On 23 February 2016, the Austrian Supreme Court (“OGH“) rendered a new decision on an action to set aside an arbitral award. Notably, this is the fourth decision since the OGH was vested with the exclusive competence for setting aside proceedings in 2014. In its decision, the OGH once more confirmed its strict stance with regard to the violation of the right to be heard. In addition, the decision contains remarks concerning the violation of both the substantive and procedural ordre public and when an arbitral tribunal may exceed its competence.
1. The underlying arbitration
Claimant (both in the underlying arbitration and the setting aside proceedings) and Respondent (both in the underlying arbitration and the setting aside proceedings) concluded an agency contract by which Claimant instructed Respondent to find three potential buyers for shares in a particular company held by Claimant within a certain period of time. The Parties agreed that Claimant would have to pay a fee of 5 % of a later paid purchase price to Respondent and that Claimant is obliged to prepay a management fee of EUR 70,000. The intended sale of the shares failed.
Claimant commenced arbitral proceedings in which it claimed repayment of half of the already paid management fee, hence an amount of EUR 35,000. Claimant based its claim on Article 21 (i) of the agency agreement which provided that in case a contract for the purchase of shares is not concluded within the term of the agency agreement without any guilt of Claimant and/or Respondent, Respondent would be obliged to repay Claimant 50 % of the management fee. Claimant argued that pursuant to Article 21 (i) of the agency agreement, Respondent would have to pay back half of the management fee irrespective of whether it acted culpably or not. Respondent argued that Article 21 (i) of the agency agreement is unclear and correctly interpreted means that Respondent only would have a repayment obligation in case it did not meet its contractual obligations. As it indeed presented three potential buyers to Claimant and the transaction only failed due to culpability on Claimant’s side, it is not obliged to repay 50 % of the management fee.
The sole arbitrator dismissed Claimant’s claim and stated that Article 21 (i) of the agency agreement does not comprise situations in which the contract for the sale of the shares is not concluded due to culpability of one of the Parties. It rather only provides for a repayment obligation of Respondent in case a contract for the sale of the shares is not concluded within the agreed timeframe and neither one or both Parties acted culpably in this respect. Notably, the interpretation of the sole arbitrator led to the outcome that a party acting culpably is better off than a party acting without culpability. The sole arbitrator concluded that Claimant would have had to rely on another contractual provision or the applicable law in order to claim the amount of EUR 35,000. Yet, as Claimant always relied on Article 21 (i) of the agency agreement, the claim was dismissed.
2. The OGH’s decision
Claimant based its action to set aside the arbitral award on an alleged violation of the right to be heard, the substantive and procedural ordre public and that the arbitral award allegedly contains decisions on matters beyond the pleadings of the parties for legal protection.
a. Substantive ordre public
Pursuant to Section 611 para 2 no 8 Austrian Code of Civil Procedure (“ACCP”) an arbitral award shall be set aside in case the arbitral award conflicts with fundamental values of the Austrian legal system (substantive ordre public). At the outset the OGH held that this ground for setting aside an arbitral award does not open the door for the OGH to assess whether an arbitral tribunal has correctly determined the factual and legal questions of the arbitration (which would lead to an impermissible révision au fond). Only in case the outcome of the arbitral award would lead to an unacceptable violation of the fundamental principles of the Austrian legal system, Section 611 para 2 no 8 ACCP is fulfilled. Further, the OGH referred to German case law on this topic and noted that German courts in case of an arbitrary application of the law hold that exceptionally a scrutiny of the content of an arbitral award may be allowed.
Based on those considerations, the OGH concluded that Section 611 para 2 no 8 ACCP is not fulfilled as the decision of the sole arbitrator was based on a contractual interpretation of the agency agreement. Whether such interpretation is correct, cannot be assessed in setting aside proceedings. The sole arbitrator also did not arbitrarily apply the law as he followed the usual means of interpretation. The OGH held that the interpretation of the sole arbitrator does not conflict with the fundamental principles of the Austrian legal system in a way that the outcome of the arbitral award – the dismissal of a monetary claim due to the unsuitability of the chosen legal basis – would lead to an unacceptable violation of the fundamental principles of the Austrian legal system.
b. Procedural ordre public
Pursuant to Section 611 para 2 no 5 ACCP an arbitral award shall be set aside in case the arbitral proceedings were conducted in a manner that conflicts with fundamental principles of the Austrian legal system (procedural ordre public). The OGH confirmed its previous case law and held that the fact that the sole arbitrator did not discuss his legal view with the Parties and thereby rendered a surprise decision does not fulfill Section 611 para 2 no 5 ACCP.
c. The right to be heard
The OGH also assessed whether the sole arbitrator’s conduct, namely not discussing his legal view with the Parties, violated Claimant’s right to be heard pursuant to Section 611 para 2 no 2 ACCP. The OGH repeated its previous case law that the right to be heard is only violated in case one party has not been granted the right to be heard at all.
Despite usually arguing that the procedure to challenge an arbitral award is no appeal procedure but rather only aims to ensure that minimum standards are met, the OGH draw a parallel to state court proceedings and held that a failure to discuss the decisive legal view could in state court proceedings only lead to a procedural deficiency (Verfahrensmangel). Yet, Section 611 para 2 no 2 ACCP may only be fulfilled in case a violation of the right to be heard would amount to a ground for nullity (Nichtigkeitsgrund) in state court proceedings or would come close to such ground for nullity.
As an example for a violation of the right to be heard (without, however, categorizing it as a ground for nullity), the OGH mentioned that the right to be heard may be violated in case an arbitral tribunal would deviate from an expressed legal view and the parties in reliance on that abstained from further pleadings. For the present case the OGH held that his was evidently not the case and therefore concluded that the right to be heard was not violated.
d. Decisions on matters beyond the pleadings of the parties for legal protection
Pursuant to Section 611 para 2 no 3 ACCP an arbitral award has to be set aside in case it contains decisions on matters beyond the pleadings of the parties for legal protection. According to the OGH, the question whether an arbitral tribunal went beyond the pleadings of the parties needs to be determined based on the subject matter of the dispute (Streitgegenstand).
In the present case, the OGH held that the sole arbitrator decided the case based on the factual and legal pleadings of both Parties; by that it also considered the legal view of Claimant, which it however not shared. Again the OGH referred to state court proceedings and held that also a state court would only decide on the asserted claims without being bound to the legal qualification made by one party. The OGH concluded that as the sole arbitrator decided within the subject matter of the dispute, Section 611 para 2 no 3 ACCP was not fulfilled.