The Third-Party Notice of Dispute in Arbitration Proceedings

In many contractual relationships, there is the possibility that one party could have a claim of recourse against a third party not involved in the legal dispute in the event of a disadvantageous outcome for them. This often occurs, for example, in contractual relationships in the construction sector with general contractors and subcontractors. Disputes arising from these relationships can often not be settled in a classic two-party procedure with plaintiff and defendant, but only in a so-called multi-party procedure. Without the possibility of involving the third party, the losing party would be exposed to the potential risk of losing the case twice, the so-called "recourse trap". One way to involve the third party in the legal dispute and at the same time bind them to the court's decision is to issue a third-party notice.

However, German arbitration law does not contain any provisions on third-party notices. Until now, third parties could not be included in arbitration proceedings through a third-party notice because there were no direct or similar legal provisions allowing for it. To issue a third-party notice in arbitration proceedings, special agreements and the consent of all parties involved were needed.

The German Institution of Arbitration has now responded by publishing the DIS-ERS. Since March 15, 2024, parties can agree on the DIS-ERS in addition to the DIS Arbitration Rules. The supplementary provisions can already be agreed for the future when the arbitration agreement is concluded in order to ensure that clear conditions exist for the declaration of a third-party notice in the event of a dispute. The DIS-ERS contractually binds the third party to the factual and legal findings of the arbitral award rendered in the original arbitration proceedings. This can avoid contradictory decisions in a subsequent legal dispute ("follow-up dispute") between a party to the original arbitration and the party that issued the third-party notice.

The DIS-ERS are based on the model of the third-party notice of the German Code of Civil Procedure (ZPO). The requirement for a third-party notice pursuant to Section 72 (1) ZPO is that a party believes it has a claim for warranty or indemnification against a third party in the event of an negative outcome of the legal dispute. The DIS has adopted this wording in its supplementary rules. The so-called "intervention effect" arises with an admissible third-party notice. In addition to the binding effect in the subsequent legal dispute, the intervention effect also leads to the suspension of the limitation period. The third-party notice thus promotes procedural efficiency and prevents contradictory decisions. To protect the recipient of the third-party notice, the recipient of the third-party notice has the opportunity to participate in the arbitration proceedings. Unlike in civil proceedings, the third-party notice can therefore only be declared within a certain period of time to allow the recipient of the third-party notice to participate in the composition of the arbitral tribunal. Anything else shall only apply if the recipient of the third-party notice consents to the notice of arbitration and declares that it has no objections to the composition of the arbitral tribunal and accepts the arbitration proceedings as they stand (Art. 4.4 DIS-ERS).

With the introduction of the DIS-ERS, the DIS is a pioneer in international comparison. A comprehensive set of rules comparable to the DIS-ERS with a corresponding binding effect is missing in most arbitration rules. The often included, subsequent involvement of other parties (see Art. 7 ICC Rules 2021) also contributes only to a limited extent to the effective participation of third parties.

The approach of the DIS offers protection for all parties involved and can contribute significantly to the efficiency of the arbitration proceedings. By being designed as a standardized set of rules in addition to the DIS Arbitration Rules and by being easy to agree by means of a model clause, the DIS-ERS are also easy to handle in practice. Companies have the opportunity to handle disputes more efficiently and save costs if all contracting parties agree on the validity of the DIS-ERS. This applies in particular to situations in which the potential involvement of a third party is obvious from the outset, such as in the supply chain.

DIS-ERS makes arbitration proceedings even more attractive as an alternative to ordinary jurisdiction. Due to the particular flexibility of arbitration proceedings and the special expertise of all parties involved in the proceedings, parties are increasingly agreeing to settle legal disputes before arbitration tribunals. Our dispute resolution team handles national and international disputes in arbitration proceedings on an ongoing basis. In addition, our lawyers also act as arbitrators before arbitration tribunals.