The Austrian Supreme Court (Oberster Gerichtshof, OGH) recently considered the subjective scope of arbitration clauses contained in contracts with protective effect for third parties (Vertrag mit Schutzwirkung zugunsten Dritter). In two decisions rendered on 20 April 2021,1 the Court ruled that an arbitration clause contained in a contract with protective effect for third parties also binds a third party that intends to assert contractual (damage) claims, arising from the contract’s scope of protection, against one of the contracting parties.
Contracts with Protective Effect Towards Third Parties
The international reader may be unfamiliar with the legal construction of a contract with protective effect for third parties as it exists in Austrian, German, and (arguably) Swiss law. It is important to differentiate contracts with protective effect for third parties from contracts for the benefit of third parties. Before delving into the two decisions at hand – which dealt only with the former – a brief overview is in order.
A contract for the benefit of a third party (Vertrag zugunsten Dritter), codified in Sections 881 and 882 of the Austrian Civil Code, exists when the promisor undertakes vis-à-vis the promisee to perform for a third party. One must distinguish between genuine (echt) and non-genuine (unecht) contracts for the benefit of a third party: in a genuine contract, the third party obtains an independent right of claim against the promisor; in a non-genuine one, the third party does not. Whether or not a contract is genuine or non-genuine is a matter of contractual interpretation.2 The subjective scope of arbitration clauses in contracts for the benefit of third parties is settled case law (see below) and was not at issue here.
A contract with protective effect for third parties, in contrast, is a legal construction that is distinct – although not always easily differentiated – from a contract for the benefit of a third party. Whereas the main obligation to perform is owed only to the contracting partner, contractual duties of protection and care are extended to certain third parties. A breach of such duties triggers contractual claims for damages by the protected third parties.3
The Facts of the Disputes
In the two disputes, based on similar factual patterns, the plaintiff asserted claims for damages against the Republic of Austria and the federal state of Carinthia. These claims arose from the sale of the federal government’s shares in the federal housing companies in 2004 as part of a bidding process. The plaintiff alleged that it was deprived of the winnings of the bidding process due to the defendants’ unlawful conduct and claimed a total of over EUR 1.9 billion in damages in the two proceedings. The plaintiff relied, inter alia, on the breach of a confidentiality agreement between the state of Carinthia and a bank carrying out the sale on behalf of the Republic of Austria. An arbitration clause was contained in this confidentiality agreement, according to which disputes arising from or in connection with the agreement were to be settled by arbitration rather than by the ordinary courts.
Before the court of first instance, the federal state of Carinthia, relying on the arbitration clause, objected inter alia to the court’s subject-matter jurisdiction. The court rejected this plea and considered itself to have jurisdiction. On appeal, the second instance court dismissed the plaintiff’s action insofar as it asserted contractual claims arising from the confidentiality agreement, which contained the arbitration clause and under which the plaintiff was a protected third party. The OGH thus had to answer the question of whether the beneficiary of a contract with protective effect for third parties is bound by an arbitration clause contained therein.
The OGH confirmed the decision of the second instance court. It noted the established principle that the claim of a beneficiary third party can never extend further than the contractual claim for compensation of an injured contractual party. Accordingly, a promisor of a contract with protective effect for third parties may invoke all defenses arising from the contract against the protected third party, such as limitations of liability.4 The OGH reasoned that what applies to limitations of liability must also apply to the modalities of enforcing rights. If a contract with protective effect in favor of third parties provides for a certain way of enforcing contractual claims – such as an arbitration clause – this applies to anyone who asserts such a contractual claim.
Numerous prior decisions of the OGH have established that arbitration clauses in genuine contracts for the benefit of third parties are binding upon third party beneficiaries.5 This follows from the reasoning that a third party directly benefiting from a contract must accept the rights granted to it therein with all its contractual characteristics – including the method of enforcing contractual rights. However, the OGH had not yet had the opportunity to extend this reasoning to contracts with protective effect for third parties.
In the decisions at hand, the OGH has built on its prior case law concerning third-party beneficiaries and has followed the opinion of legal scholars, who had unanimously accepted that arbitration clauses contained in contracts with protective effect for third parties are binding on protected third parties.6 This decision must be welcomed as bringing further certainty to arbitration practitioners in Austria.
1 Dockets 4 Ob 36/21d und 4 Ob 43/21h.
2 Dullinger in Rummel/Lukas, ABGB4 § 881 ABGB, marginal no. 8.
3 ibid, marginal no. 18.
4 RIS-Justiz RS0013961.
5 Dockets 4 Ob 533/95 and 1 Ob 79/99w.
6 See, for instance, Koller in Liebscher/Oberhammer/Rechberger, Schiedsverfahrensrecht I Rz 3/304.
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