ways can the funder participate in, and exert influence on, the litigation?

Funders may raise ideas, ask helpful questions and generally serve as a ‘third pair of eyes' that can contribute their own experience and expertise when asked to do so. However, they cannot impose their view on the litigant or the litigant's counsel.

8 Ethical considerations

8.1 In what circumstances (if any) is it necessary to disclose a legal finance agreement to the court or to the opposition? What specific information must be disclosed?

There is no disclosure obligation vis-à-vis the courts or the opposition party in litigation proceedings in the state courts. However, disclosure of the funding agreement is required in arbitration proceedings in order to prevent a conflict of interest based on an existing connection between the funder and a member of the tribunal.

A positive side effect of this disclosure might be an increased willingness of the defendant/respondent to settle, since the fact that the case is funded eliminates the hope that claimant will be unable to afford a protracted dispute.

8.2 Are communications between the parties to the legal finance agreement subject to privilege in your jurisdiction?

This question has not been settled by case law. Funders include comprehensive clauses governing legal, attorney-client professional, work product and common interest privilege in their LFAs, in order to ensure that the sharing of information between the litigant and the funder is not misconstrued as a waiver of any applicable privilege.

8.3 Does the rule of attorney work product apply to documents generated for the purposes of securing legal finance in your jurisdiction?

This question has not yet been settled by case law in Germany. Funders include comprehensive wording in their LFAs to ensure that the documents generated for the purposes of securing funding are qualified as attorney work product.

8.4 In what circumstances (if any) do rules about fee-splitting impact on the use and practice of legal finance?

Fee splitting between different law firms is permitted in Germany. There are no specific rules covering fee splitting in legal finance.

8.5 Do the doctrines of champerty and maintenance apply in your jurisdiction?

The common law doctrines of champerty and maintenance do not apply in Germany, which is a civil law jurisdiction.

8.6 Are there any types of proceedings (family, private prosecutions) for which funding is not permitted?

There is no blanket ban on the funding of any particular types of proceedings. In some specific circumstances, such as claims for the disgorgement of profits under the Unfair Practices Act, the case law leads to a de facto ban.

Additionally, funders may decide out of their own volition not to fund certain types of disputes due to reputational or economic concerns.

9 Proceedings

9.1 What is the typical timeframe for first-instance proceedings in your jurisdiction?

According to the most recent data published by the Federal Office of Justice, the aggregate average duration of civil proceedings at the regional courts – that is, the courts of first instance that hear civil disputes with an amount in dispute of over €5,000 and therefore most commercial disputes – was:

11 months in cases that were resolved without a contentious decision (eg, by means of a settlement, withdrawal of the claim); and
13.1 months in cases that were resolved by a contentious decision.

This means that the German civil courts can generally be considered expeditious by European standards.

Some specialised courts often do even better. The commercial divisions, for instance – which have jurisdiction over some, but not all commercial disputes at first instance – are known to handle cases particularly expeditiously. The German patent infringement courts also have a reputation for handling cases with great speed. However, high-value disputes tend to last longer than the average cases described above.

9.2 What are the opportunities in the litigation process for a case to be struck out prior to a trial?

There are no rules in German law that give the court the power to strike out a case prior to the oral hearing. In particular, there is no concept of a motion to dismiss such as in US proceedings.

A court can only dismiss a case after the oral hearing if the case is clearly unfounded. However, courts often pass indicative orders informing a party why its claim has no or very limited chances of success, giving it a chance to withdraw or adapt the claim.

9.3 How much party discovery of evidence is permitted in your jurisdiction? Are there procedures for seeking or compelling evidence from non-parties?

The scope of discovery of evidence in Germany is limited when compared to, for instance, US standards. In particular, the German legal system does not provide for pre-trial discovery. This is not to say that there is no means of obtaining document disclosure. Pursuant to the Code of Civil Procedure, a court may order a party to the proceeding or a third party to produce records or documents that are in its possession and to which one of the parties has made reference.

Overall, in cases where a party does not have access to evidence that lies in the sphere controlled by the other party, German law tends to rely much more on the burden of evidence and, if needs be, on a reversal of the burden than on disclosure/discovery.

9.4 Are interlocutory appeals (appeals of non-final judgments) permitted during proceedings in the first instance?

Under the German law of civil procedure, there are different types of judgments that are non-final in the sense that they are rendered while a case still pending and without finishing the court instance, such as:

partial judgments – that is, judgments that finally resolve only part of the subject matter of the dispute (eg, one of several claims or only certain prerequisites of a claim); and
interlocutory judgments (eg, decisions on jurisdiction).

While the exact details may vary, these types of judgments can generally be appealed during the first-instance proceedings.

9.5 Are first-instance decisions commonly appealed in your jurisdiction? What is the typical timeframe for appeal proceedings?

Appeals of first-instance decisions are not rare. In our experience, approximately 60% to 70% of these decisions are appealed. This is in line with statistical data published by the Federal Office of Justice that indicates similar appeal rates. The rate may be even higher in high-value commercial disputes.

9.6 How are decisions typically enforced in your jurisdiction? What is the typical timeframe for enforcement proceedings?

In Germany, claimants may use a number of procedures for the enforcement of a judgment, depending on the type of the decision and the assets to be attached.

When enforcing a judgment under German law, claims are transferred to the creditor, while physical assets are sold in an auction. Accordingly, the timeframe for enforcement of a decision will also vary depending on whether the creditor:

can obtain the transfer of a claim;
must rely on the sale of physical assets; or
can secure the debtor's compliance following attachment of the assets.

9.7 Is there an automatic stay on enforcement pending appeal or under what circumstances is one granted? Are appeals from first instance granted as of right?

There is no automatic stay of enforcement of judgments pending appeal. On the contrary, it is possible to provisionally enforce judgments while an appeal is pending, provided that the creditor can provide security, the amount of which will depend on the value of the claim.

A stay of enforcement pending the appeal may be granted upon provision of a security by the debtor in certain circumstances that are not relevant in the context of commercial litigation (eg, in case of low amounts in dispute). Leaving these scenarios aside, upon request by the debtor, the court can allow the debtor to avert enforcement by providing security if enforcement would result in an irremediable disadvantage for the debtor.

A first-instance decision may be appealed if:

the value of the subject matter of the appeal amounts to more than €600; or
the court of first instance grants leave to file the appeal.

10 Costs and insurance

10.1 Will the court order the losing party to pay the costs of the winning party? How else might costs be allocated between the parties and under what conditions?

The German law of civil procedure takes the ‘costs follow the event' approach (as opposed to the so-called ‘American Rule', which provides that each party must pay its own attorney's fees). In other words, the losing party must generally bear the legal costs of the winning party. The recovery of attorneys' fees is capped by the statutory rate – which means that the higher hourly rates charged by top-tier law firms will generally not be reimbursed.

10.2 Are some or all of the costs of funding recoverable by the winning party?

This question has not yet been conclusively answered by the German courts. As far as can be seen, there is just one older decision rendered by a first-instance court that concluded that the costs of funding cannot be recovered under German law. However, this decision was not appealed, so the appellate courts have not yet ruled on this issue.

Recent publications in the legal literature, including a comprehensive dissertation on the subject, argue in favour of the recoverability of costs of funding.

10.3 Can the court order costs against the litigation funder?

Under the existing legal framework, the courts cannot order costs against a litigation funder, which is not a party to the dispute and thus has no rights or obligations in relation to the proceedings.

10.4 Can the court order security for costs? If so, in what circumstances will it generally do so and how is this calculated and provided?

The German courts can order security for costs. A relevant example is claims brought by non-EU parties. Typically, the courts will order the provision of security which is calculated on the basis of the statutory lawyers' fees. However, the courts have discretion in deciding whether the security should cover only one instance or include an appeal to the second (and potentially even third) instance. Additionally, the parties to the dispute are free to agree on the type and amount of the security.

Security must be provided:

in the form of an irrevocable and unconditional guaranty of unlimited term, issued in writing by a financial institution that is authorised to pursue its business in Germany; or
by lodging cash or certain defined security bonds.

10.5 Is security for costs commonly ordered in funded litigation?

There is no indication that it will become more or less likely that a court will order a security for costs purely because a funder is involved.

10.6 Is after-the-event (ATE) insurance allowed in your jurisdiction? If so, how mature is the market?

ATE insurance is allowed in Germany and is offered by some funders as part of the funding package. Others obtain the ATE solution externally in addition to the funding.

10.7 In what circumstances is ATE insurance typically used? What are the advantages and disadvantages?

ATE insurance can be used across a variety of different disputes.

The key advantage of ATE insurance is that it reduces the case budget, since only the insurance premium will affect the budget. Moreover, the ATE insurance provider can offer support in the potential provision of security for costs.

10.8 What other types of insurance are available for litigants in your jurisdiction? In what circumstances are they typically used? What are the advantages and disadvantages?

Another type of insurance available in the German market is litigation buy-out insurance (LBI). This is a contingent risk insurance solution against adverse dispute outcomes which aims to transfer a pre-identified risk from the insured party (typically a defendant in a legal dispute) to the insurer.

LBI can cover the costs of:

adverse judgments against the insured;
appeals brought by the counterparty against judgments or arbitral awards that are favourable from the perspective of the insured and that it seeks to preserve; and
challenges to permits or licences obtained by the insured.

LBI can be combined with litigation finance to cover both active claims (where the funded party is a claimant) and passive claims (where the insured is a defendant).

11 Trends and predictions

11.1 How would you describe the current legal finance landscape and prevailing trends in your jurisdiction?

There is significant movement in the German legal finance market. Current developments are underway that will likely lead to the market's rapid transformation. Key trends include:

a shift towards new forms of funding; and
a wider use of legal finance products for risk management (as opposed to a classic provision of liquidity).

11.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The legislative reform at the centre of interest in the industry is the implementation of the recommendations of the Voss Report (see question 2.2). Following the adoption of a large parts of the report by the European Parliament, it is up to the European Commission to come up with a new EU-wide regulatory framework.

The legal finance industry is also awaiting the implementation of the Collective Redress Directive, which member states must complete by late December 2022. Since there is an inherent need for external funding in order for collective redress to function effectively (which the directive acknowledges), the expansion of collective redress to jurisdictions where it currently does not exist is likely to further transform the legal finance industry.

12 Tips and traps

12.1 What would be your recommendations for the smooth progress of funded litigation in your jurisdiction and what potential pitfalls would you highlight?

Over the course of the legal dispute, the transparent and frequent flow of information between the litigant and the funder is central for the smooth progress of the funded litigation. This applies not only to status updates regarding the steps that have been taken in the proceedings, but also to forecasts regarding the estimated funding requirement which helps the funder to have the funds available for the respective case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Germany: Litigation Funding Comparative Guide