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19 January 2017
In a recent decision, the Supreme Court considered if and under what circumstances defective reasoning of an arbitral award may lead to its annulment under the Arbitration Law.(1) In a deviation from previous case law(2) and views expressed by the majority of Austrian legal scholars, the court held that the requirement of sound reasoning is a fundamental principle of the Austrian legal system, and thus that an arbitrator's failure to comply with this constitutes a violation of procedural public policy.
The underlying dispute stemmed from a consultancy agreement which provided for commission in the case of successful brokerage of sales of heat exchangers. The scope of businesses that triggered commission was broadly defined. The claimant in the arbitration (and subsequent annulment proceedings) requested that the respondent accounts for concluded sales include four specific projects and "all other deals" of a certain period, so that the basis for the commission claim could be assessed.
The arbitral tribunal rendered an interim award in which both claims were dismissed. The tribunal found that the four specific projects under the first demand did not fall under the scope of the consultancy agreement and explained its legal view on this matter. It also rejected the second claim "due to a lack of specificity" and because its wording was "too broad"; however, it provided no additional reasoning.
The claimant subsequently appealed to the Supreme Court in order to have the award partly set aside.
In the annulment proceedings, the claimant raised the following arguments:
The Supreme Court rejected the claimant's arguments, but nevertheless partially annulled the award.
The Supreme Court first clarified that an annulment request aimed at the annulment of only part of an award is admissible.
Violation of procedural public policy
The Supreme Court granted the annulment of the arbitral award for violation of procedural public policy in regard to the second claim for accounting of "all other deals" while dismissing the other annulment request. Even though the claimant had not argued a violation of procedural public policy, the Supreme Court found that it was not limited in its review to the legal evaluation by the claimant, as long as the claimant did not expressly request such a limitation.
Deviating from previous case law and the majority of legal scholars, the court found that sound reasoning ranks among the fundamental values of the Austrian legal system and that its absence constitutes a violation of the procedural public policy. It thereby relied on the views of the sole Austrian voice(4) arguing that lack of reasoning constitutes a violation of procedural public policy and German case law and scholars.
The court concluded that defective reasoning justifying an annulment could be given if:
As regards the depth of the reasoning, the court held that it is necessary to distinguish between the following cases:
The Supreme Court made two qualifications for cases when defective reasoning may not permit an annulment:
The Supreme Court noted that, as prescribed by law, the three-month deadline following receipt of an award within which an annulment request must be filed also requires that grounds for annulment be raised and specified within that deadline. The court therefore dismissed the argument that the chair of the tribunal had deviated in the award from a position expressed during the hearing, as this argument was raised after the three-month deadline had lapsed.
The Supreme Court also dismissed the annulment for lack of dealing with all requests, as it noted that it was only a partial award and that the claimant could still raise additional requests during the continued proceedings. It also noted that Austrian law contains a provision permitting a party to notify that as a procedural defect.(8)
Violation of right to be heard
The court dismissed the argument that the right to be heard had been violated and noted that this would be relevant only if it reached a level corresponding to nullity of court judgments under Austrian law. While the court noted that this could be the case if the tribunal deviated in the award – with no debate – from a legal view expressed during the proceedings, it found that this was not the case here.
This case is unique in several aspects. First, out of the 12 annulment claims filed in the past three years with the Supreme Court, this is the first case in which an annulment request was accepted.
Second, the decision deviates from views expressed by several scholars (see above) and rightfully obligates the arbitral tribunal to submit a sound reasoning in its awards. As this should be a matter of course, the decision will certainly also help to strengthen the presently much-debated legitimacy of arbitration. Regrettably, the Supreme Court has made the qualification that the timely filing of an interpretation request is a prerequisite for annulling an award on the grounds of defective reasoning. This poses a difficult burden on the party seeking annulment.
Third, the decision clarifies that the party (and thus counsel) must not specifically articulate the legal rule on which annulment is based; instead, it is sufficient to outline the grounds within the three-month deadline of receipt of the award.
For further information on this topic please contact Nikolaus Pitkowitz at Graf & Pitkowitz by telephone (+43 1 401 17 0) or email (firstname.lastname@example.org). The Graf & Pitkowitz website can be accessed at www.gpp.at.
(6) See Article 33(1)(b) of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Arbitration and Article 610(1)(2) of the Civil Procedural Code: "Unless another period of time has been agreed upon by the parties, each party may within four weeks of receipt of the award request the arbitral tribunal, to… 2. if so agreed by the parties, to give an interpretation of certain parts of the award."
(7) See Section 579 of the Civil Procedural Code: "Where the arbitral tribunal has not complied with a procedural provision of this chapter from which the parties may derogate, or with an agreed procedural requirement of the arbitral proceedings, a party shall be deemed to have waived his right to object if he does not object without undue delay after being informed, or within the provided time limit."
(8) See Article 33(3) of UNCITRAL Model Law on International Arbitration or Article 610(1)(3) of the Civil Procedural Code: "Unless another period of time has been agreed upon by the parties, each party may within four weeks of receipt of the award request the arbitral tribunal, to… 3. to make an additional award as to claims presented in the arbitral proceedings but omitted from the award."
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