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16 October 2008
In a recent decision the Supreme Court was asked to set aside an award rendered by an ad hoc tribunal deciding a dispute between Austria and several private persons, who were the heirs of the former owners of Gustav Klimt’s portrait of Amalie Zuckerkandl.(1)The heirs sought to set aside an award which denied their claim for the picture's restitution. The Supreme Court denied the challenge.
The claimants comprised of two groups, each of which represented the descendants of a former owner of the picture. The first group (group 1) were the heirs of the portrayed Amalie Zuckerkandl. The second group (group 2) were the heirs of Ferdinand Bloch-Bauer. Bloch-Bauer, who owned the picture in 1938, handed it over without consideration to Amalie Zuckerkandl’s daughter, Ms Müller-Hofmann, when he was forced to leave the country due to Nazi persecution. Müller-Hofmann, who later also found herself persecuted, sold the picture to a gallery owner to raise money to leave the country. The gallery owner sold the picture to Austria in 1988. Both groups demanded restitution of the picture from Austria.
According to the Restitution of Works of Art Act, works of art which have been directly or indirectly acquired by Austria as a consequence of the Nazi regime can be reclaimed by their former owners or heirs.
To settle the dispute, Austria concluded an arbitration agreement with group 2 and they each appointed an arbitrator. Group 1 subsequently joined the arbitration agreement and agreed to honour the award. Both groups then filed a statement of claims.
The arbitral tribunal found that the prerequisites for returning the picture according to the provisions of the Restitution of Works of Art Act were not fulfilled as both former owners had not been dispossessed of the picture. The tribunal found that Bloch-Bauer had transferred the picture to Müller-Hofmann before he left the country due to a close personal relationship between the two of them, and that Müller-Hofmann had sold the picture to the gallery owner at a fair market price. Therefore, the arbitral tribunal denied the heirs’ claim for the picture's restitution.
Group 1 challenged the arbitral award based on the invalidity of the arbitration agreement and on an alleged violation of public policy. Group 1 had not been able to participate in the establishment of the arbitral tribunal, and more specifically, it had not been able to appoint an arbitrator or influence the joint appointment of an arbitrator. According to group 1, this was a violation of minimum procedural standards and of Article 6 of the European Convention on Human Rights. Further, as Austria would not have been willing to conclude a further arbitration agreement with group 1, its only options were to either join the arbitration agreement or be unable to enforce its claim. Consequently, group 1 agreed to join the arbitration under duress, which accordingly violated public policy. Therefore, group 1 claimed that it had not validly joined the arbitration agreement.
Further, both groups challenged the award before the courts, claiming that the arbitral tribunal’s legal findings violated public policy. They maintained that the arbitral tribunal had wrongly applied the Restitution of Works of Art Act. As the values reflected in the Restitution of Works of Art Act and the Nullity Act (to which the former refers) are fundamental values of Austrian legal order, the misapplication of these acts constitutes a violation of public policy.
The Supreme Court decision was rendered under the previous arbitration law. The court's decision on the review of the arbitral tribunal’s legal reasoning would no doubt have been the same under the new arbitration law; however, this may not have been the case for its reasoning regarding the violation of procedural rights.
The Supreme Court held that in accordance with a consistent line of jurisprudence, it was precluded from reviewing the arbitral tribunal’s legal reasoning. Generally, the Supreme Court is willing to set aside an award only if the result of the award is contrary to public policy. In the present case, the Supreme Court found that the arbitral tribunal had not misinterpreted or misapplied the applicable law and that this was sufficient to deny the allegation of a violation of public policy.
With regard to the alleged violation of the minimum procedural rights of group 1, the Supreme Court denied any such violation. It reasoned that by concluding the joinder agreement, group 1 had waived the right to appoint an arbitrator. Since there are no strict procedural rules in arbitration, the Supreme Court held that the basic procedural right to be heard would be violated only if the ‘equality of arms’ of the parties was disturbed. This was clearly not the case. Austria was not obliged to conclude an arbitration agreement at all.
The Supreme Court then focused on the alleged violation of Article 6 of the European Convention on Human Rights. It held that by concluding an arbitration agreement, every party partially waives its rights granted under Article 6 of the European Convention on Human Rights. With regard to the basic procedural right to be heard, the Supreme Court stated - in accordance with its prior jurisprudence - that not every violation of this right would justify setting aside the arbitral award. An award could be successfully challenged only if a party had been excluded from being heard altogether. In a number of decisions under the old arbitration law, the Supreme Court has held that the setting aside of an award could not be justified by:
Therefore, a party divests itself of the full protection of Article 6 of the European Convention on Human Rights when concluding an arbitration agreement.
The Supreme Court denied that a violation of procedural rights had occurred and therefore dismissed the action for setting aside the award. It also denied any violation of public policy due to the alleged situation of duress when the arbitration agreement was conlcuded. The only disadvantage that group 1 would have suffered by not joining the arbitration agreement would have been its inability to participate in the arbitration. However, this was merely a disadvantageous legal position, not a situation of duress.
In this context it is necessary to look at the new Arbitration Act, which has been in force since 2006. Section 594(2) of the Civil Procedure Code, which was amended by this act, stipulates that parties must be treated fairly and have the right to be heard. The explanatory materials to this act explain that the term ‘fairly’ has been adopted from Article 6 of the European Convention on Human Rights and is to be understood as having been elaborated on in jurisprudence on this provision. The Austrian legislature therefore introduced the valuations of the European Convention on Human Rights into the new Arbitration Act.
It remains to be seen whether the Supreme Court will decide differently if it is asked to render a decision under the new arbitration law and therefore must consider Section 594(2) of the Civil Procedure Code. In the decision at hand, as the Supreme Court based its decision on the previous law, it did not expressly address Section 594(2). However, the decision makes no reference to the old legislation nor states that it is limited to it; rather, the Supreme Court’s explanations on the waiver of rights under Article 6 of the European Convention on Human Rights are formulated as a general rule, which could also apply under the new arbitration law. However, if the term ‘fair’ introduces the rights of Article 6 of the European Convention on Human Rights to Austrian law, the Supreme Court may find it challenging to reconcile its position with the mandatory character of Section 594(2).
For further information on this topic please contact Gerold Zeiler or Alfred Siwy at Schönherr Rechtsanwälte GmbH by telephone (+43 1 53 43 70) or by fax (+43 1 53 43 76100) or by email (firstname.lastname@example.org or email@example.com).
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