Green Light for the Application of Religious Rules in Arbitration of Pecuniary Claims
This post was written by Paul Eichmüller, University of Vienna.
A recent decision by the Regional Civil Court of Vienna has sparked controversy in Austrian media. The outcry was due to the fact that the court allowed the enforcement of a domestic arbitral award that was based on “Islamic law (Ahl as-Sunna wa-l-Ǧamāʿa) according to equity”, as agreed by the parties. Tabloid media denounced that Austrian courts supposedly hailed the application of Sharia law in Austria. Yet, this decision is not as problematic as asserted and should not have come as a surprise to anyone familiar with Austrian arbitration law and its conflict-of-laws rules.
The Facts of the Case
Two Austrian parties had concluded a commercial contract (which was not further specified in the decision), including an arbitration clause for all disputes arising out of the contract. In addition to this arbitration clause, they specified that disputes were to be resolved on the basis of “Islamic law (Ahl as-Sunna wa-l-Ǧamāʿa) according to equity”. When a dispute arose, one party initiated arbitral proceedings and was awarded more than € 1 million in the arbitral award; the award was not set aside. As the respondent nevertheless refused payment, the claimant sought enforcement of € 320,000 before a district court in Vienna.
During the enforcement proceedings, the respondent argued that the award could not be enforced due to a violation of Austrian public policy. The application of “Ahl as-Sunna wa-l-Ǧamāʿa” would allegedly not be definite enough, as its exact content is subject to debate among Islamic legal scholars and its interpretation thus varies. The court dismissed this argument: also in state law, even the most basic legal notions are often subject to scholarly disagreements – yet, that does not mean it is unfit as a legal base for a dispute. Consequently, the court enforced the arbitral award. When an appeal was lodged before the Regional Civil Court of Vienna, it upheld this decision.
Non-State Legal Rules in Arbitration
Austrian arbitration law (contained in the Austrian Code of Civil Procedure) contains a specific provision on the applicable law in arbitral proceedings. Section 603 (1) CPC allows parties to choose the applicable law – even in domestic disputes. What is more, Section 603 (1) CPC does not only allow for the choice of a particular law (Rechtsvorschriften) but also of legal rules (Rechtsregeln). This provision extends the selection of legal frameworks that can be made applicable to the merits of a dispute not only to state law but also to non-state legal rules. While Islamic law is not considered “law” in the strict sense, it can be made applicable in an arbitration – just as the UNIDROIT Principles on International Commercial Contracts could.
The Takeaway
The ruling of the Regional Civil Court of Vienna has shown that arbitration based on religious rules is possible when the arbitration is seated in Austria. Yet, contrary to what the tabloids are asserting, this is not “Islamic values slowly creeping into the mainstream in Europe”. Actually, this is not a specificity of Islamic law and would equally apply to Jewish law or Canon law – or the ancient Roman Digest, for that matter.
Neither is this a case of parallel justice. The state courts still exercise control over the arbitral proceedings by way of their supervisory jurisdiction, above all via setting-aside proceedings (see Section 611 CPC). This ensures a fair hearing and a result that is palatable for the domestic legal system. To avoid a total opt-out of state control, Section 613 CPC even provides for a limited ex officio review of the award regarding arbitrability and substantive public policy, independent of setting-aside proceedings. If there is a serious incompatibility of the award with the values of the Austrian legal system, it will not be given effect by the courts in any context.
Furthermore, not all disputes are arbitrable: only pecuniary relationships or those that may be settled by the parties (Section 582 (1) CPC) can be arbitrated. What is more, particularly sensitive matters like family law and landlord–tenant law are explicitly declared non-arbitrable (Section 582 (2) CPC). In consumer arbitration, a choice of law cannot derogate from mandatory rules (Section 617 (6) 1 CPC), similar to Article 6(2) of the Rome I Regulation.
The scope of application for religious rules thus remaining is the sphere for which substantive law grants considerable room for a party-autonomous determination anyway. If the parties want their pecuniary disputes arising out of, e.g., a service contract settled by religious rules, they should have the opportunity to do so. After all, a legal system hugely profits from acceptance by its legal subjects. If religious arbitration leads to greater acceptance of the decision and the results are compatible with public policy, we should refrain from demonising it.
Thanks for the report, Paul.
It is hard not to see this as parallel justice. Austrian courts might have supervisory jurisdiction, but as they do not review merits of the case, this means that the parties could pretty much avoid State justice to settle their dispute. That’s what arbitration about, after all: allowing a parallel justice system for arbitrable claims.
Also, is the choice of law rule the same for domestic and international arbitration? One of the main reasons to distinguish is precisely to restrict party autonomy for domestic cases.
Thank you, Gilles! Of course, the question what constitutes “parallel justice” depends on what one understands under this notion. What I meant is rather that it is no more “parallel justice” than any other kind of commercial arbitration, with which society doesn’t seem to have that many problems.
The conflict-of-laws rule is the same for domestic and international cases – that is indeed an issue that could and should be discussed, yet not because Sharia specifically (or religious law in general) is the problem. Rather, a very liberal choice-of-law rule for domestic cases is something that should be reevaluated – in a process that is not led by emotions, but by considerations of what is best for our civil justice system.
To a large extent, I am joining Gilles’ concerns here (and I am equally joing him in applauding the thorough report written by Paul): The starting point is a lack of clarity between the Rome I Regulation whose Art. 3 (3) states: “Whereall other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.” The relationship of this provision with section 603 of the Austrian CCP has not been clearly settled so far. To my opinion, the Rome I Regulation applies to all contracts agreed within the Internal Market as it adresses the parties to the contracts, not only the courts of EU Member States. Therefore, arbitral tribunals (with seat in the Union) addressing these situations are bound by the Regulation (being the applicable law), too.
However, Art. 3 (3) of the Regulation that does not fully exclude any choice of law in purely domestic cases but subjects these contracts to all mandatory rules of the respective EU Member State. Therefore, arbitral tribunals (and Austrian courts in annulment and similar procedings) cannot ignore the Rome I Regulation, despite section 603 Austrian CCP. European law prevails and requires a review of the content of the award. This aspect is missing in the judgment of the Landesgericht Vienna – the court only made a general reference to (Austrian) public policy without going into the details of the award. Still, Art. 3 (3) Rome I Regulation requires a more thorough review of the arbitral award – coming close to a revision au fond and, therefore, a different aproach compared to the limited review of (international) arbitral awards under section 603 of the Austrian CCP, totally
Let me add an additional thought here: Every Saturday in Vienna, I go shopping at the “Brunnenmarkt”, a famous, exiting market (the biggest of Vienna, located in a long street of several kilometers). It is one of my favorite places as one gets immediately the impression of being at the same time in different parts of Arabia, of Africa; in Hungary and Slovakia and in different Austrian provinces, too. It is an amazing melting pot that I strongly recommend to all readers of this blog. – However, I am not sure whether it would be a good idea to subject disputes among the different merchants of this place to the kind of arbitration and the limited review exercised by the Landesgericht Vienna in this case at hand. Domestic disputes should be subject to (mandatory) domestic laws and the review of these awards should be more detailled than the review of awards in international commercial arbitration. This is exactly what Art. 3 (3) of the Rome I Regulation mandates. As a result, I disagree with the judgment of the Landesgericht Wien.
Btw, there are additional weaknesses in the judgment of the Landesgericht that I will address in a case note in the Austrian journal “ecolex” to be published soon.
Thank you for your detailed analysis – I am already looking forward to the case note in ecolex. I totally agree that there were substantial weaknesses in the decision (particularly, but of course not limited to the sources that were used on Islamic Law). Thus, the decision is far from perfect, but I do think that the central takeaway that I reported in this post is still convincing.
Same as Gilles, however, I’ll disagree on the applicability of the Rome I Regulation in arbitration in general. Additionally, even if one applies Art 3(3), it should not hinder the case being decided the way it was – after all, Art 3(3) serves to protect the integrity of the legal system which is being opted out of. In the case at hand, that is Austrian law. If the very same law allows for the derogation of commercial provisions in the context of arbitration, I have my doubts that this is an issue that Art 3(3) would or should be concerned with.
It seems that this case will raise again the issue of whether the Rome I Regulation applies in the context of arbitration and overrides all choice of law rules contained in the arbitration laws of the Member States (at least in contractual matters).
My sense is that the dominant view in the EU is that the Rome I Regulation does not apply in the context of arbitration. Thus, I am not sure art 3(3) is relevant in the present case. I would rather submit that the issue is whether the choice of law rule contained in Austrian arbitration law contains a similar limitation to party autonomy in domestic cases, and that this is an issue of Austrian law which is left untouched by EU law.
But if arbitration depends on demonstrable consent, what is the problem if the parties to the agreement agree that the teachings of scientology, or of some other cult, should be applied by the adjudictor to settle the issues between them, the role of the national court is to confirm, if asked, that the matter was arbitrable and that there was no admissible flaw in the process. What’s the problem ? One sees in the gutter press and gutter politics in the United Kingdom (to say nothing of the upper echelons of United States) an ignorant fury about sharia law (whatever that may be) taking over civil society. It is nonsense, of course. States make their own dispositions for the supervision and control of arbitration (so also, one supposes, of marriage and its dissolution), even in Europe. I agree with Gilles to this extent, that the weary, dreary argument about whether the Rome I Regulation takes the determination of the applicable law away from the states and out of the hands of the arbitral tribunal (it doesn’t; it just doesn’t) may have to be re-run; but the state, even in Europe, decides for itself whether to allow a body with the skill set to apply religious ‘laws’, or other principles, to deal with the primary issues, and defines the role of its courts as it sees fit. One may, I suppose, asperse the Austrian legislator for making what appears to be a perfectly sensible choice; but if this is to be done, it is hardly a matter of private international law.
Thank you – just as you say: the public outcry in Austrian media because of that decision was massive, which just goes to show that this matter is not being discussed on an objective level. Personally, I think that the Austrian rules have worked very well in the past 19 years of their existence, but that’s not to say that they are perfect. Restricting the choice for purely domestic arbitration (if not generally, then at least for certain types of arbitrable disputes) is something that is worth thinking about.
Dear Adrian,
I agree that once the policy decision has been made to allow arbitration for certain claims, the application of sharia law is uncontroversial.
I would say, therefore, that there are two pre-conditions. The second is consent of the parties, as you point out. But the first is that the claims were arbitrable. This should be the case each time the state otherwise allows the parties to settle, redefine or waive the claims as they see fit. In French parlance, the parties should be free to dispose of their rights, and if they are, they should be able to arbitrate them under any norms they like.
Dear Gilles,
I do agree. But the decision of the Vienna court would seem to suggest that it regarded this matter as arbitrable as a matter of Austrian law. I have no knowledge of Austrian law, but it would strike me as very strange if a dispute of this kind were not arbitrable. More generally, if persons who do not share a common domicile or nationality, but who both subscribe to a cult, find common ground and the basis for dispute settlement in the rules of that cult, one would expect the laws of the state to accommodate it, indeed, to encourage it, within the limits laid down by the legislator. Mountains and molehills come to mind…