Poznań Regional Court judgment
dated 25 May 2011
Case No. IX GC 704/10
Summary by arbitraż.laszczuk.pl:
Under a 1996 exclusivity agreement, a Polish distillery (spun off from the Polmos spirits monopoly) which held export rights to one of the Polmos brands of vodka gave exclusive rights to an American alcohol distributor to import and distribute the brand on the US market and in duty-free outlets.
In 1999, the Polish Treasury auctioned off the Polmos vodka brands among the different spun-off Polmos distilleries. The brand in question here was awarded to a different distillery, and the exporter under the exclusivity agreement assigned its export rights to this brand to the company that won the rights to the brand.
Under the exclusivity agreement, the former exporter was required to assure that the new owner of the brand assumed its rights and obligations under the exclusivity agreement with the US distributor. Otherwise, the US distributor would have a right to terminate the exclusivity agreement prematurely, for reasons attributable to the former exporter, and obtain reimbursement of its marketing expenditures on the brand over the past 5 years.
The new holder of the export rights continued to supply the American distributor but refused to assume the former exporter’s rights and obligations under the exclusivity agreement (a dispute that was the subject of separate arbitration proceedings which were subsequently ruled on by the Poznań Appellate Court and the Supreme Court of Poland).
According to the former exporter, when it became clear that the US distributor had grounds for termination of the agreement, even though the new holder of the export rights continued in fact to supply it with the vodka, the US distributor should have terminated the agreement immediately. Instead, it waited until the last possible moment, expecting that in the meantime it could continue to invest in marketing the brand and then recover such expenditures from the former exporter, even though it was no longer supplying the US distributor with the vodka. The US distributor claimed that it was withholding termination pending the outcome of the dispute over the new holder’s assumption of the former exporter’s rights and obligations under the exclusivity agreement. In any event, the US distributor finally terminated the agreement shortly before the end of its stated term.
Pursuant to an arbitration clause in the agreement, the US distributor then filed a claim with the Court of Arbitration at the Polish Chamber of Commerce against the former exporter for reimbursement of its marketing expenditures on the brand, in the amount of over PLN 16 million. (The new holder of the rights to the brand was an intervenor in the case.) The arbitration court issued an award denying the claim on equitable grounds, specifically estoppel (referred to in Polish literature through the Latin concept venire contra factum proprium) and the clean-hands doctrine, finding that the claimant intended to terminate the exclusivity agreement and had the grounds to do but unjustly delayed the termination in order to increase the amount of marketing expenditures to be reimbursed by the defendant. According to the arbitration court, through such behaviour the claimant itself generated the losses it claimed from the defendant in the form of marketing expenditures, while the defendant did not profit from the claimant’s marketing and distribution of the vodka. The claimant’s behaviour thus violated principles of fair dealing set forth in the Polish Civil Code.
The claimant filed a petition with the Poznań Regional Court to set aside the award on the grounds that it violated public policy, particularly the principles of the market economy, economic freedom, freedom of contract, and enforceability of contracts. The court found that the objections to the award were essentially disagreements with the factual findings by the arbitration court and the legal conclusions it drew from those facts. The fact that the parties had entered into a valid contract which called for the defendant to reimburse the claimant’s marketing expenditures under certain circumstances did not mean the claimant had an absolute right to demand reimbursement under circumstances in which, as the arbitration court held, to do so would itself violate fundamental principles of Polish contract law, such as fair dealing. An award based on fundamental principles of public policy, properly understood, could not violate such principles at the same time. The court denied the petition to set aside the award accordingly.
Excerpts from the text of the court’s ruling:
1. A petition to set aside an arbitration award is an extraordinary means of review of arbitration rulings by the state court. It is not an appeal, but combines the features of an extraordinary means of challenge with a claim to establish a right or legal relationship. But it cannot be agreed that it is a type of appeal or means of challenge.
2. The list of grounds for a petition to set aside an arbitration award provided in Civil Procedure Code Art. 1206 §§ 1 and 2 are exhaustive in nature; that is, the court may not set aside an arbitration award for reasons other than those set forth in this provision. It should nonetheless be pointed out that one of the grounds for the petition—the public policy clause—is in the nature of a general clause, which means that the list of circumstances which may justify setting aside an award is not closed.
3. Not every violation of the rules for procedure before the arbitration court established by the parties or arising under the code should result in setting aside an arbitration award. It is justified to accept by way of interpretation that the fundamental rules of procedure are those whose violation could have an effect on the result in the proceeding before the arbitration court in the specific case.
4. With respect to review of arbitration awards, the purpose of the public policy clause is to protect the national legal system against resolutions that are incompatible with the system. The resolution by the arbitration court, understood as an individual and concrete norm expressed in the arbitration award, as well as the method by which it was issued, is subject to assessment from the point of view of compatibility with the fundamental principles of the legal system.
5. The state court does not review the correctness of the arbitrators’ resolution, but it must examine and assess it in order to review the compatibility of the resolution with public policy. In other words, the state court should—at least insofar as the allegation of incompatibility [with public policy] arises—create a model of the ruling which in its opinion is correct, and then compare that to the arbitrators’ resolution, in order to determine whether the nature and scale of the inconsistency justifies the allegation of violation of public policy.
6. A gross and obvious discrepancy between the facts appearing from the arbitration case file (or facts that are commonly known or known to the state court in its official capacity) and the facts assumed as the basis for the award may not remain entirely beyond the scope of interest of the state court.
7. In the meaning of consistency with the fundamental principles of the legal system of the Republic of Poland, the point of the Parliament was not that a ruling be consistent with all regulations of Polish law, but only that there be consistency with the fundamental principles of the legal system of the Republic of Poland.
8. The principle of the enforceability of contracts belongs to the group of fundamental principles of the Polish legal system. It is not absolute in nature, however, and is subject to a number of statutory exceptions. One of them is Civil Code Art. 5, setting forth the notion of abuse of a subjective right.
9. The principle of estoppel (venire contra factum proprium) and the clean-hands doctrine are not counted among the fundamental principles of arbitration court procedure and are not recognized as a part of the legal system of the Republic of Poland.
10. The rule of impartiality leads the arbitrators to maintain an impartial attitude toward the case and the participants in the proceeding. In turn, the formal equality of the parties is manifest in the right to be heard and equal procedural measures. The principle of equality in the proceeding before the arbitration court has two aspects: hearing out the parties by the arbitration court, and the opportunity to present their allegations and evidence to support them (the opportunity to use the same procedural measures). The principle of directness requires that evidence be taken before the full panel of the arbitration court.
11. If no injury was caused, awarding damages should be regarded as inconsistent with the fundamental principles of the legal system of the Republic of Poland.