Arbitration in Austria: Legislation and Rules
Among the cases decided during last years, two decisions of the Austrian Supreme Court (the “OGH”) are of particular practical relevance. First, it ruled that an award cannot be set aside if it is clear from the reasoning of the award that the violation of the right to be heard or the procedural ordre public was irrelevant to the outcome of the decision (B.1 below). Second, it ruled that an arbitration agreement is ineffective if the tribunal constituted under this agreement will not give effect to the mandatory rights enjoyed by a self-employed commercial agent who operates in the European Union.
Right to beheard
The decision of the OGH of 6 December 2016dealt with the following facts:
The defendant sold shares in a construction company for EUR 53 million to the plaintiff. The company became insolvent. In arbitration proceedings, the defendant claimed the outstanding purchase price of EUR 3.7 million. The plaintiff challenged the purchase agreement arguing, among other things, that it was deceived by the defendant.
The arbitral tribunal granted the claim. While accepting that the defendant had concealed certain irregularities, the arbitral tribunal found that the plaintiff would also have concluded the agreement if it had been fully informed. The arbitral tribunal found that when concluding the agreement, the plaintiff was aware that the defendant had twice been convicted for bribery and that, therefore, knowledge of the other irregularities would not have changed anything.
The plaintiff requested to set aside the award. It argued that the defendant only invoked the plaintiff’s knowledge of the convictions in its post-hearing brief and that this was too late since the arbitral tribunal had set an earlier cut-off date for such arguments. By basing its decision on this factual argument without offering the plaintiff the opportunity to comment, the arbitral tribunal violated the plaintiff’s right to be heard as well as the procedural ordre public.
The OGH dismissed the claim and upheld the award. The most important point that the OGH made is that although under Austrian law, in principle, a violation of the right to be heard or the procedural ordre public results in an automatic setting aside of the award, an award cannot be set aside if it is clear from the reasoning of the award that the violation was irrelevant to the outcome of the decision.
In this case, the arbitral
tribunal also based its decision to grant the claim on a second reason, independent of the first. It found that the plaintiff would have, in any event, concluded the agreement (even if it had known of the irregularities) due to internal company guidelines.
It was therefore clear to the OGH that the award itself showed that any violation of the right to be heard or the procedural ordre public could not have had any bearing on the outcome of the decision itself because the arbitral tribunal would have made the same decision.
Invalidity of an arbitration agreement due to a possible violation of the EU Directive on Self-Employed Commercial Agents
In its decision of 1 March 2017,the OGH held that an arbitration agreement is ineffective if the tribunal constituted under the agreement does not give effect to the mandatory rights enjoyed by a self-employed commercial agent who operates in the European Union.
1. In state court proceedings, the plaintiff, a commercial agent based in Vienna, requested compensation pursuant to Section 24 of the Austrian Commercial Agents Act because the agency agreement with the defendant, which was governed by New York law, had been terminated by thedefendant.
2. The defendant objected to the Austrian court’s jurisdiction, arguing that the parties had agreed on arbitration. Arbitration had already been initiated by the defendant against the plaintiff before an arbitral tribunal seated in New York and the arbitral tribunal had already rendered a partialaward.
3. The lower courts rejected the claim, reasoning that they lacked jurisdiction because of the agreement to arbitrate. The OGH overturned these decisions and found that the state court had jurisdiction for the followingreasons.
Pursuant to Article II(3) of the New York Convention, a court must refer parties to arbitration if the matter is subject to an arbitration agreement unless the arbitration agreement is null and void, inoperative or incapable of being performed. A court may fully review the validity and effectiveness of an arbitration agreement and is not limited to a prima facie review. The corresponding provision in Austrian law (Section 584(1) sentence two of the Austrian Code of Civil Procedure) stipulates that a claim may not be rejected if the court finds that the alleged arbitration agreement is ineffective. An arbitration agreement may be considered ineffective if the parties’ intention was to exclude the application of mandatory procedural or substantive provisions.
The OGH referred to the case law of the Court of Justice of the European Union, according to which apparent violations of fundamental EU law provisions constitute an ordre public violation. The CJEU in Ingmarruled that the EU Directive on Self-Employed Commercial Agents, which is implemented by the Austrian Commercial Agents Act, is applicable irrespective of the parties’ choice of law if the underlying facts have a strong EU connection. It is generally understood that the CJEU classifies certain rights of commercial agents as being internationally mandatory in character.
Parties cannot exclude these rights by agreement and they apply even if such rights are unknown under the applicable law.
However, the arbitral tribunal seated in New York had already expressed in its partial award that it would not give effect to those rights as they are unknown under New York law. Since the plaintiff’s mandatory right to compensation would not be recognized by the arbitral tribunal, the OGH declared the arbitration agreement ineffective.
Funding in international arbitration
Neither Austrian arbitration legislation nor institutional rules address third-party funding. Furthermore, the OGH has not yet commented on this issue.
There is controversial discussion in legal literature as to whether third-party funding agreements violate Section 879 paragraph 2(2) of the Austrian Civil Code (prohibition of quota litis arrangements, ie any arrangement under which the lawyer’s remuneration depends on the results of the case), and are therefore null and void. This provision prohibits any form of contingency fee arrangements with attorneys. The reason for this is to protect the client, who usually cannot assess the chances of success.However, it is unclear whether the quota litis prohibition could also apply to third-party funders who do not provide legal services, but fund thelitigation.
The Vienna Commercial Court in a decision of 7 December 2011 found that Section 879 paragraph 2(2) of the Austrian Civil Code does not apply to third-party funders.The OGH left the issue open since the appeal could be dismissed without engaging in this question.Yet, the OGH did state that even if the agreement with the third-party funder violated the quota litis prohibition, the invalidity would only concern the compensation arrangement. Therefore, the OGH decided that even in case of such invalidity, the plaintiff would still have standing in the proceedings.
Against this background, and although many important questions remain unresolved, third-party funding can, in principle, be regarded as a valid practice in Austria, including with regard to arbitration.
Filip Boras and Florian Ettmayer
OGH, 6 December 2016, docket no. 18 OCg 5/16h (published on 30 January 2017).
OGH, 1 March 2017, docket no. 5Ob 72/16y.
See Zib in Fasching/KonecnyII/1 §§ 31, 32 ZPO for references.
Vienna Commercial Court, 7 December 2011, docket no. 47 Cg 77/10 s.
OGH, 27 February 2013, docket no. 6 Ob224/12b.
OGH, 27 February 2013, docket no. 6 Ob224/12b.