AUSTRIA: An introduction to Dispute Resolution: Litigation

On the back of an eventful year, litigation practitioners and courts are facing a challenging environment. There have been significant developments and changes for financially voluminous – and from a lawyer’s perspective, historically important – industries, as well as regulatory developments. These developments are expected to have a considerable impact on litigation practice in 2025.

The Rising Tide of Insolvency: Austria's Legal System in the Wake of (Real Estate) Bankruptcies

Austria's legal system is currently facing significant challenges in managing the increasing number of insolvency cases, especially in real estate and related industries. The complexity of large corporate structures, the sheer volume of cases and the need to protect creditors' rights are straining the dispute-resolution system. Austrian courts are struggling to handle these cases efficiently due to the intricacies involved, particularly in high-profile bankruptcies, which involve multiple jurisdictions and a diverse array of creditors.

With regard to international players in the affected industries, Austrian courts have had to untangle a web of subsidiaries, holding companies and international assets, which has significantly prolonged proceedings. This situation has exposed the limitations of the current system, particularly the need for specialised knowledge and resources to manage complex insolvencies.

To address these challenges, potential reforms are being considered, including the establishment of specialised insolvency courts, streamlined procedures as well as new standards for insolvency practitioners. There is definitely growing momentum for reforms in Austria's insolvency framework in order to better manage the complexities of large corporate bankruptcies.

Code of Civil Procedure

In recent years, the Austrian Code of Civil Procedure has undergone a series of reforms with the objective of digitising the judicial system. The Austrian legislature has now adopted permanent versions of the rules introduced during the pandemic, including a permanent procedural framework for remote hearings and new provisions on the procedural framework for remote (or hybrid) hearings in civil matters. In accordance with the aforementioned framework, and with the consent of the parties involved, a court may conduct hearings via videoconferencing software. The court shall have the discretion to determine whether to conduct such hearings. In making its decision, the court will consider the economy of the proceedings and the technical facilities available.

Cybercrime-Related Litigation

Cybercrime is a trending topic, as the biggest threat for many companies is now a breakdown of their digital structures or a loss of data. This trend is confirmed by the figures of the Austrian Federal Criminal Police Office (Bundeskriminalamt) published in April 2024, according to which, in 2023, a total of 65,864 cyber incidents were reported – which represents an increase of over 5,000 cases from the previous year. With the clearance quote coming down to roughly 32% - a ten-year low – the threat for companies is bigger than ever.

These incidents can easily have an enormously negative impact on the target company, quickly causing six- or even seven-figure losses (think business interruption, recovery costs, etc). Several cases in this context have attracted public attention in the past year because they resulted in long business interruptions or high ransom payments. Both scenarios are also highly complex under insurance law and can usually only be prevented by an impeccable cybersecurity setup.

Against this background, the EU adopted the NIS-2 Directive (Directive (EU) 2022/2555), which represents a significant evolution in the EU’s approach to cybersecurity. Building on the foundations laid by the original NIS Directive (Directive (EU) 2016/1148), NIS-2 aims to address the growing sophistication and frequency of cyber threats. The NIS-2 Directive broadens the scope of entities subject to cybersecurity regulations, encompassing not only operators of essential services (OES) but also digital service providers (DSPs) across various sectors (such as healthcare, energy, transport or banking). Companies are categorised as either "essential" or "important” based on their criticality to societal functions, as well as the economy, and must comply with correspondingly stringent cybersecurity obligations. NIS-2 also strengthens co-operation among EU member states through the establishment of the European Cyber Crises Liaison Organisation Network and enhanced information-sharing protocols.

The adoption of NIS-2 has faced some challenges in its implementation in Austria, however, and at the time of writing it is uncertain whether Austria will meet the EU's deadline.The Austrian adoption (NISG 2024) will include mandatory reporting of significant cybersecurity incidents within tight deadlines and the possibility of substantial penalties for non-compliance. However, the delay in implementation means that Austria may temporarily lag behind other EU member states in meeting the enhanced cybersecurity standards set out by NIS-2.

Dispute Hedging

In line with the general trend, dispute hedging is gradually gaining importance in the Austrian market. An obvious indication of where this development is leading to is the implementation of rules regarding litigation funding and its disclosure according to the adoption of Directive (EU) 2020/1828, discussed below.

At the moment, the discussion revolves around the fact that insurers – providing the market with after-the-event (ATE) insurance and similar products – act in a strictly regulated environment, whereas litigation funders are not regulated in a similar way, either at the EU or Austrian level. At the EU level, the Voss Report, published by the Legal Affairs Committee, deals with some of the (perceived) challenges in this area. The political motivation for more regulation in this area can easily be deduced from the wording of the proposal. At the time of writing, the authors of the Voss Report and the market concerned (litigation funders) are far apart in their assessment of what kind of regulation is needed. In particular, the lack of involvement of any funders in the consultation process does not help to bridge that gap. However, the European Commission has not yet initiated the legislative process for possible regulation in this area, so further discussions can be expected.

As indicated, there is in fact already a form of litigation funding that is highly regulated – this applies, in particular, to ATE insurance products. Typically, ATE policies provide financial protection against the potential costs of legal disputes, allowing the risks of legal disputes to be mitigated. In contrast to litigation funders, who take a share of the successfully claimed amount as a fee, ATE policies generally provide for an insurance premium to be paid without the policyholder having to surrender a percentage of the successfully claimed amount. ATE insurance products are a particularly interesting tool to consider in jurisdictions such as Austria, where the party losing a lawsuit is required to reimburse the winning party's legal costs. In this context, it can serve as a risk management tool, enabling policyholders to pursue legal action with reduced financial exposure. A related insurance product, which is not yet widely known and used in the Austrian market, is judgment preservation insurance (JPI), which can, for example, help a party to protect and monetise court judgments and arbitral awards against the risk of subsequent reversal or annulment on appeal, or in other subsequent proceedings.

Class Actions

Fast-forwarding from widespread criticism (also discussed here in last year’s edition) of the procedural and economic shortcomings of the Austrian instruments of collective redress, Directive (EU) 2020/1828 has finally been adopted in 2024.

Austria's approach to class actions is centred around certain qualified entities, such as consumer protection organisations, filing collective claims against businesses. This law complements existing Austrian mechanisms for collective redress, especially Sammelklage österreichischer Prägung, a unique Austrian form of class action based on the aggregation of claims through assignment. Under the new law, a class action requires the involvement of at least 50 consumers affected by the same conduct. Austria has opted for an "opt-in" model, meaning that only those consumers who actively join the collective action are included.

Notably, third-party litigation funding is permitted under certain conditions, providing a new way of financing such collective actions. As seen in similar – mostly arbitration – rules, this third-party funding must be disclosed to the court. The implementation of this directive is seen as a significant advancement in consumer protection, offering a more efficient and cost-effective way to handle mass claims. However, its success will depend on the willingness of consumers to engage with the process and how well businesses adapt to the new legal landscape.