The Banking Litigation Law Review: Austria

Overview

In terms of sheer numbers of cases, litigation proceedings in Austria have decreased over recent years. Banking litigation was no exception in this regard. While there is no unanimous perception as to what reasons lie behind this development, it is fair to say that the complexity of the pending cases has increased and has made court proceedings more expensive and time-consuming. At the same time, the continued activities of the Austrian legislature impose more extensive and detailed duties on financial institutions in particular. In this chapter, some of the significant recent developments in case law and legislation will be summarised and show that banking disputes will likely remain a key driver of the case law development in Austria, both in the field of civil procedure and substantive law.

Significant recent cases

The following noteworthy case has recently been dealt with by the Austrian courts.

i No negative interest

In its decision of 26 February 20202 the Austrian Supreme Court upheld its opinion on negative interest in credit agreements.

In the past the Supreme Court already decided on several occasions on the question whether a lender may also be obliged to pay interest to the borrower depending on the development of a reference interest rate.3 In each of these decisions, the court assumed that the parties typically agree that the borrower has to pay interest in return for the provision of the loan value. The Supreme Court held that when concluding the credit agreement, the borrower does not regularly expect to receive payments from the lender at any time during the term of the agreement, so that the lender may receive less in total – or in individual interest periods – than it has provided.

In the present case the Supreme Court was confronted with the interpretation of interest escalation clauses and found that in the absence of special circumstances, an interest escalation clause must be interpreted in such way that it does not lead to 'negative interest'. The Supreme Court also stated that if a borrower had in fact understood the interest rate agreements in the credit agreement to the effect that the lender might be obliged to pay interest to the borrower in certain circumstances, a bona fide contracting party would have been expected to disclose such an understanding, as such understanding would be contrary to a typical loan agreement.

ii Contributory negligence of an investor: change of case law by the Supreme Court

According to the established case law of the Supreme Court, in the case of incorrect investment advice, contributory negligence on the part of the investor can come into consideration, which reduces the investment advisor's liability for damages, if the customer has, among other things, excellent knowledge of the investment sector and should, therefore, have noticed the incorrectness of the investment advice.4

In past decisions,5 the Supreme Court stated that in the case of several errors of advice, a reduction of damages can only be considered if the careless behaviour of the injured party is also correlated to the respective error of clarification.

In its decision of 29 August 2019,6 the Supreme Court abandoned this view. Now the Supreme Court takes the view that, in case of contributory negligence, the only criterion for the division of damages is whether the injured party acted in breach of care (in his own affairs) and whether this negligence was also the cause of the occurrence of the specific damage. As a result, it must be examined whether the injured party's negligence caused the same damage as the breach of the defendant's advisory duty. It is not required that the injured party's negligence is somehow related to the breach committed by the defendant.

ii No redemption of claims protected by bank secrecy

In its decision of 4 July 2018,7 the Austrian Supreme Court held that banking secrecy rules preclude a transfer of claims to a payer that is not subject to banking secrecy.

In the present case, a bank's credit insurer sought payment of the outstanding loan amount from the borrower. The insurer and the bank agreed in the insurance contract to transfer the bank's rights against the borrowers under certain circumstances. Subsequently, the insurer claimed to have been vested with the bank's creditor's rights by operation of law pursuant to Section 1422 of the Austrian Civil Code8 (compulsory assignment – notwendige Zession).

The insurer inter alia argued that banking secrecy rules would not apply due to Section 38, Paragraph 2, No. 7 of the Austrian Banking Act. According to the latter provision, the obligation to maintain banking secrecy does not apply to the extent that the disclosure of information is required to clarify legal matters arising from the relationship between banks and customers. The Supreme Court, however, held that this exception from the bank secrecy obligation would not apply in the present case. Instead, the assignment in question serves to fulfil the insurance contract between the bank and the insurer but does not serve to clarify legal matters arising from the relationship between the bank and the customer.

iii Statute of limitation of prospectus liability claims

In its decision of 24 September 2019,9 the Austrian Supreme Court commented on the statute of limitation of prospectus liability claims.

According to former Section 11 Paragraph 7 of the Austrian Capital Market Act (KMG)10 – now Section 22, Paragraph 7 of the KMG 201911 – claims of investors must be filed with the court within ten years of the end of the offer subject to the obligation to publish a prospectus. According to Section 1489 of the Austrian Civil Code, any action for compensation is time-barred after three years from the time when the damage and injuring party became known to the injured party, but at the latest after 30 years. Up to now it was not entirely clear and was subject to an ongoing discussion whether the ten years' period and the three years limitation period apply concurrently. This would mean that despite a maximum ten years' limitation period the claim would get time-barred three years after the damage and injuring party became known to the injured party (effectively shortening the limitation period to three years). In the present case the Austrian Supreme Court held that, at least with regard to negligence behavior, Section 11, Paragraph 7 of the KMG (now Section 22, Paragraph of the 7 KMG 2019) supersedes not only the objective 30-year limitation period but also the subjective three-year period of Section 1489 of the Austrian Civil Code.

Recent legislative developments

i General

In the spring of 2020 the covid-19 pandemic plunged the global economy into a deep crisis and posed major challenges for the future. Austria was also considerably affected by the covid-19 pandemic, and therefore the Austrian legislator enacted numerous laws and regulations.

ii Laws in connection with the covid-19 pandemic

3rd COVID-19 Act12

In the context of the 3rd COVID-19 Act, published on 4 April 2020, inter alia the Beneficial Owner Register Act (BORA) was amended. In general, according to the BORA all legal entities listed in Section 1 of the BORA, that is, stock corporations (Aktiengesellschaften), limited liability companies (GmbHs), saving banks (Sparkassen), insurance companies (Versicherungsvereine) trusts and partnerships (Kommanditgesellschaften, Offene Gesellschaften) are obliged to report their beneficial owners within four weeks after the first registration of the respective entity (Section 5, Paragraph 1 of the BORA). Regarding most of the above mentioned entities, the deadline starts upon the registration in the commercial register, as regards trusts following the establishment of a place of administration in Austria. Any changes in the information must also be reported within four weeks from the date when the change becomes known. According to Section 3, Paragraph 3 of the BORA, these entities are obliged to check once a year whether the data entered in the register is up-to-date. They are obliged to report a change or to confirm the previously reported data within four weeks after the due date of the annual review.

According to Section 16, Paragraph 1 of the BORA, the Austrian tax office can impose a penalty if the report according to Section 5 is not submitted. In this case, a warning period of six weeks must be set before a compulsory penalty may be imposed.

By way of Article 3 of the 3rd COVID-19 Act a transitional provision was inserted in Section 18 of the BORA. According to this provision, the periods for reporting data by the legal entity and the warning period and imposition of a penalty are interrupted if the periods had not yet expired by the end of 16 March 2020 or if the start of the period falls within the period between 16 March 2020 and 30 April 2020. These deadlines according to Section 5 of the BORA have started to run anew on 1 May 2020.

4th COVID-19 Act13

On 4 April 2020, the '2nd Federal Law On Accompanying Measures To COVID-19 In The Judiciary' (2nd COVID-19 JUBG) was issued. The first chapter of the 2nd COVID-19 JUBG provides for measures for civil law cases. According to Section 2 of the 2nd COVID-19 JUBG, the due date of payments for loan agreements was postponed.

For consumer loan agreements concluded before 15 March 2020, claims of the creditor for repayment, interest or redemption payments due between 1 April 2020 and 30 June 2020 were deferred for a period of three months from the due date, if the consumer, due to the exceptional circumstances caused by the spread of the covid-19 pandemic, suffers a loss of income that makes it unreasonable to expect him to provide the service owed. In particular, the borrower cannot reasonably be expected to provide the service if his reasonable livelihood or the reasonable livelihood of his dependants is at risk.

For the duration of the deferral, the borrower is not in default with the payment of these services; during this period, therefore, no interest on arrears will accrue. If a period is set for the realisation of collateral for the credit, after the expiry of which the collateral can no longer be realised, this period shall be extended in accordance with the duration of the deferral.However, the borrower has the right to continue to make his contractual payments on the originally agreed due dates. In this case the deferral does not apply. However, the parties to the contract may agree to defer payments in deviation from the legally prescribed deferral. However, termination by the lender due to default in payment or a significant deterioration in the financial circumstances of the consumer is excluded until the deferral expires. This rule is mandatory for the lender.

According to Section 3 of the 2nd COVID-19 JUBG in the case of a contractual relationship entered into before 1 April 2020, if the debtor did not make a payment due between 1 April 2020 and 30 June 2020 or did not make it in full because his economic capacity has been considerably impaired as a result of the covid-19 pandemic, he or she must pay the statutory interest of no more than 4 per cent for the arrears of payment. This applies irrespective of any deviating contractual agreements. In addition, the debtor is not obliged to reimburse the costs of extrajudicial debt collection or recovery measures.

According to Section 9 of the 2nd COVID-19 JUBG, over-indebtedness is suspended as ground to file for insolvency until 31 January 2021. Further, creditors may not file for insolvency based on over-indebtedness (i.e., the debtor company has still cash to pay due debt, but will fail doing so in the future) during that period. However, directors are under the obligation to file for insolvency (1) within 60 days from 31 January 2021 if the company is (still) over-indebted by the end of 31 October 2021, or (2) within 120 days from the date of the occurrence of over-indebtedness, whichever period ends later. Note that illiquidity (i.e., inability to pay the due debt) remains a ground to file for insolvency both for creditors and debtors.

According to Section 10 of the 2nd COVID-19 JUBG bridge loans granted in order to pre-finance short-time work measures in connection with covid-19 are not subject to claw back claims according to Section 31 of the Austrian Insolvency Act, if such bridge loans are repaid to the lender immediately after receipt of short-time work payments by the Public Employment Service Austria (AMS). The latter does not apply (1) with regard to secured loans and (2) in cases where the lender was aware of the borrower's illiquidity.

According to Section 13 of the 2nd COVID-19 JUBG unsecured shareholder loans do not fall under the prohibition of repayment under Austrian capital maintenance rules if granted with a maximum maturity of 120 days until 31 January 2021. Both foregoing provisions shall induce shareholders to inject their own money to help protecting the company without having to fear that their claim be subordinated to claims of other creditors.

iii The New 'Capital Market Act 2019'

As the 'Regulation (EU) 2017/1129 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market'14 (the Prospectus-Regulation) had to be applied directly as of 21 July 2019 in all Member States, in Austria the Austrian Capital Market Act was renewed entirely in July 2019. As part of the EU-Finance-Adjustment Act 201915 the Capital Market Act 201916 (KMG 2019) entered into force on 21 July 2019.

The most important change was that the regulations for the offer of securities are now regulated in the Prospectus Regulation. For this reason, these provisions have now been removed from the KMG 2019 and the Austrian legislator has taken this as an opportunity to completely renew the KMG. However, the KMG 2019 has not brought any major changes. This was justified with regards to the existing case law in Austria.17

The following innovations are worth mentioning:

  1. The exemptions from the obligation to publish a prospectus for investments have now been reduced, which is why a prospectus obligation pursuant to Section 3, Paragraph 1 of the KMG 2019 applies in the following cases, among others:
    • an offer of investments aimed at investors who acquire investments with a minimum amount of €100,000 per investor in each separate offer, as well as an offer of investments with a minimum denomination of €100,000;
    • an offer of investments with a total equivalent value in the European Economic Area (EEA) of less than two million euros; this upper limit shall include any income from offers of investments of the last twelve months that are exempt from the prospectus pursuant to this section;
    • an offer of investments which is directed exclusively at qualified investors; and
    • offers of investments addressed to less than 150 natural or legal persons per EEA member state who are not qualified investors.
  2. Article 8, Paragraph 3 of the KMG 2019 now stipulates that prospectuses must remain available for ten years after publication on (1) an Internet site of the issuer or on an Internet site of the financial intermediaries placing or selling the investments, including any paying agents existing in Austria, or (2) on an Internet site of the Financial Market Authority (FMA) or on the Internet site of a body commissioned by the FMA for this purpose against appropriate remuneration.
  3. Pursuant to Article 21 of the Austrian Capital Market Act, the right for consumers to cancel the purchase of securities or investments only comes into play in the event of failure to publish a prospectus in the case of an offer of securities or investments subject to the obligation to publish a prospectus at all. There is no more a cancellation right for failure to publish supplements to the prospectus.
  4. Penalties for violations of the provisions of the Prospectus Regulation for public offerings of securities were regulated in Section 15, Paragraph 1 of the KMG 2019. A fine of up to twice the amount of the profits or losses avoided as a result of the infringements may be imposed, if such profits or losses can be quantified, or, if such quantification is not possible, a fine of up to €700,000 may be imposed. In addition, the penalties for the imposition of fines on legal persons in connection with violations of the provisions of the Prospectus Regulation have now been increased. Therefore, pursuant to Section 15, Paragraph 2 of the KMG 2019, the maximum fine to be imposed is €5 million or 3 per cent of the total annual turnover of the legal person concerned.

Privilege and professional secrecy

Section 9, Paragraph 2 of the Austrian Lawyers Act (ALA) sets forth the lawyer's duty of confidentiality regarding all matters that were disclosed to him or her in his or her function as counsel whose non-disclosure is in the interest of the client. Therefore, a lawyer has the right to deny testifying in court or before any other authority according to the respective procedural provisions. Section 9, Paragraph 3 of the ALA prohibits circumventing this principle by, for example, interrogation of employees of the lawyer or seizing communications. The procedural implementation of these principles has led to several not entirely identical provisions in the various codes of procedure.25

Regarding criminal proceedings, the attorney's right to deny testifying as a witness is stated in Section 157 of the Austrian Code of Criminal Proceedings (ACCP).26 As mentioned above, owing to the prohibition on circumventing, seizing communications between attorneys and defendants is also prohibited. An amendment of the provision means that this is now also applicable in cases where these communications are located outside the attorney's office (e.g., at the defendant's apartment). However, there is the requirement that all documents and data must have been created either by the attorney or the defendant. Documents that have been created by another person (e.g., a legal expert) and later handed to the defendant or the attorney do not fall within the provision.

In addition to those already mentioned, similar provisions can be found in: Section 321 of the Code of Civil Procedure, Sections 89 and 104 of the Finance Criminal Code, Section 49 of the Code of Administrative Procedure and Sections 171 and 143 of the Austrian Fiscal Code.

Sources of litigation

Banking litigation in recent years has revealed that banks are more likely to be defendants in lawsuits than plaintiffs. Nevertheless, a few cases with high amounts in dispute were initiated by banks, for example, a case filed by a well-established Austrian bank against an Austrian community seeking redress for the closing costs of derivative instruments with negative market value, which had been purchased by the public administration in order to improve its debt management.

With regard to banks as defendants, numerous cases were triggered following the start of the financial crisis in 2008, which concerned alleged breaches of advisory duties in the context of the marketing and sale of certificates. These included claims based on prospectus liability if the bank was involved in the issuance or control of prospectus information. These cases reached four-digit sums at various Austrian courts and were responsible for a significant statistical increase in lawyers' caseloads.

Such cases are now in decline as they are being resolved by way of final judgment or settlement. However, nowadays banks seem to be increasingly exposed to representative actions filed by consumer protection associations, primarily the Austrian Consumer Association (VKI), seeking the removal of terms and conditions used by banks for alleged non-compliance with transparency and contra bonos mores rules, as provided for in Austrian consumer law. The most recent example is the issue of negative interest loan agreements (including FX loans), which focuses on the extent to which banks are obliged to pass on the economic benefit of negative interest in loan arrangements to the customer.

Footnotes

1 Holger Bielesz is a partner at Cerha Hempel. Paul Krepil is an associate and Florian Horak is a consultant at Wolf Theiss.

2 OGH 26 February 2020= ÖBA 2020, 650.

3 OGH 21 March 2017, 10 Ob 13/17k = ÖBA 2017, 338; OGH 29 August 2017, 6 Ob 51/17v = ÖBA 2017, 867; OGH 26 April 2017, 1 Ob 4/17w = ÖBA 2017, 510; OGH 28 June 2017, 9 Ob 35/17p; OGH 30 May 2017, 8 Ob 101/16k = ÖBA 2017, 856 (Foglar-Deinhardstein); OGH 30 May 2017, 8 Ob 107/16t.

4 OGH RS0102779.

5 OGH 29 August 2018, 1 Ob 137/18f; OGH 29 November 2017, 1 Ob 112/17b.

6 OGH 29 August 2019, 1 Ob 78/19f.

7 OGH 4 July 2018, 7 Ob 20/18v =ÖBA 2019, 923 (Liebel).

8 According to Section 1422 of the Austrian Civil Code (compulsory assignment – notwendige Zession) anyone who pays another person's debt for which he is not personally liable or for which he is not liable with specific assets can demand the assignment of the creditor's rights before or during payment (redemption request). This can also be done by implication.

9 OGH 24. 9. 2019, 8 Ob 14/19w = ÖBA 2020, 264 (Burtscher).

10 BGBl. Nr. 625/1991.

11 BGBl. I Nr. 62/2019.

12 BGBl. I Nr. 23/2020.

13 BGBl. I. Nr. 24/2020.

14 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC.

15 BGBl I 2019/62.

16 BGBl. I Nr. 62/2019.

17 Thomas Zivny, ZFR 2019/548.

18 RGBl 1896/79, in its applicable version.

19 Kodek in Angst/Oberhammer, EO3, Section 379, AEA, Paragraph 7ff.

20 Kodek in Angst/Oberhammer, EO3, Section 379, AEA, Paragraph 34.

21 Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012.

22 Thomas Garber in Angst/Oberhammer, EO3, Section 79, AEA, Paragraph 11.

23 Regulation (EU) No. 655/2014 of the European Parliament and of the Council of 15 May 2014.

24 Before 1 December 2016, the respective provisions were included in Section 79, AEA.

25 Prunbauer-Glaser, 'Legal Professional Privilege' v. Schutz der anwaltlichen Verschwiegenheit', AnwBl 2013, p. 56.

26 Owing to the implementation of Directive 2013/48/EU, an amendment of Section 157 of the ACCP entered into force on 1 November 2016.

27 RGBl, No. 111/1895, in its applicable version.

28 BGBl, No. 140/1979, in its applicable version.

29 BGBl No. 304/1978, in its applicable version.

30 Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), OJ 2008, L 177, p. 6.

31 Regulation (EC) No. 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II), OJ 2007, L 199, p. 40.

32 Krejci in Rummel/Lukas, ABGB4 Section 879, Civil Code, Paragraphs 122–130.

33 Reischauer in Rummel, ABGB3 Section 1298, Civil Code, Paragraph 10a.

34 Reischauer, 'Contractual exclusion of liability for culpable conduct, in particular gross negligence', ÖJZ 2009/114.

35 Krejci in Rummel/Lukas, ABGB4, Civil Code, Section 879, Paragraphs 122–130.

36 OGH 22 November 1984, 7 Ob 666/84; SZ 57/184; EvBl 1985/98 p. 495; RdW 1985, p. 73; JBl 1986, p. 168.

37 Reischauer, 'Contractual exclusion of liability for culpable conduct, in particular gross negligence', ÖJZ 2009/114.

38 OGH 11 June 1992, 6 Ob 541/92; ÖBA 1993, p. 325 (Jabornegg); JBl 1993, p. 397; RdW 1992, p. 399.

39 Reischauer, 'Contractual exclusion of liability for culpable conduct, in particular gross negligence', ÖJZ 2009/114.

40 Bielesz/Krepil/Horak, The Banking Litigation Law Review – Edition 3, Chapter III.ii.

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