Austria: Austrian Supreme Court Decides on the Term "Consumer", also with Respect to Arbitration

In recent decisions the Supreme Court has established an economic approach to the qualification of shareholders as consumers or entrepreneurs for the purposes of Section 1 of the Consumer Protection Act. This economic view has now been consolidated by a new Supreme Court decision of June 24 2010 (OGH, docket no 6 Ob 105/10z). Importantly, the economic approach is also determinative for an interpretation of Section 617 of the Code of Civil Procedure, and thus for the term "consumer" as applicable in Austrian arbitration law.

Section 617 of the code, which severely restricts the possibility of conducting arbitration agreements with consumers, applies whenever Austria is the place of arbitration. For example, according to Section 617(1), arbitration agreements with consumers can be concluded only after a dispute has arisen. Consequently, it is of considerable importance for Austrian arbitration law to which extent physical or legal persons qualify as consumers for the purposes of Section 617, and can thus avoid the legal consequences of arbitration agreements previously entered into.

In its decision of June 24 2010 the Supreme Court was called on to decide whether a shareholder, holding 50% of the shares in a company and acting as managing director thereof, was to be considered a consumer for the purposes of Austrian consumer protection law. The Supreme Court, following its economic approach, rejected the application of consumer protection law in this case.

Facts

The claimant company, S-GmbH, had entered into a franchise agreement with another company, P-GmbH, which at the time was in the course of incorporation. P-GmbH was held by two individuals, one directly holding 50% of the shares, the second holding 100% of the shares in a third company, which in turn held the remaining 50% of the shares in P-GmbH. Both the direct and the indirect shareholders acted as managing directors, with the right to represent solely P-GmbH. Both individuals stood surety for P-GmbH under the franchise agreement. The franchise agreement contained a forum selection clause, setting out that all disputes were to be settled by the court competent for S-GmbH, which was the franchisor and claimant in the ensuing litigation.

S-GmbH then requested payment under the franchise agreement, directing its payment claim against the two individual shareholders as sureties.

According to Section 14(1) of the Consumer Protection Act, a forum selection clause concluded with a consumer which is resident, domiciled or employed in Austria is valid only with respect to disputes which have already arisen. Section 617 of the Code of Civil Procedure contains the same restriction with regard to arbitration agreements concluded with consumers. As in this case a future dispute was concerned, it was crucial to determine whether the respondents qualified as consumers on entering into the forum-selection clause.

The lower courts

The first instance court rejected the claim for lack of jurisprudence. It held that the forum selection clause had not been validly concluded as the two respondents, neither of which held a majority but only 50% of the shares each, were to be regarded as consumers.

The second instance court, however, reversed this decision, rejecting the jurisdictional challenge. It held that from an economic perspective both respondents were to be considered as 50% shareholders and sole managing directors and as such, according to the rationale of the Consumer Protection Act, did not qualify as consumers for the purposes of this act. They had thus validly concluded the forum selection clause.

The respondents appealed against this decision to the Supreme Court.

The Supreme Court decision

The Supreme Court concurred with the second instance court.

After noting that a person qualifies as a consumer, according to Section 1 of the act, if the transaction at hand does not pertain to the conduct of its business, the Supreme Court gave an overview of its past case law with respect to the qualification of managing directors and shareholders as consumers or entrepreneurs.

In particular, the court pointed to its leading decision of February 11 2002, in which a sole shareholder and managing director of a company was held to be an entrepreneur (OGH, docket no 7 Ob 315/01a). There, in construing Section 1 of the act, the court had already strongly relied on an economic approach.

The Supreme Court also highlighted another decision, handed down on the interpretation or Article 13 of the Brussels Convention ("jurisdiction over consumer contracts"; OGH, docket no. 6 Ob 12/03p). In this judgment the court had again invoked an economic approach. Two co-shareholders, which were at the same time managing directors of the company, had entered into suretyship agreements for their company acting as entrepreneurs and thus did not qualify as consumers. It was left unclear, however, whether this reasoning could also be transferred to Austrian domestic law.

The court further reported the main Austrian scholarly views on the issue, concluding that they, to a large extent, support an economic approach to the interpretation of the term "consumer" (see Martin Karollus, Anmerkung zu OGH February 11 2002, 7 Ob 315/01a, JBl 526 (2002); Peter Bydlinski & Susanne Haas, GmbH ÖBA 11 (2003); Albert Heidinger, OGH February 14 2007, 7 Ob 266/06b, wbl 146 (2007); Daniela Huemer, JBl 647 (2007).

With respect to the present case, the Supreme Court reasoned that - notwithstanding the first respondent's mere indirect holding - from an economic view both respondents were to be considered as 50% shareholders and sole managing directors. On conclusion of the franchise agreement, both respondents held a material economic interest and could exert material influence on the franchisee. As each of the two respondents held 50% of the shares, neither of them could give instructions to the other, so that in practice both enjoyed sole entrepreneurial decision-making power. Since, 'in truth' both respondents were acting in their own economic interest comparable to a sole shareholder, the Supreme Court concluded that the rationale of the act would oppose qualifying the respondents as consumers.

Author's comment on the Supreme Court's decision

It is commonly held that Section 617 of the code, which severely restricts the possibility of entering into arbitration agreements with consumers, refers to the definition of the term "consumer" as set out in Section 1 of the act.1 Supreme Court decisions rendered on the scope of Section 1 - such as the present judgment - are thus of material importance to Austrian arbitration practitioners.

In its recent case law, mainly concerned with the conclusion of suretyship agreements between a company's shareholder and a third party, the Supreme Court has developed an economic approach ("substance over form") to the interpretation of the term "consumer" - an approach which was further consolidated in the present judgment.

According to this case law, mere financial investors which do not exert relevant influence on the management of a company qualify as consumers and thus enjoy the protection of Section 617. This, however, does not apply to shareholders which, due to their legal standing as sole shareholders or else factually (eg, as 50% co-shareholders), enjoy entrepreneurial decision-making power. It remains to be seen whether in subsequent decisions the Supreme Court will further extend this notion of "entrepreneur", also including - under certain circumstances - managing directors who hold less than 50% of the shares.

Indeed, in various constellations a qualification of minority shareholders as entrepreneurs may well be justified (eg, where a minority shareholder acts as managing director while enjoying certain veto rights). Also, under certain circumstances the mere shareholding without a formal position as managing director together with effective influence on the management of the company might suffice for such a shareholder to qualify as an entrepreneur. Those cases, however, remain to be decided.

In its present judgment the Supreme Court stressed the consistency of the consumer term underlying Section 1 of the act, which, according to the court, does not vary depending on whether a certain provision is based on European law or not. Still, it remains to be seen, irrespective of the ever stronger economic approach generally taken, whether the court might interpret the term "consumer" even more restrictively when it comes to the conclusion of arbitration agreements (ie, "consumer" for the purposes of Section 617 of the code) regarding shareholders' internal corporate relationship.2 This would, for example, concern shareholders' agreements, rather than the conclusion of suretyship contracts with external third parties. The very existence of a shareholders' agreement may often carry with it the implication that the shareholder is actively involved in the management of the company.

It has now become increasingly difficult for shareholders who have entered into arbitration clauses to challenge the jurisdiction of arbitral tribunals by invoking consumer protection law, again adding to Austria's appeal as a place of international arbitration.

Footnotes

1 See Gerold Zeiler, Schiedsverfahren no 8 to section 617.

2 Such interpretation is advocated by distinguished Austrian scholars, inter alia by Christian Hausmaninger in Zivilprozessgesetze, Section 617 mn 23 (Fasching, HW & Konecny, A (eds), 2nd ed, 2007).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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