In this article, our three authors – experienced litigators and arbitrators – give you an outlook on the topics that will play an important role in practice in the coming year
Business Law Magazine – Lawyers’ Top 5:
(1) ESG Litigation
There is consensus that ESG compliance will continue to be a significant task for corporates and their advisers in 2022, partly fueled by the German Supply Chain Act (Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten), which will enter into force for the largest companies in 2023.
At the same time, ESG-related litigation will be on the rise in 2022. Climate change litigation has already made significant headlines in Europe. 2022 will see the first hearings in lawsuits brought by NGOs against German corporates. It remains to be seen whether the proposed EU Directive on Corporate Due Diligence and Corporate Accountability will provide for civil litigation against infringers.
Another likely focus area is the financial sector. Increased disclosure and reporting obligations under the Taxonomy Regulation (Regulation (EU) 2020/852) and the Sustainable Finance Disclosure Regulation (Regulation (EU) 2019/2088) may be used as a hook to litigate against “greenwashing”. Similarly, corporates will likely increasingly be held to the promises made in their disclosures and capital markets reporting.
We also expect to see more sustainability-related litigation from consumer organizations and even competitors in relation to false or misleading sustainability-related claims under unfair commercial practices laws, e.g., the German Act Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb).
In light of increasing public and shareholder interest, we expect that sustainability-related risks will play an ever-increasing role in the due diligence process in M&A transactions and, ultimately, in post-M&A disputes.
(2) Mass Litigation
We expect to see more mass litigation in Germany. Claims bundling, in particular, will be a hot topic as the effects of the AirDeal decision of the German Federal Court of Justice (Judgment of July 13, 2021, II ZR 84/20) as well as the legislative reform of the Legal Services Act (Rechtsdienstleistungsgesetz) will shape the future structuring of bundling models. There remain some uncertainties with respect to third-party funding of mass consumer claims but we do not expect these issues to put a damper on the number of new collective litigation efforts.
As the wave of diesel emissions claims seems to have ebbed, claimant-oriented law firms, legal tech companies and litigation funders have already turned their eyes to new shores, e.g., the millions of Euros of banking fees that may need to be reimbursed to customers following a recent judgment of the German Federal Court of Justice (Judgment of April 27, 2021, XI ZR 26/20). The Court held that constructive customer consent based on general terms and conditions was insufficient to support unilateral price increases. This judgment will affect other sectors that use similar general terms.
The business models of commercial providers that offer easy access to justice for consumers, in particular in niche markets, will continue to increase their market presence in 2022. Conversely, we do not expect a significant increase in cases within the framework of the statutory collective redress mechanism (Musterfeststellungsklage), which is perceived as being relatively slow and not sufficiently user-friendly.
The digitalization of dispute resolution will progress further in 2022. Now having had ample time to practice during a transition period, lawyers in Germany are – in most proceedings – obligated to file their submissions electronically. We hope that courts will follow suit and conduct the proceedings electronically as well.
In the arbitration world, some institutions are already one step ahead of the German courts: Modern case administration platforms used, for example, by the Arbitration Institute of the Stockholm Chamber of Commerce, the Vienna International Arbitral Centre and the Hong Kong International Arbitration Centre allow for state-of-the-art case management and communication between the arbitral tribunal, parties, lawyers, the arbitral institution and potentially also other involved persons. These platforms offer a centrally-stored repository containing all documents and communications relating to a case, similar to real-time online access to the docket file.
The pandemic acted as an accelerant with respect to the now widely accepted practice of conducting remote hearings in both court proceedings and arbitrations. We expect fully virtual hearings and hearings with at least partial participation by video conference to remain frequently used options in 2022. Although many practitioners emphasize the advantages of in-person hearings, including better rapport with the court or tribunal and a more authentic view of witness testimony, those advantages will oftentimes not outweigh the benefits of saving time and money unless the stakes are high.
The implementation of novel, tech-driven concepts in the dispute resolution process takes time, in particular in the state court system. We should thus not expect miracles in terms of digitalization in 2022.
(4) Insolvency-Related Disputes and Third-Party Funding
There is a general market expectation that the number of large corporate insolvencies will increase, not least following expiry of state-aid programs of the pandemic. In our expectation this may prompt an increase in large-scale litigation, both from insolvency administrators seeking to maximize the estate and creditors establishing their own claim or defending their position.
On such large-scale bankruptcy litigation, we expect to see, increasingly, the use of third-party funding or trading of litigious claims. While Germany is traditionally not a jurisdiction in which litigation funding or litigation claims trade is very common, the market has developed significantly.
In the Wirecard-related litigation, Union Investment, a large German asset manager, reportedly is launching a >EUR 240 million lawsuit against the administrator in order to establish the ranking of its damage claim. The case is funded by a specialized litigation funder. Union Investment, as a shareholder, claims that its damages claims – resulting from false capital markets publications issued by Wirecard – rank pari passu with regular creditor claims. Such waterfall litigation can have a major impact on the recovery of creditors (e.g., as seen in the English Lehmann bankruptcy waterfall litigation).
In the case of Air Berlin, the insolvency administrator recently announced his intention to sell the estate’s litigious claims against former Air Berlin shareholder Etihad purportedly resulting from a 2017 comfort letter, as well as litigious claims against former management, the D&O insurance and Air Berlin’s former auditor. The administrator is reported to have mandated negotiations with specialized funds regarding the sale of the claim. This is one of the first, if not the first, reported instances of a litigious claim of this size being sold by a German insolvency administrator.
Overall, we take these developments as indications that insolvency administrators are ready to employ modern tools and adopt a more commercial approach to collecting money for the estate creditors.
(5) Rise of Institutional Arbitration with a Seat in Hong Kong
For certain cross-border disputes, arbitration proceedings are the more attractive choice compared with ordinary court proceedings. This holds true especially for disputes involving the People’s Republic of China, Germany’s economically most significant trading partner.
Germany and China have not entered into a bilateral treaty on the recognition and enforcement of court judgments. To date, there are only sparse reports of Chinese courts being tasked with the recognition and enforcement of German judgments in commercial matters. Therefore, it is highly uncertain whether a German judgment against a Chinese entity whose assets are primarily located in China will be of value.
As a consequence, arbitration is the dispute resolution mechanism of choice for most international commercial players who contract with a Chinese counterparty. Most international players, however, are hesitant when it comes to choosing a domestic arbitration institution in Mainland China to administer the dispute.
Arbitrations administered by a recognized institution in Hong Kong have traditionally been attractive fora for disputes involving a Chinese party. Recently, China and the Hong Kong Special Administrative Region entered into an agreement that allows parties to an arbitration to apply for interim measures from Mainland China courts, including asset freezing and evidence preservation orders, before or during an arbitration.
While the judicial assistance is limited to certain institutional arbitrations, including arbitral proceedings administered by the ICC and HKIAC and seated in Hong Kong, the option of court assistance as well as the enforcement of interim awards more generally is not available with any degree of reliability in other foreign arbitrations. As of September 2021, the HKIAC had already received 50 applications for interim measures to be passed on to the Mainland Chinese courts. Based on information provided by the HKIAC, Mainland Chinese courts need an average of eight days to rule on such an application.
As a result, and as this tool is being incorporated in new commercial contracts, we expect to see more Hong Kong-seated, institutionally administered arbitrations between Chinese and non-Chinese parties in 2022 and beyond. Although arbitrating in Hong Kong may still be an exotic idea for German and other international corporates, arbitrating under institutional rules with a Hong Kong seat need not scare off sophisticated international arbitration users.