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17 March 2005
Under Article V(1)(a) of the New York Convention, recognition and enforcement of an arbitral award may be refused if the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country in which the award was made. In light of this provision, the Austrian courts have found in the past that they have jurisdiction to decide a matter where an arbitration clause is invalid under the law of the place of arbitration. Conversely, they have dismissed claims where a valid arbitration clause existed under that law irrespective of whether the clause was valid under Austrian law.
The Supreme Court recently decided a case(1) in which a Croatian claimant and an Austrian defendant had entered into a sales contract that included an arbitration clause, with the place of arbitration being Switzerland. However, the Croatian claimant sued the Austrian defendant in the Austrian state courts, claiming that the arbitration clause was invalid due to a disagreement between the parties.
In line with prior decisions, in particular a landmark decision in 1971,(2) the Supreme Court made it clear that in principle the law agreed upon by the parties governs the arbitration clause. However, in this respect it is important to be careful with the regular governing law clause. If the parties agree on a law to govern the main contract, such agreement does not necessarily extend to the arbitration clause. On the contrary, it is probable that the parties would not intend the agreement to cover the arbitration clause unless they explicitly state otherwise.
It is more likely that there will not be any agreement between the parties regarding which law shall apply to the arbitration clause. In such cases, it is the law of the place of arbitration that applies to the arbitration clause. Therefore, the validity of such a clause must be established under the law of the place of arbitration. In applying this law, the Supreme Court, without explicitly mentioning the New York Convention as it did in the 1971 ruling, reconfirmed that the law of the place of arbitration must be applied where the validity of the arbitration clause is disputed and where there is no agreement between the parties as to the applicable law.
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