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Landmark Decision by Austrian Supreme Court on Arbitral Award: Non-Arbitrability of Shareholder Disputes
Landmark Decision by Austrian Supreme Court on Arbitral Award: Non-Arbitrability of Shareholder Disputes
On 3 April 2024, the Austrian Supreme Court (ASC) issued a significant decision setting aside an arbitral award due to the non-arbitrability of the subject matter. This ruling has crucial implications for international arbitration in Austria and deserves a closer examination.
Facts of the Case:
The Applicant, a limited partnership under Austrian law, sought the setting aside of an arbitral award related to a contentious shareholder resolution. The partnership agreement contained an arbitration clause referring to the rules for limited liability companies, deviating from Austrian partnership law. In October 2020, some shareholders initiated arbitration to invalidate the resolution. The arbitral tribunal declared the resolution null and void, leading the Applicant to petition the ASC to set aside the award, arguing that its binding effect excluded shareholders not involved in the arbitration, resulting in an unlawful fragmentation of the partnership’s legal relationship.
The ASC, as the sole instance for such matters, concurred with the Applicant, setting aside the arbitral award and emphasizing the necessity for ensuring a comprehensive binding effect in shareholder disputes.
The ASC’s Reasoning:
The ASC emphasized that the arbitrability of disputes depends on whether the state allows private dispute resolution and recognizes arbitral decisions. The ruling was assessed under pre-2006 Austrian arbitration law, requiring the claim to be capable of settlement. The ASC affirmed that disputes over shareholder resolutions are generally arbitrable if all shareholders are bound by the arbitration agreement, either through partnership agreements or articles of association.
The ASC underscored that all shareholders must be allowed to participate in the arbitration process to protect their rights, aligning with the fair trial principle under Article 6 of the European Convention on Human Rights. This includes involvement in the selection of arbitrators and the tribunal’s constitution. The ASC found that the arbitration agreement in question did not meet these requirements, rendering the subject matter non-arbitrable.
Key Takeaways for Arbitration Practice:
1. Importance of Drafting Arbitration Agreements
The ASC’s decision makes it clear that the arbitrability of shareholder disputes depends heavily on the arbitration agreement's drafting. All shareholders must be granted certain participation rights from the outset, including the ability to join arbitration proceedings and participate in selecting arbitrators. Any defect in the arbitration agreement, irrespective of the fairness of the actual procedure, can render an award vulnerable to being set aside.
2. Implications for Ad Hoc and Institutional Arbitration
In ad hoc arbitration, meticulous drafting is essential. For institutional arbitration, the choice of rules becomes crucial. Arbitration rules that include provisions for shareholder disputes, such as those offered by the Swiss Arbitration Centre, are likely to meet the ASC’s standards. On the other hand, the Vienna International Arbitral Centre's current provisions may be insufficient, casting doubt on their suitability.
3. Impact Beyond Austria
The ASC’s decision is not limited to domestic cases. The standards articulated may affect international arbitrations seated in Austria. Additionally, under Article V.2.a of the 1958 New York Convention, these standards could influence the recognition and enforcement of foreign arbitral awards in Austria.
4. Uncertainty for Other Legal Entities
The decision raises questions regarding its applicability to other legal entities, such as limited liability companies or private foundations. For entities like private foundations, issues such as the identification of beneficiaries, often not explicitly named, add further complexities, highlighting the need for judicial or legislative guidance.
Conclusion:
The ASC’s decision emphasizes the importance of comprehensive arbitration agreements to ensure arbitrability and the binding nature of arbitral awards in shareholder disputes. Legal practitioners must carefully draft arbitration agreements to meet the requirements laid down by the ASC, ensuring all shareholders’ participation from the outset. This ruling has implications not only for Austrian arbitration but also for international arbitration involving Austrian entities.
