Austrian Supreme Court on Third-Party Funding and the Right to Be Heard

In a recent decision rendered on 15 December 2021,[i] the Austrian Supreme Court (Oberster Gerichtshof, OGH) examined different grounds for setting aside an arbitral award. The OGH reiterated its almost 70-year-old jurisprudence on the right to be heard as a ground for setting aside an arbitral award and made a surprising statement that third-party funding is generally admissible in Austria. This is the OGH’s first definite statement on the admissibility of third-party funding despite an existing ban on contingency fee arrangements (quota litis arrangements) in section 879(2)(2) of the Austrian Civil Code (Allgemeines bürgerliches Gesetzbuch, ABGB).

Facts of the Dispute

The setting aside proceedings before the OGH arose out of an arbitration administered by the Vienna International Arbitral Centre. The arbitral tribunal had decided on damage claims arising out of a share purchase transaction between a Chinese and a Croatian party as claimants and two Croatian parties as respondents. In its final award, the arbitral tribunal dismissed the first claimant’s claim and awarded the second claimant partial reimbursement for its damages as well as compensation for the procedural costs.

Subsequently to a denied application for the tribunal to correct, clarify, and supplement the arbitral award, both claimants requested the OGH to set aside parts of the award, including the decision on costs. They based their request mainly on allegations of an infringement of their right to be heard, that the arbitral tribunal exceeded its mandate, as well as on violations of Austrian public policy (ordre public).

The OGH dismissed the claimants’ request. In the following, two of the arguments advanced by Claimants in their attempt to set aside parts of the award will be examined.

Issue 1: Inability to Comment on the Opposing Party’s Cost Submission

The claimants asserted a violation of their right to be heard under section 611(2)(2) of the Austrian Code of Civil Procedure (Zivilprozessordnung, ZPO) by arguing that they were not granted the possibility to comment on the opposing party’s cost submission, which formed the basis for the court’s decision on costs. They supported their argument by citing inter alia Austrian legal scholarship that stated that the right to be heard includes the parties’ right to comment on the opposing party’s cost submission.[ii]

Decision

The OGH unsurprisingly reiterated its restrictive jurisprudence concerning a party’s right to be heard in arbitral proceedings and dismissed the claimants’ arguments. The court’s current jurisprudence dates back to a decision from 1955 and has not substantially changed ever since.[iii] Accordingly, an arbitral award may only be set aside if a party’s right to be heard was not granted at all. A mere incomplete determination of facts, insufficient discussion of legally relevant facts, or the denial or even complete disregard of evidence alone cannot form the basis for an action of annulment.[iv] An award may only be set aside under section 611(2)(2) ZPO if the breach of the right to be heard happened indiscriminately.[v]

The court found that the citation of Austrian legal scholarship does not prove that an inability to comment on the cost submissions amounts to a reason to set aside the award. The author himself cited a source that merely refers to the fact that arbitral tribunals usually make sure that the opposing party can comment on the cost submission.[vi] The court also lists other scholars who maintain the position that the possibility to object to the cost submission is, although desirable, not mandatory.[vii]

Furthermore, the court drew a comparison to the Austrian law of civil procedure, in which the possibility to comment on the opposing party’s cost submission is only mandatory in the first instance of civil proceedings (section 54(1a) ZPO).

Comment

The OGH’s current jurisprudence on the right to be heard as a ground for setting aside an arbitral award is largely criticized by Austrian scholars.[viii] The criticism notes that the extremely restrictive approach does not meet the minimum requirements of Article 6 ECHR and does not manage to find the right balance between maintaining the benefits of arbitral proceedings and, at the same time, ensuring the parties’ right to be heard. Reiner, whom the court itself cited in its decision, is of the opinion that it lies within the OGH’s responsibility to ensure that the parties’ right to be heard in arbitral proceedings is safeguarded at least to the same extent as in civil proceedings.

With that being said, it is also the prevailing view amongst scholars, as touched upon by the OGH in its decision, that tribunals do not have to allow parties to comment on cost submissions. Moreover, the OGH has rightfully drawn a comparison to the Austrian law of civil procedure and found that the ability to comment on the opposing party’s cost submission is not a mandatory principle. Even if one were to apply Reiner’s approach of ensuring that the right to be heard in arbitral proceedings reaches the same standards as in civil proceedings, one could not conclude that the claimants’ right to be heard has been violated in the case at hand.

Issue 2: Admissibility of Third-Party Funding and the Quota Litis Prohibition

The claimants further argued that the underlying quota litis arrangement between the Croatian respondents and their representatives amounted to a breach of Austrian public policy as such contingency fee arrangements are void under section 879(2)(2) ABGB and are also prohibited under Croatian law. They also maintained that such a fee arrangement comes at the expense of the claimants, as it enables the respondents to arbitrate without any cost risks.

Decision

The OGH dismissed the claimants’ argumentation concerning the quota litis arrangement based on the following considerations:

The court applied a restrictive interpretation of public policy in section 611(2)(8) ZPO. Accordingly, public policy comprises the core values of the Austrian constitution. Although the court found section 879 ABGB to be a mandatory provision, it concluded that mandatory provisions do not automatically equate to the high standards of public policy. Only such mandatory provisions that cannot be waived even in disputes that display a cross-border element fall within the narrow scope of application. According to the court, a fee arrangement between Croatian respondents and their representatives in an arbitration with links to Austria and China does not meet the scope of application.

Furthermore, the court refuted the claimants’ argument that a contingency fee arrangement would come at their expense by stating, in accordance with the OGH’s current jurisprudence,[ix] that section 879(2)(2) ABGB solely serves to protect clients and the professional honor of lawyers, but not the opposing party. In this context, the court strengthened its reasoning by stating that Austrian law generally allows for litigation without cost risks as it permits the involvement of third-party funders. Although the court drew the comparison to third-party funding in a very nonchalant way within only one sentence, it is a surprising (obiter dictum) statement, as the topic of the admissibility of third-party funding is widely discussed in Austrian literature and jurisprudence.

Comment

Section 879(2)(2) ABGB prohibits fee arrangements based on a certain percentage of the amount awarded between the client and their so-called “legal supporter”. Since the term “legal supporter” is interpreted widely[x] (not only including lawyers but also tax consultants, notaries, and generally all professions which are subject to comparable professional duties), the question arises whether third-party funders may also be subsumed under section 879(2)(2) ABGB. The views of Austrian scholars on this topic vary.

Some scholars argue that third-party funders do not fall under the scope of section 879(2)(2) ABGB, as they do not underlie professional duties which are comparable to the ones existing for lawyers. This approach is also supported by the Austrian Constitutional Court which explicitly stated, while upholding the constitutionality of the prohibition of quota litis arrangements in general, that it is permissible for lawyers and third-party funders to be treated differently as third-party funders do not underlie any professional duties.[xi]

Other scholars assess the part a third-party funder plays in proceedings. Judging from an earlier decision on third-party funding in the more limited context of mass claims, this approach also seems to be supported by the OGH.[xii] Accordingly, third-party funders may not offer comprehensive legal advice themselves but rather only evaluate the prospects of success or failure and then refer clients to a lawyer. Third-party funders may not influence the course and structure of the proceedings. The client must remain in control of the proceedings.

Although the OGH’s obiter dictum statement on the general admissibility of third-party funding is a first, it only offers limited ground for extrapolation. Not only does the statement seem to deviate from the OGH’s current approach, but third-party funding was also not an immediate issue in the case at hand. This may lead to the conclusion that the court did not intend to fully evaluate the issue in this decision.

[i] Docket 18 OCg 5/21s.

[ii] Hausmaninger in Fasching/Konecny³ § 611 ZPO para 102.

[iii] OGH 13.01.1955 JBl 1955, pp 503 et seq.

[iv] RS0045092.

[v] Dockets 18 OCg 10/19y, 18 OCg 1/19z.

[vi] Reiner, Schiedsverfahren und rechtliches Gehör, ZfRV 2003/11, pp 52 et seq.

[vii] Aschauer/Neumayr, Austrian Arbitration Law in Motion, para 756; Schumacher in Liebscher et al, Schiedsverfahrensrecht II, para 10/245.

[viii] See, for instance, Liebscher, ecolex 2013/285; Nueber, Zur Aufhebung eines Schiedsspruchs wegen Verletzung des rechtlichen Gehörs und der Überschreitung der Befugnisse des Schiedsgerichts; Pitkowitz, Handbuch Schiedsgerichtsbarkeit und ADR, para 80.

[ix] Docket 6 Ob 224/12b.

[x] See, for instance, Oberhammer, ecolex 2011, p 972.

[xi] VfGH B 330/07 VfSlg 18.541.

[xii] Docket 4 Ob 180/20d.