The objective arbitrability of disputes about defects in resolutions of partnerships was addressed by the Austrian Supreme Court in its recent decision 18 OCg 3/22y, related to intra-group restructuring of the Tyrolean Swarovski group. The Supreme Court concluded that such disputes cannot be subject to arbitration unless sufficient participation and involvement of all partners is guaranteed, which must be set out in the arbitration agreement. Therefore, arbitration clauses in partnership agreements must now fulfil specific requirements for disputes about defects in resolutions to be arbitrable. Most arbitration clauses in partnership agreements and articles of association are unlikely to meet these standards at the moment. As the decision affects not only partnerships, but also corporations, partners and shareholders should act quickly if they prefer to resolve potential disputes among themselves by way of arbitration rather than in state courts in future.
Key elements of the decision
The general assembly of the partnership in question had increased liable equity capital by EUR 350 million to EUR 400 million, while excluding the partners’ pre-emption right. The right to subscribe to the entire amount of the capital increase was reserved for a new limited partner, whose entry into the partnership was approved at the same time. As a consequence, the new limited partner was to receive a stake of 82.5% in the partnership. Several but not all of the other partners then petitioned the arbitral tribunal stipulated in the partnership agreement, requesting that the relevant resolutions be declared null and void. As set out in the partnership agreement, the request for arbitration was directed only against the partnership. In its award, the arbitral tribunal declared the invalidity and nullity of the contested resolutions.
The partnership against which the tribunal had ruled then requested the repeal of the arbitral award by the Austrian Supreme Court under Section 611 of the Austrian Code of Civil Procedure. It argued, inter alia, that disputes about defects in resolutions were not objectively arbitrable unless sufficient participation and involvement of all partners was guaranteed, which must be set out in the arbitration agreement. Without such participation and involvement, in particular to guarantee the partners’ involvement in the constitution of the arbitral tribunal, the arbitral award could not have legal effect on the partners, it argued.
The court followed these arguments in its decision. It considered that to preserve the fundamental right to a fair trial enshrined in Article 6 of the European Convention on Human Rights, all partners had to be notified of the arbitration in due time and enabled to participate in the arbitral tribunal’s constitution. Such participation and involvement rights of all partners must be guaranteed in an arbitration clause. This is a precondition for a dispute to be subject to an arbitration agreement (objectively arbitrable), since otherwise, the latter’s effect does not extend to any partners who are not parties to the arbitration proceedings. Moreover, as the Court explicitly stated, it is not enough if such rights are merely granted to the partners in fact in the course of the arbitration. In this respect, the Austrian Supreme Court closely followed the case law known as “Arbitrability I-IV” of the German Federal Supreme Court.
In effect, this means that a claim to contest or declare the nullity of a resolution of a general meeting is only objectively arbitrable if the arbitration clause is worded accordingly. It must meet the following (minimum) requirements:
- all partners/shareholders must be parties to the arbitration agreement;
- they must be notified of the arbitration’s start and progress, and must be enabled to appear as interveners in the arbitration; and
- they must be involved in the selection and appointment of the arbitrators, unless a neutral party selects the arbitrators.
Otherwise – as clearly demonstrated by the Austrian Supreme Court’s decision – the arbitral award may be repealed for lack of objective arbitrability, no matter how much circumspection the arbitral tribunal exercised in the arbitration.
Practical implications
The decision has far-reaching implications in practice.
It has an immediate effect on all pending arbitrations of disputes about defects in resolutions of partnerships and corporations if the arbitration clauses set out in their partnership agreements or articles of association do not meet the Austrian Supreme Court’s standards. Objective arbitrability is not just a precondition for the legal effect of an arbitration agreement; its absence also constitutes ex officio grounds for repealing an arbitral award delivered regardless, as well as grounds to refuse recognition and enforcement under Article V(2)(a) of the New York Convention.
Finally, disputes about defects in resolutions are bound to arise in future, especially in (potentially) conflict-prone family-held companies. To ensure that such disputes continue to be capable of settlement by arbitration, we recommend reviewing the validity of existing arbitration clauses in partnership agreements and articles of association and amending arbitration clauses to reflect recent case law where necessary. Both the German Arbitration Institute (DIS) and the Swiss Arbitration Centre have provided model arbitration clauses and supplemental arbitration rules for corporate law disputes to take into account the specific challenges of disputes among partners or shareholders. The Vienna International Arbitral Centre (VIAC) has yet to provide similar resources for the Vienna Rules. A prompt addition to the Vienna Rules for corporate law disputes and a model arbitration clause to take into account the specificities of Austrian case law would certainly be useful.
