Security Costs in German Litigation for Foreigners

When foreign parties engage in litigation in Germany, they may be required to provide security for costs. This requirement aims to protect the opposing party from potential financial risks, ensuring that if the foreign litigant loses the case, the defendant can recover legal expenses. This article examines the legal framework, conditions, and implications of security for costs in German litigation, focusing on its impact on foreign plaintiffs.

Legal Basis for Security for Costs

The requirement for security for costs is primarily governed by Section 110 of the German Code of Civil Procedure (Zivilprozessordnung, ZPO). According to this provision, a plaintiff who is not domiciled in the European Union (EU) or the European Economic Area (EEA) may be required to provide security to cover the defendant’s potential litigation costs. The underlying rationale is to prevent defendants from facing difficulties in recovering costs from foreign plaintiffs who lack assets in Germany.

However, several international treaties and EU regulations limit or modify the application of this rule. For instance, under the Brussels I Regulation (Recast) (Regulation (EU) No. 1215/2012), plaintiffs from EU and EEA countries cannot be required to provide security for costs solely based on their nationality or residence.

Who Must Provide Security for Costs?

Security for costs applies to plaintiffs who are not domiciled in Germany, including individuals and companies based abroad. It also applies to those who are not domiciled in the EU or EEA, as plaintiffs from these regions are exempt due to the principle of non-discrimination under European law. Additionally, plaintiffs who do not qualify for exemptions under international agreements may also be subject to this requirement. Several treaties between Germany and other nations (e.g., Switzerland, Turkey, and the U.S.) exempt nationals of those countries from security cost requirements.

Exceptions to the Requirement

Even if a plaintiff falls under the above criteria, German courts may waive the requirement in certain situations. This includes cases where the defendant has sufficient assets in Germany to cover potential cost recovery, where the plaintiff qualifies for legal aid (Prozesskostenhilfe) based on financial hardship, or where a relevant international treaty or bilateral agreement waives the requirement.

Amount and Type of Security Required

The amount of security is determined based on the expected litigation costs, which include court fees (calculated based on the value of the claim), attorney fees (determined by the German Lawyers' Remuneration Act (Rechtsanwaltsvergütungsgesetz, RVG)), and expert witness fees if applicable. The security is usually provided in the form of a cash deposit with the court, a bank guarantee from a German or EU financial institution, or a surety bond from a reputable German insurer. The court determines the exact amount based on the case’s complexity and potential legal expenses. If the plaintiff fails to provide security within the deadline set by the court, the lawsuit may be dismissed.

Procedure for Requesting Security for Costs

The process begins with the defendant’s request, where the defendant formally applies for security for costs before the court. The court then reviews the application to determine whether the plaintiff meets the criteria and, if necessary, sets the required security amount. The plaintiff is then given a deadline to provide the security, either as a deposit or through an acceptable guarantee. If the plaintiff does not comply within the given timeframe, the court may dismiss the lawsuit.

Implications for Foreign Plaintiffs

Security for costs can have significant consequences for foreign plaintiffs, particularly small businesses and individuals pursuing claims in Germany. First, it creates a financial barrier to litigation, as the requirement to deposit security adds a financial burden that may discourage foreign plaintiffs from pursuing legitimate claims. This is particularly problematic for small businesses or individuals with limited resources. Second, there is a risk of losing the deposit, as if the plaintiff loses the case, the defendant can claim reimbursement of legal costs from the security deposit. If the security amount is insufficient, the plaintiff remains liable for the outstanding costs. Lastly, the requirement can impact litigation strategy, as plaintiffs may choose to settle or withdraw a claim rather than risk the financial exposure of an unsuccessful lawsuit.

Strategies to Mitigate the Impact

Foreign plaintiffs can take several steps to manage the risks associated with security for costs in German litigation. First, they should assess applicability before filing, determining whether they fall under the security requirement and exploring possible exemptions. Consulting a German attorney early in the process can help clarify obligations. Second, they may consider alternative dispute resolution (ADR) options such as mediation or arbitration, especially if the contract includes an arbitration clause that bypasses German courts. Third, plaintiffs with limited financial resources may seek legal aid (Prozesskostenhilfe) in Germany, which, if granted, can exempt them from the security requirement. Lastly, plaintiffs should evaluate cost insurance options, such as litigation cost insurance (Rechtsschutzversicherung), which may cover security costs in some cases.

Security for costs in German litigation serves as a protective mechanism for defendants but can pose significant challenges for foreign plaintiffs. Understanding the legal framework, potential exemptions, and strategic options is crucial for those considering litigation in Germany. Proper planning and legal consultation can help mitigate financial risks and ensure a smoother litigation process.