Facts of the Case
The party requesting the setting aside of the arbitral award was a limited partnership (Kommanditgesellschaft) under Austrian law (the “Applicant”). The Applicant’s partnership agreement contained an arbitration agreement providing for ad hoc arbitration under Austrian arbitration law and specified that challenges to shareholder resolutions should follow the rules pertaining to limited liability companies (and not partnerships). It bears noting that such rules deviate from Austrian partnership law by providing that judicial challenges of shareholder resolutions shall be directed solely against the company itself rather than all individual shareholders.
Following this legal regime, in October 2020, after a contentious shareholder resolution, several but not all of the Applicant’s shareholders initiated arbitration proceedings against the Applicant, seeking to invalidate the resolution. The arbitral tribunal, appointed by the involved shareholders and the Applicant, issued an award, rendering the resolution null and void.
The Applicant petitioned the ASC, the first and final instance in such matters in Austria, to set aside the award, arguing that the subject matter was not arbitrable. The Applicant contended that the award’s binding effect was limited to the parties involved in the arbitration, excluding other shareholders who had not properly participated. This exclusion, the Applicant argued, resulted in an unlawful fragmentation of the partnership’s legal relationship, invalidating the entire award. In its decision of 3 April 2024, the ASC concurred with the Applicant’s reasoning and set aside the arbitral award, emphasizing the necessity of ensuring comprehensive binding effects in shareholder disputes to maintain legal coherence within the entity.
The ASC’s Reasoning
The ASC articulated that the objective arbitrability of a dispute hinges on the extent to which the state cedes exclusive jurisdiction to private dispute resolution mechanisms and recognizes arbitral decisions. In this instance, arbitrability was assessed under the old (pre-2006) Austrian arbitration law, which required that the claim be capable of being settled. In principle, the ASC affirmed that disputes over challenges against shareholder resolutions are generally arbitrable under specific conditions: all shareholders must be parties to the arbitration agreement, typically through inclusion in the articles of association or partnership agreement, and the arbitral award must bind all shareholders.
The ASC emphasized that the need for a binding effect on all shareholders requires the arbitration agreement to confer certain participation rights to all of them. This requirement is rooted in the principles of a fair trial under Article 6 of the European Convention on Human Rights, applicable to both arbitration and state court proceedings. The ASC stressed the necessity for shareholders to be (given the opportunity to be) adequately involved in the arbitration process from the outset to protect their rights and interests. Specifically, all shareholders must have the opportunity to participate in the selection of arbitrators and the constitution of the arbitral tribunal. Such participation rights cannot be left to the general procedural discretion of the arbitral tribunal but must be expressly enshrined already in the arbitration agreement. Meeting these minimum requirements is essential to achieving a comprehensive res judicata effect of the arbitral award, binding even those shareholders who eventually do not participate in the proceedings, thereby ensuring the arbitrability of the dispute.
In the case at hand, the ASC found that the arbitration agreement did not meet these essential requirements and that, consequently, the subject matter of the arbitral award lacked objective arbitrability.
Key Takeaways for Arbitration Practice?
The ASC’s decision is remarkable for a number of reasons and has far-reaching implications for arbitration practice.
To begin with, the determination of whether the challenge of a shareholder resolution is arbitrable under Austrian law will now primarily depend on the specifics of the arbitration agreement. It must grant all shareholders certain participation rights and involvement in the arbitration proceedings from the outset. Specifically, it must ensure they are informed about the initiation and progress of the arbitration, while also allowing them to join the proceedings if they wish. Most importantly, the arbitration agreement must enable the shareholders to partake in the selection and appointment of arbitrators. Failure to meet these criteria constitutes a serious defect affecting the arbitration agreement that cannot be cured in the course of the arbitral process itself (even if such process factually ensures all shareholders’ participation). In other words, irrespective of how impeccable the procedure is conducted, if the arbitration agreement lacks the required characteristics, any resulting award remains vulnerable to being set aside or refused enforcement by the Austrian courts.
Secondly, the link between the arbitrability of a claim and the terms of the arbitration agreement makes arbitrability a variable that depends significantly on the careful drafting of the agreement by the parties (and their legal advisors). Specifically for ad hoc arbitration, meticulous drafting of the arbitration agreement is paramount. If parties prefer institutional arbitration, the choice of arbitration rules becomes crucial. In some (extreme) cases, the choice of rules might have significance even to the effect that a claim may be arbitrable in Austria under one set of rules but not under another. For example, the Swiss Arbitration Centre and the German Arbitration Institute offer model arbitration clauses and special rules for shareholder disputes that are likely to meet the ASC requirements. Conversely, the Vienna International Arbitral Centre currently does not offer comparable provisions within its rules, casting serious doubt on whether they alone would suffice.
Thirdly, the standards established by the ASC are not limited to domestic settings in Austria. Rather, they radiate into international sets of circumstances. Indeed, irrespective of the company’s legal seat or the nationality of the parties involved, these standards might even apply when the arbitration is seated in Austria. In addition, given that objective arbitrability is a ground for refusal under Article V.2.a of the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), such standards will certainly be relevant in cases where the arbitral award needs to be recognized and enforced in Austria.
Finally, it is yet unclear what impact the decision will have on the range of (other) legal entities. It is certainly advisable for corporations such as Austrian limited liability companies (GmbH), flexible companies (FlexCo), and stock companies (AG) to observe the aforementioned requirements of the ASC for an arbitration agreement. On the other hand, it is questionable whether it is necessary to extrapolate these requirements to legal entities that typically have a different shareholder structure or are structured entirely differently, such as Austrian private foundations. If these principles were to apply to the latter (a question that has not yet been answered by case law), one factor that would render such an application particularly difficult would be the often-unclear status of a foundation’s beneficiaries. These persons, who may be considered the closest equivalent to shareholders in conventional companies, are frequently not named in the foundation deed and are appointed by the foundation board at its discretion, making disputes over beneficiary status a common issue. The uncertainty about the scope of application of the standard described above underscores the need for further clarification and potential legislative or judicial guidance for legal practice.
________________________
To make sure you do not miss out on regular updates from the Kluwer Arbitration Blog, please subscribe here. To submit a proposal for a blog post, please consult our Editorial Guidelines.
