Gdańsk Appellate Court judgment
dated 14 July 1995
Case No. I ACr 424/95
Summary by arbitraż.laszczuk.pl:
The case involved a political dispute over privatization of public assets controlled by a local commune.
The commune owned a plant for production and use of construction aggregate, but held the land on which the plant was located in tenancy. In 1993, the commune council adopted a resolution calling for privatization of the plant through sale or lease, and authorized the board of the commune to conclude a privatization agreement.
In January 1994, the board entered into an agreement for finance leasing of the plant with an individual (also a member of the council of the commune) who intended to privatize the plant. Under the agreement, he would use the plant’s fixed assets and sublet the land for 9 years, in exchange for payment of the value of the plant in 35 quarterly instalments, after which the commune was to transfer ownership of the plant to him. The agreement provided that if it were terminated for reasons attributable to the commune, the commune would be required to refund 30% of the leasing instalments paid, plus pay reimbursement of investment expenditures by the lessee and a contractual penalty equal to 10% of the unpaid leasing instalments. The agreement also included a guarantee by the commune to the lessee that he could use the real estate under the same terms as held by the commune, for the duration of the agreement. The agreement included an arbitration clause.
In February 1994, the commune notified the lessee that it refused to perform the leasing agreement until further notice. It refused to deliver the property to the lessee. Then, in May 1994, the commune sold the plant to a company made up of employees of the publicly owned plant, including the owner of the land, who had refused to permit the commune to sublease the land to the lessee that intended to privatize the plant.
The lessee terminated the leasing agreement and in July 1994 obtained an arbitration award from a panel of arbitrators at the regional chamber of legal advisers for the compensation and penalties due under the leasing agreement.
The commune and the province prosecutor filed petitions with the province court to set aside the arbitration award on the grounds that the award violated public policy, because it was based on an agreement that was invalid because it was unlawful, illusory, collusive, intended to circumvent the law, and contrary to public policy. In the alternative, the prosecutor sought to reduce the amount of the award.
The province court held that the award violated public policy because it was based on an unlawful, invalid, illusory agreement, among others reasons because the parties knew that it could not be performed because the owner of the land would object to subletting the land, and, the court found, the leasing agreement was concluded only in order to trigger the obligation by the commune to pay the compensation and penalties to the lessee. The province court set aside the award accordingly.
On review, the Gdańsk Appellate Court pointed out, with respect to the concept of public policy, that the changeover in the system after the fall of communism sought to increase the freedom of contract, to cease privileging the general interest above the individual interest, and to allow local governments to administer their assets as they see fit.
The court went on to hold that there were no grounds for finding that the leasing agreement was invalid, and thus that the arbitration award based on the agreement violated public policy. More specifically, the court held that it was permissible for the commune to enter into a leasing agreement for the plant when it held only a tenancy of the land. The agreement was not illusory due to impossibility of performance. The owner of the land could consent to the sublease by the commune, and in the leasing agreement the parties agreed that the risk of refusal to consent to the sublease would be borne by the commune. After entering into the leasing agreement, the commune changed its mind on who should privatize the plant, and was consequently required to pay compensation to the lessee under the leasing agreement, but the leasing agreement itself was not collusive.
The court held that the alternative demand to reduce the amount of the arbitration award could not be considered, because the review of an arbitration award by the state court is strictly in the nature of cassation; that is, the state court may set aside the award but may not reform it.
The appellate court amended the judgment below to dismiss the petitions to set aside the award.
Excerpts from the text of the court’s ruling:
1. An essential difference in comparison with the procedure before the state court is that the arbitration court is not bound either by civil procedure regulations (Civil Procedure Code Art. 705) or by provisions of substantive civil law. While it is true in the latter case that there is no express provision to this effect, a conclusion of this kind follows clearly from an analysis of Civil Procedure Code Art. 711 §3 and Art. 712 §1(4), which provide that violation of the rule of law or principles of social coexistence is the only criterion for assessment of the correctness of an arbitration award.
2. Under Civil Procedure Code Art. 712 §1(4), assertion of the objection that an arbitration award violates specific provisions of substantive law may be effective only insofar as the violation of specific norms also violates the principles of the rule of law in the state of Poland, which requires a demonstration firstly that the substantive law was violated, and moreover that the violations are so numerous that it conflicts with the very rule of the prevailing legal order as seen from the perspective of systemic, political and socio-economic principles.