Pros and Cons of Settling a Civil or Commercial Lawsuit under German Law 

German litigation lawyers as well as German judges love it when the parties of a civil dispute enter into a settlement agreement (called “Vergleichsvereinbarung” or simply ”Vergleich“). Why? Because German civil procedure rules and other laws concerning German civil litigation (see this post) provide financial incentives for lawyers if they find a way to resolve the dispute amicably, i.e. if the lawsuit is ended without the need for a judgment or other formal order by a German court. 

With regard to the German judge, the motivation to promote a settlement is obvious: If the parties settle, the judge does not need to spend many working hours hearing witnesses, examining documents and writing a judgment. 

German Law encourages Settlements

Section 278 German Code of Civil Procedure explicitly rules that the court shall at all stages of the civil lawsuit “work towards an amicable resolution of the dispute”. The original German wording of the relevant statute is:

„Das Gericht soll in jeder Lage des Verfahrens auf eine gütliche Beilegung des Rechtsstreits oder einzelner Streitpunkte bedacht sein.“

This means that a German judge in a civil litigation matter shall proactively attempt to induce the parties to reach such amicable resolution by way of a court recorded settlement agreement (gerichtlicher Vergleich); details are explained below. 

In practice, this happens right at the beginning of the first oral hearing (mündliche Verhandlung), where the German judge summarizes the facts of the case as presented by the parties, explains the strengths and weaknesses of each party’s arguments and then asks the parties whether they are willing to consider entering into settlement agreement. The technical term for this stage of a German civil lawsuit is “Gütetermin” or “Güteverhandlung” (conciliation hearing), section 278 para. (2) German Civil Procedure Code. 

This is comparable to a settlement conference which is available under many state civil procedure rules in the USA, for instance in California. The Güteverhandlung (settlement conference) under German civil procedure rules is, however, quite informal and is being conducted by the same judge who will decide the case if the settlement discussions fail to bring a result. Such a Güteverhandlung can be over in two minutes or it can last for hours. The content of a settlement agreement is not restricted to the litigation matter, i.e. the parties can bring other aspects into such a settlement.

The wording of s. 278 para. 2 of German Civil Procedure Code:

“For the purposes of arriving at an amicable resolution of the legal dispute, the hearing shall be preceded by a conciliation hearing unless efforts to come to an agreement have already been made before an alternative dispute-resolution entity, or unless the conciliation hearing obviously does not hold out any prospects of success. In the conciliation hearing, the court is to discuss with the parties the circumstances and facts as well as the status of the dispute thus far, assessing all circumstances without any restrictions and asking questions wherever required. The parties appearing are to be heard in person on these aspects.”

Parties can also settle at later Stages of Civil Litigation

If the Güteverhandlung, i.e. the settlement conference at the beginning of the first oral hearing, did not result in an amicable solution, this does not mean that all hope for a settlement is lost. Another popular procedural stage where German judges usually again raise the issue of and do promote a possible settlement is after the witnesses have been heard. In many cases, the court as well as well as the parties have a pretty good idea about who will most likely win the case and who will most likely lose. The latter, i.e. the potentially losing party, is then usually more open to settle the dispute after all, obviously at much less unfavourable terms now. Even if the parties know who will win the case, a settlement may have advantages for both sides: The court fees are being reduced and the lawsuit is finally over because the settlement, in contrast to a judgement, cannot be appealed.

Even after a German court has handed down a judgment and one party decides to appeal that judgment, guess what: The German court of appeal will again try to motivate the parties to enter into a settlement. 

Court initiated Mediation and ADR

Sometimes, after listening to the parties for a while, it becomes evident to the court that while the current lawsuit may be about one specific claim, the underlying issue between the litigants is in fact something else entirely. The real reasons for quarrels between family members or neighbours can go back decades. In such cases, a German judge may not only attempt a settlement conference but may go one step further by suggesting to the parties to opt for court initiated mediation (Mediationsversuch). 

In 2012, the German Civil Procedure Rules were amended and this new statute s. 278a ZPO was included in the Code:

Mediation, alternative conflict resolution

(1) The court may suggest that the parties pursue mediation or other alternative conflict resolution procedures.

(2) Should the parties to the dispute decide to pursue mediation or other alternative conflict resolution procedures, the court shall order the proceedings stayed.

Most German civil courts nowadays even employ specially trained mediation judges (Güterichter). If the parties are willing to give mediation or ADR a try, the actual litigation proceedings are stayed (i.e. put on hold) and the parties will discuss the case (and whatever else they deem relevant) in a more informal manner. The goal is to reach an amicable solution which will not only put the pending litigation itself to rest but which will hopefully pacify the entire relationship between the parties.

How is a settlement agreement recorded?

If the parties to a German civil litigation case have found an amicable solution, the judge will officially record the terms of such settlement agreement, usually by dictating the wording to the clerk who puts it in the official minutes of the court hearing (Protokoll der mündlichen Verhandlung). Such an official settlement agreement which has been recorded by the court (gerichtlich protokollierter Vergleich) is on par with a German judgment or a court order. This means that the parties can directly and immediately enforce the content of such a settlement agreement without the need for any further court intervention. If, for example, the defendant has agreed in a court recorded settlement agreement to pay amount X to the claimant until date Y, the claimant can immediately seize the defendant’s bank account if the defendant does not pay on time.

Actually, an officially recorded settlement is even better that a judgment, because it cannot be appealed and is thus immediately binding. That’s unless it was explicitly entered into as a revocable settlement (widerruflicher Vergleich), which is an approach sometimes taken in a court hearing if a lawyer appears without his or her client and wants to settle, but has not yet obtained the client’s consent to enter into an irrevocable agreement. The court then lays down the terms of the (tentative) settlement in the hearing minutes, but the settlement only becomes binding if and when the party has not revoked the agreement by a certain deadline which is also laid down in the court hearing minutes. 

Court recorded settlements outside a court hearing

In some cases, the parties are in principle willing to settle but they first need to research certain issues and/or discuss technical details of the wording. Then, it is possible under German civil procedure rules, to have the German court officially record the terms of a settlement without the parties having to be present at the courtroom. The parties (or rather their respective legal counsels) will then simply submit to the court in writing the wording they have agreed upon between them. The judge checks the terms and then hands down an official court order (Beschluss) which contains the entire written settlement agreement. This approach is explicitly described in section 278 para. (6) German Code of Civil Procedure:

“A settlement may also be made before the court by the parties to the dispute by submitting to the court a suggestion, in writing, on how to settle the matter, or by their accepting, in a corresponding brief sent to the court, the suggested settlement made by the court in writing. The court shall establish, by issuing a corresponding order, that the settlement (…) has been reached, recording the content of same in the order.“

Such a court recorded settlement by submitting the terms in writing is possible at every stage of the civil procedure, i.e. even before the first oral hearing or after the last oral hearing. As long as the parties are in agreement and neither party is treated unfairly, the German court will record the terms and thus terminate the proceedings.

What if a party refuses ADR or if ADR goes nowhere?

In spite of all these incentives and alternative dispute resolution options available under German law, there is, however, no obligation for the parties to settle. Each party can refuse to even discuss the possibility of an amicable resolution without having to give any reasons for this. Whether such behaviour makes that refusing party very popular with the court is, of course, another matter entirely.

If the parties have opted for mediation but, after a while, it shows that the discussions go nowhere, the lawsuit can be continued at any time. The party which desires to discontinue the ADR attempt must simply declare that it considers the settlement negotiations to have failed and apply to the competent German civil court to resume the litigation proceedings. Then, the lawsuit continues where the parties left off. Thus, by attempting mediation no one has anything to lose.

Court and lawyer fees in case of a settlement

What exactly are these incentives granted by German law with regard to litigation costs if the parties agree to settle?

• Pursuant to no. 1211 of annex 1 to the German Court Fees Act (Gerichtskostengesetz) https://www.gesetze-im-internet.de/gkg_2004/anlage_1.html, the court fees in all civil litigation cases at the Amtsgericht (Circuit Court) or Landgericht (High Court) level are being automatically reduced by 2/3 if the parties settle before a judgment is being handed down.

Example: If the claimant sued the defendant for payment of EUR 100,000 at a German Landgericht, the court fees to be paid in at the start of the lawsuit were EUR 3,078. As soon as the parties agree to a settlement (whatever the content of such a settlement may be) and the court officially records that settlement (gerichtlich protokollierter Vergleich), the court fees are reduced by two thirds and the claimant, in our example, receives a refund of EUR 2,052 from the court.

• The parties’ legal counsels, i.e. the German trial lawyers, are entitled to an additional statutory fee, the so called settlement fee (Einigungsgebühr or Vergleichsgebühr) pursuant to no. 1003 annex 1 VV to the Rechtsanwaltsvergütungsgesetz (RVG) / German Lawyer Fees Act. 

This settlement fee is even higher (see no. 1000 of the above fee table) if a lawyer achieves an amicable resolution of the matter before a civil lawsuit has been officially filed with the court. At the appeal stage  of a German civil dispute (i.e. Berufung or Revision, see the post German Court System), there is also a significant lawyer settlement fee if the parties manage to put the dispute to rest without the need for a judgement by the appeals court (see no. 1003 of the above fee table).  More on German lawyer fees in this post.

If you are a U.S. lawyer asking a German litigation firm to assist in a German civil dispute, you should be aware of these incentives in order to understand why a German litigation lawyer may appear very keen to reach a settlement at an early stage. Truth be told, however, in high profile cases, the statutory fees under German law are only a small portion of what an experienced lawyer will actually charge. So the settlement fee, in such cases, is not really what drives the German legal counsel’s decisions. But in smaller cases it might.

For legal advice on German civil procedure and how to successfully litigate in Germany, contact the international litigation experts and trial lawyers of GrafLegal.

Copyright & Disclaimer All posts are copyrighted material. This blog is made available by Graf & Partners for educational purposes as well as to give you general information on German law, not to provide specific legal advice. Simply reading this blog does, of course, not result in any attorney client relationship between you and Graf & Partners. The blog should not be used as a substitute for competent legal advice provided by a licensed professional attorney in a specific legal matter.