RELEVANT RULES AND LEGISLATION (i) Cost rules

2.1 The relevant provisions of the German Code of Civil Procedure²⁵ are as follows:

“The losing party has to bear all costs of the litigation, in particular all costs accrued by the opponent, as far as these costs were necessary to defend or to enforce a right…”²⁶

“The statutory fees and expenses of the lawyer of the winning party are to be refunded in any type of proceeding…”²⁷

“If each party partly loses and partly wins costs are to be balanced out or to be shared proportionally”.²⁸

2.2 The German cost rules, unlike CPR Part 44, do not confer any general discretion upon the court in respect of costs. The court will determine the extent to which each party has succeeded in proving its case, and make its order accordingly.

By way of example, if the claimant claims €1,000,000, and recovers €700,000, the court will order the defendant to pay 70% of the costs, and the claimant to pay 30% of the costs.²⁹ Such costs comprise court fees, lawyers’ fees and expenses as discussed below.

24 However, the German system is not inquisitorial, i.e. the court does not conduct an inquiry.

It is for the parties themselves to plead their respective cases and provide evidence to the court. The court simply exercises control over the evidence that is to be adduced, based on the court’s decision as to what evidence it needs. This approach is referred to as the “principle of procuring” (Beibringungsgrundsatz).

25 German Civil Procedure Code (Zivilprozessordnung in der Fassung der Bekanntmachung vom 5. Dezember 2005, zuletzt geändert durch Artikel 1 des Gesetzes vom 30. Oktober 2008 (“ZPO”)).

26 German Civil Procedure Code, section 91(1).

27 German Civil Procedure Code, section 91(2).

28 German Civil Procedure Code, section 91(3).

29 In respect of claims for non-monetary relief, the court will make a similar assessment by

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(ii) Recoverable costs and court fees and expenses

2.3 The quantum of legal costs that a successful party is entitled to recover from an unsuccessful party, and the fees and expenses of the court which are payable, are prescribed by statute.³⁰ These rules do not seek to provide a successful party with a complete indemnity for his or her legal fees. Instead, they provide for the payment of legal fees and court costs in scales which increase in a degressive, non-linear fashion and with the use of multipliers that vary according to the value of the dispute, the stage at which the case is resolved, and other aspects of the case.³¹ Illustrations are given below of how these rules apply to disputes of varying sizes, in respect of the amount payable by the unsuccessful party (leaving aside that party’s own legal fees, which it must bear).³²

x Amount in dispute = €10,000

Court fees payable €588.00

Lawyer’s fees payable (for one lawyer) €1,869.37 Total payable by unsuccessful party €2,457.37 x Amount in dispute = €100,000

Court fees payable €2,568.00

Lawyer’s fees payable (for one lawyer) €5,123.07 Total payable by unsuccessful party €7,961.07

x Amount in dispute = €1,000,000

Court fees payable €13,368.00

Lawyer’s fees payable (for one lawyer) €16,900.85 Total payable by unsuccessful party €30,268.85

reference to the issues on which each party has succeeded.

30 Court fees are prescribed by the German Court Fees Act (the “GKG”, being the Gerichtkostengesetz vom 5 Mai 2004, zuletzt geändert am 30 Oktober 2008) and legal fees are scaled under the German Lawyers’ Fees Act (the “RVG”, being the Gesetz über die Vergütung der Rechtsanwältinnen und Rechtsanwälte vom 5 Mai 2004, zuletzt geändert am 30 Oktober 2008). The RVG is the only applicable statute in respect of legal fees. There are other statutory provisions concerning the payment of court fees in certain cases (e.g.

guardianship and probate cases), but the GKG is the main statute in relation to civil litigation.

31 According to German Civil Procedure Code section 3(1), the value of the dispute is to be determined by the court in its “absolute discretion”. I am advised, however, by senior German judges that in practice no discretion is involved when the litigation concerns quantified or readily quantifiable claims.

32 The costs, fees and expenses payable under Court Fees Act and the Lawyers’ Fees Act vary depending upon a number of factors, e.g. the number of lay and expert witnesses and whether the witnesses were examined in court. The examples given in this chapter assume among other things, and for the sake of simplicity in calculation, that neither the court nor the successful party’s lawyer incurred any expenses, and no witness or expert was examined in court. The calculation of recoverable lawyers’ fees and payment of court fees is different where a party seeks non-monetary relief, e.g. in the nature of a declaration or injunction.

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x Amount in dispute = €30,000,000³³

Court fees payable €96,408.70

Lawyer’s fees payable (for one lawyer) €274,368.00 Total payable by unsuccessful party €343,020.35

2.4 The court fees payable are significantly less (i.e. around 1/3rd less) where court proceedings are discontinued e.g. because of settlement, to reflect the fact that the court has less work to do in such cases. However, the recoverable lawyers’ fees (assuming the parties do not settle the issue of legal fees) are higher than if the case proceeds to judgment. One of the reasons for this is to provide the parties’ lawyers with an incentive to settle.³⁴ To illustrate, in the case of a €1,000,000 claim which settles before trial, the fees would be as follows (again, assuming that the parties do not agree to settle the question of payable legal fees):

Court fees payable €4,456.00

Lawyer’s fees payable (for one lawyer) €22,251.09 Total payable by unsuccessful party €26,707.09

2.5 A key notion that underpins the German cost rules, and the amounts recoverable under the applicable rules for lawyers’ fees, is that a lawyer is “an independent agent in the administration of justice”³⁵ who is bound only to law and justice and to the concerns of his client. Lawyers practise in a “liberal profession”³⁶ which is “not a trade”.³⁷ The cost rules try to ensure that lawyers maintain their independence by, among other things, prohibiting (subject to limited exceptions) agreements between lawyers and their clients that contemplate lawyers being remunerated for court work at rates below those prescribed by the cost rules.³⁸ By doing this the German cost rules endeavour to ensure that a lawyer is able to focus his or her energies on pursuing the legal rights of his or her client, without being distracted or compromised by having to focus on his or her own interests in being remunerated at a reasonable rate. In broad terms, the German cost scales seek to provide lawyers with something akin to a living wage, whilst at the same time

33 In respect of claims for more than €30m, the lawyers’ fees (but not the court fees) are capped at the level fixed for €30m claims. The constitutional validity of this cap was recently challenged, but affirmed by the German Constitutional Court: see section 3, below.

34 The fact that a lawyer may receive a bonus of sorts for a case settling (an

“Einigungsgebühr”) can, at least theoretically, give rise to a conflict between the lawyer’s interests and those of his or her client. There is, however, no evidence of this potential conflict affecting lawyers’ behaviour in practice, and moreover the fact that a case has settled could be regarded as a benefit which outweighs the potential for conflicts of interest. Another reason why this apparent conflict of interest may not be regarded as problematic is that it is common for parties to settle proceedings on the basis that each party is to bear its own costs, and that court fees are to be shared proportionally. Under the German system there is no equivalent to Part 36 of the CPR, or other costs principles which give parties with an incentive to settle by making settlement offers.

35 German Federal Lawyers’ Act (the “BRAO” or Bundesrechtsanwaltordnung vom 01.08.1959, zuletzt geändert am 12 Juni 2008) section 1.

36 German Federal Lawyers’ Act section 1(1).

37 German Federal Lawyers’ Act section 2(2).

38 German Federal Lawyers’ Act section 49b(1) and (2). It has, however, been reported these statutory provisions are regularly breached, as many clients are often are not willing or able to pay the full statutory fees: Dr Michael Kleine-Cosack, Commentary on the Federal Lawyers’

Act (2008).

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ensuring that the scale of recoverable fees and expenses is proportionate to the amount in dispute.

2.6 “Cross-subsidisation”.³⁹ A notion which underpins the cost scales used in Germany is that of “cross-subsidisation” which, in summary, posits that a lawyer may earn a reasonable living out of his or her profession by accepting a number of smaller cases where remuneration under the scale of fees is not very great (and there may be only a small profit margin) and in addition accepting a number of medium or large cases where the scale fees are higher. If a lawyer’s practice consists of a mix of small, medium and high value cases, the theory is that the fees from the medium and large value cases will “cross-subsidise” those derived from smaller ones, enabling the lawyer overall to earn a reasonable living.

2.7 Adjustments to cost scales. The scales of costs applied in the German legal system remain fixed until amended by legislation. There is no in-built mechanism for increasing or reducing the scale of fees according, for example, to the prevailing rate of inflation (or deflation).⁴⁰ The most recent change to the scale of fees occurred in 2004,⁴¹ and the previous change before that was in 1994.

2.8 It should be noted, however, that the cost scales prescribed by the rules only limit (i) the amount of costs recoverable as between parties to litigation; and (ii) the minimum which a client is required to pay to his or her lawyer. It is open to a party to retain a lawyer on a rate which exceeds the scale rates.

(iii) Funding arrangements

2.9 Contingency fees and CFAs.⁴² Until recently, agreements for contingency agreements and CFAs were thought to be illegal under German law, and were expressly prohibited unless they were agreed after judgment in a case or settlement of the case. One objection to them was that they contemplate a lawyer being paid at less than the applicable scale fee where the lawyer’s client is unsuccessful, which may be inconsistent with the underlying notion of “cross-subsidisation” (which allows lawyers to earn something equivalent to a “living wage”).⁴³ However, a recent ruling of the German Constitutional Court⁴⁴ decided that the strict prohibition of contingency fees and CFAs as traditionally provided for in German statutory law was not in line with the German constitution (the Basic Law, or “Grundgesetz”). German law was therefore amended on 1 July 2008 to permit contingency fee agreements and

39 The German expression is “Quersubventionierung”.

40 This may be contrasted with e.g. the Italian Civil Procedure Code, where it is contemplated that the applicable scales of costs be reviewed every 2 years. A similar position applies in Slovakia, where cost scales are linked to a general price indexed, and the scales are adjusted approximately every 2 years. However, the adjustment of cost scales according to prevailing rates of inflation (or deflation) has an effect on legal aid funds, as lawyers who perform legal aid work are remunerated according to the applicable costs scale. Legal aid is discussed further, below.

41 The change was partly driven by the “need to adjust fees to the present economic situation”: draft law (Gesetzesentwurf) by the German Federal Government (Bundesregierung), BT-Drs.15/2403, page 1.

42 German law does not make a distinction between contingency fee agreements and CFAs.

The German expression for such agreements is “Erfolgshonorar”.

43 German Federal Lawyers’ Act section 49b(1) and (2). It was, however, permissible for lawyers to enter into an agreements which provided for an uplift in fees (as occurs under CFAs), provided that such an agreement did not in any circumstance contemplate the lawyer being paid at less than the statutory scale.

44 Bundesverfassungsgericht, judgment dated 12^th December 2006 (1 BvR 2576/04).

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CFAs to be used, but only in limited circumstances such as where a client does not qualify for legal aid and is unable to afford a lawyer.⁴⁵ The question of whether a person, who is ineligible for legal aid, is unable to afford a lawyer (and may therefore engage a lawyer on a contingency fee or CFA basis) is not entirely clear. A key consideration is whether a person in the client’s position would not instruct a lawyer, on the basis of the expense of doing so, unless it were on the basis of a contingency fee or CFA basis.⁴⁶

2.10 Legal expenses insurance. Before-the-event legal expenses insurance is used commonly (and has been for a long time) as a means of paying for a party’s legal fees (whether claimant or defendant).⁴⁷ This is discussed further in section 4, below.

2.11 Third party funding. Third party funding is permissible under German law, but it is not widely used. This, too, is discussed further in section 4, below.

2.12 Legal aid. Legal aid is available in certain civil, administrative, social, employment and tax cases. Prospective claimants who wish to apply for legal aid are means tested, and their case must be likely to succeed before funding will be available. The decision as to whether an applicant will be granted legal aid is made by the court which is to decide the case. Legal aid is granted on the basis that the appointed lawyer will be remunerated according to the applicable costs scale.

2.13 Cost assessments. Costs are assessed shortly after judgment has been given.

Costs are assessed by a “Rechtspfleger”, a court official broadly similar to a costs officer in England and Wales. The assessment of court fees and scale fees is a mechanistic task, for which IT is readily available. In addition, the Rechtspfleger will allow reasonable “court expenses”. These comprise the costs of attendance by factual witnesses and experts whom the court has called. In rare and exceptional cases, the Rechtspfleger may allow the costs of independent experts who have assisted the parties during the course of proceedings (for example, in complex clinical negligence or construction cases).

2.14 Small claims. Small claims procedures are implemented across most of Germany, as enacted by the various State (Länder) legislatures. The small claims procedures usually involve claims of less than €600, and endeavour to resolve such claims primarily by way of extra-judicial mediation. In practice the small claims procedure is not widely used, and does not operate so as to prevent a claimant from taking its case straight to court.⁴⁸ Germany has also recently implemented the European Small Claims Procedure⁴⁹ in respect of cross-border claims of €2,000.00 or less.

45 This is now reflected in the Lawyers’ Fees Act (the “RVG”) sections 4 and 4a. The German Federal Lawyers’ Act section 49b(2) was also amended to include an explicit prohibition on comprehensive funding agreements by lawyers. The prohibition, however, only extends to the lawyer’s own fees, not the fees of the opponent in court proceedings or to court costs.

46 The prevailing view is that the question must be answered objectively, that is from the perspective of a reasonable person in the financial circumstances of the particular client:

Mayer/Kroiß, Rechtsanwaltsvergütungsgesetz (2008).

47 Prof Adrian Zuckerman, “Lord Woolf’s Access to Justice: Plus ça change…” (1996) 59 Modern Law Review 773 at 791-795; Dr Matthias Kilian, “Alternatives to Public Provision: the Role of Legal Expenses Insurance in Broadening Access to Justice: The German Experience”

(2003) 30 Journal of Law and Society 31.

48 If a claim for less than €600 is brought by way of court proceedings, the court has a broad discretion as to the conduct of the case: German Civil Procedure Code, section 495. Such cases are conducted in an informal manner if the parties are unrepresented.

49 EC Regulation No. 861/2007, which took effect on 1^st January 2009. The procedure has been implemented in German Civil Procedure Code, section 1097ff.

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2.15 Specialist courts. There are specialist courts in Germany, such as the

“Kammer für Handelssachen” (Chamber of Commerce),⁵⁰ but no special cost rules apply to those courts.