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20 April 2010
In a recent landmark ruling the Austrian Supreme Court of Justice held that some prevalent and customary clauses included in terms and conditions of Austrian law-governed bond issues are illicit with regard to consumer bondholders. The decision ended a lawsuit for injunctive relief between the Consumer Protection Association and the issuer of a corporate bond initiated in 2007.
Payments to paying agent
To date, many Austrian law-governed bond issues have included certain clauses in their terms and conditions that state that the issuer will be discharged from its payment obligations to bondholders on performance of payments to, or to the order of, the paying agent. According to the recent ruling, this grossly disadvantages the rights of consumers as the paying agent typically acts as agent for the issuer only and has no contractual relationship with the bondholders. In addition, the Supreme Court argued that the risk of bankruptcy of the paying agent is being transferred to the bondholders in case the issuer is discharged immediately after payment to the agent if the agent fails to pay. Therefore, the Supreme Court held that an issuer's payments to the paying agent do not validly discharge the issuer from its payment obligations to consumer bondholders.
Extraordinary rights of termination
Furthermore, a clause in the bond's terms and conditions relating to limitations of the bondholders' rights of termination was found to be illicit in relation to consumers. In the terms and conditions the issuer had limited the right of extraordinary termination to explicitly specified extraordinary matters and excluded any ordinary right of termination for bondholders. According to the ruling, this clause harms consumer rights since extraordinary rights of termination must not be specified exhaustively under Austrian law, but may extend to other matters not explicitly specified in the terms and conditions.
Equivalent termination rights
According to the bond's terms and conditions, the issuer was entitled to terminate the bond before maturity each year at its sole discretion. However, the bond's terms and conditions did not contain corresponding bondholder termination rights. The Supreme Court followed the argument of the Consumer Protection Association, stating that this clause grossly disadvantages consumer bondholders because they are not granted any ordinary termination rights. The court dismissed the issuer's argument that the bondholders' right to sell bonds on the capital markets constitutes an equivalent right to the issuer's early termination right.
Modifications of terms and conditions
Various preceding Austrian bond issues have included clauses concerning the modification of the issue's terms and conditions by extraordinary resolutions of a bondholders' meeting. Duly passed resolutions of the bondholders' meeting will be binding for all bondholders (irrespective of whether they were present at the meeting when the resolution was passed). According to an additional clause included in the bond's terms and conditions, any modification of the terms and conditions required a proposal for the resolution to be passed by the issuer's management board. The Supreme Court found this clause to be grossly disadvantageous because bondholders have no equivalent right to initiate or suggest modifications of the terms and conditions. Furthermore, the Supreme Court dismissed the issuer's attempt to justify the validity of such clause, arguing that even the former German Act on Bonds from Entire Issues, which contained similar provisions to the clauses stipulated in the issuer's terms and conditions, has since been substantially revised to enhance bondholders' rights.
This ruling addresses for the first time certain issues regarding Austrian law-governed terms and conditions, and thus must be taken as a landmark ruling on the validity of certain common clauses in terms and conditions of bond issues under Austrian law. Several preceding Austrian bond issues have included similar clauses; therefore, the Consumer Protection Association may well incriminate other issues' terms and conditions and seek injunctive relief from other issuers. Going forward, the Supreme Court's guidelines set forth in the ruling are expected to be of relevance for future retail bond issues in Austria.
For further information on this topic please contact Christoph Moser or Ursula Rath at Schönherr Rechtsanwälte GmbH by telephone (+43 1 53 43 70), fax (+43 1 53 43 76100) or email (firstname.lastname@example.org or email@example.com).
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