Warsaw Court of Appeal judgment
dated 15 December 2014
Case No. VI ACa 311/14
Summary by arbitraz.laszczuk.pl:
In 2005 a limited-liability company entered into a framework agreement with a bank concerning future contracts for purchase and sale of certain “zero-cost” currency hedging instruments. The framework agreement included a clause calling for arbitration before the Court of Arbitration at the Polish Bank Association.
The arbitration rules in force when the arbitration clause was concluded in 2005 provided that the parties could select arbitrators from a non-binding list of arbitrators maintained by the arbitration court. The party-appointed arbitrators would then appoint a presiding arbitrator from the list of arbitrators. The arbitrators on the list were nominated by member banks of the Polish Bank Association. The bank involved in this case was a member of the association. In 2006, the existing arbitration rules were superseded by a new set of rules, which in this respect contained essentially the same provisions for appointment of arbitrators.
Pursuant to the framework agreement, individual contracts were concluded for the purchase and sale of currency hedging instruments until February 2009, when the company gave notice that it was cancelling the framework agreement upon one month’s notice. Then, in June 2009, the company gave notice that it repudiated the contracts for purchase and sale of the hedging instruments, on grounds of mistake and irregularities in conclusion of the contracts. The bank maintained the validity of the contracts. It closed out the client’s position in July 2009 with a final balance under which the company allegedly owed the bank over PLN 24 million.
The company commenced arbitration against the bank in March 2010, seeking invalidation of the hedging contracts and disgorgement of nearly PLN 14 million in alleged unjust enrichment obtained by the bank under the contracts. The bank counterclaimed for payment of the balance allegedly due of over PLN 24 million.
It was undisputed that until October 2010, the arbitration was conducted under the wrong set of rules, i.e. the rules from 2006 rather than the rules in force when the arbitration clause was concluded. Thereafter the correct set of rules were followed.
In an award issued in June 2011, the arbitral tribunal denied the company’s claim in its entirety and granted the bank’s counterclaim, but stated in the justification for the award that it had not considered the claim for invalidation of the hedging contracts because it regarded this as a separate claim which required payment of a separate arbitration fee, which had not been paid.
The claimant filed a petition with the Warsaw Regional Court to set aside the award on grounds including violation of public policy and that the arbitration clause had lapsed when the existing arbitration rules were replaced with a new set of rules. The regional court set aside the award in the part concerning the claim for invalidation of the hedging contracts, finding that the award in this respect violated public policy because the reasoning in the justification was inconsistent with the wording of the award. The arbitral tribunal could not rule on the merits of the invalidation claim, as it formally did, while at the same time maintaining that it did not consider the merits of that claim; this could also cause confusion for purposes of res judicata and prevent the claimant from asserting that claim in separate proceedings. The court rejected the claim that the arbitration clause had lapsed, as it was precluded because the claimant did not assert it promptly before the arbitration court in compliance with the Civil Procedure Code, but only in the petition to set aside the award, and furthermore was obviously groundless because under the Civil Procedure Code, unless otherwise provided by the parties the arbitration is governed by the rules in force at the time the arbitration clause was concluded, even if (as here) those rules are subsequently repealed.
The claimant also sought to set aside the award on the grounds that the wrong arbitration rules had been used during part of the proceeding and that it was denied equal treatment because the other party, as a member of the Polish Bank Association, had an indirect role in creation of the list of arbitrators from which the presiding arbitrator was chosen. The regional court found that the use of the wrong rules had no effect on the result of the case. The rules concerning appointment of arbitrators were essentially unchanged; the claimant successfully appointed an arbitrator of its choosing, and could not demonstrate any actual prejudice in the selection of the presiding arbitrator from the list. Furthermore, as a professional business the claimant should have been aware of the rules of the arbitration court and the procedures for appointment of arbitrators in force at that time, and could have negotiated this issue at the time.
The company appealed to the Warsaw Court of Appeal, which held that an arbitration award could be set aside in part only if the two parts were separable, and here the two parts were intertwined because upholding the bank’s claims assumed the validity of the hedging contracts under which the claims arose. Moreover, because the court is limited to the relief sought in the petition to set aside an arbitration award, it cannot set aside the award in part if the petitioner seeks only to set aside the award in its entirety.
Furthermore, the court of appeal found that the award violated public policy because the parties had fully litigated the issue of the validity of the hedging contracts, but were not notified until the award that this was regarded as a separate claim that had to be paid for separately. This deprived the claimant of the ability to pursue and defend its rights.
The court of appeal amended the judgment of the regional court accordingly to set aside the arbitration award in its entirety.
Excerpts from the text of the court’s ruling:
1. It is permissible to seek to set aside an arbitration award in part, if the challenged resolution can be separated from the remaining part of the award.
2. In a proceeding to set aside an arbitration award, the court cannot set aside the award in part if the petitioner applied to set aside the award in its entirety and there are grounds to grant the petition. This is because a demand to set aside an arbitration award in part is not a lesser included demand in a demand to set aside the award in its entirety; it is a different type of demand. Moreover, if the particular parts of the award interlock so that none of the parts can be separated from the other parts without materially deforming the entirety, it is impermissible to set aside the award in part.
3. Informing a party only in the justification of the award that (despite denying the claim in its entirety) one of the party’s demands was not considered because the fee for that claim was not paid, when that demand was the subject of examination during the evidentiary proceeding and was the subject of the response to the statement of claim and pleadings by both parties, while at the same time granting the demands of the opposing party in their entirety, which resolution was dependent on the resolution of the plaintiff’s demands, indicates that the arbitration award is contrary to the public policy clause, depriving the party of the ability to exercise the rights provided by regulations of substantive law and also indirectly depriving the party of a defence against the counterclaims of the opposing party. This method of proceeding before the arbitration court violates the party’s right to a fair and honest trial.
4. Resolving the respondent’s demands in their entirety before resolving the claimant’s complete demand, regardless of whether or not the party could apply for supplementation of the award, is also contrary to fundamental principles of the legal order, including violation of the principle of equal treatment of the parties. Moreover, the arbitration court would already be bound by the award issued by it in the part concerning the counterclaim, and thus it could not issue a ruling with different substantive legal consequences. Undoubtedly the principles of a fair trial require that the party be informed prior to issuance of an award of the possible taking of a procedural decision as to one of the party’s claims, regardless of whether the claimant’s claim is deemed to be an alternative claim (as it was worded, in the event that the main claim is not upheld) or as a separate procedural claim in an accumulation of claims.
5. The defence of the ineffectiveness of an arbitration clause may be asserted not only by the respondent, but also by the claimant. However, it is indicated in the legal literature that in such case, the claimant, as the party initiating the proceeding before the arbitration court, should make a thorough analysis of the factual and legal state of the case, including issues connected with the grounds for commencement of the proceeding before the arbitration court, and if it concludes that the clause is ineffective, it should file the case with the state court, which upon the objection of the respondent will resolve the issue of the effectiveness of the clause. As indicated in the literature, asserting the ineffectiveness of the clause only at this stage violates the principle of due diligence which a professional participant in commercial dealings is required to comply with.
6. An arbitration clause may cease to be in force in the instances set forth in Civil Procedure Code Art. 1168 and 1195 §4 or in the bankruptcy law, or in the occurrence of certain substantive legal events (e.g. repudiation of the legal consequences of a declaration of will), including those indicated by the parties as the reasons for the clause ceasing to be in force. The mere change in the rules of the arbitration court does not result in loss of force of the clause, either under the regulations currently in force or in accordance with the regulations in force on the date of conclusion of the clause.
7. The mere fact that one of the parties to the arbitration participated in creation of the list of arbitrators by nominating candidates for arbitrators from among persons who are authorities in the given field does not mean that there is dependency between the arbitrator and the party or that the party has greater rights. Despite the indirect influence of the banks over a portion of some panels of arbitrators, the rules of the Court of Arbitration at [the Polish Bank Association] ensure the impartially of the arbitration court and do not violate the principle of the equality of the parties in the arbitration proceeding. Because there are numerous arbitrators [on the list], and the party does not know which of them will hear the case and does not select a specific person as presiding arbitrator, it cannot be found that the party had greater rights than its opponent.
8. A petition to set aside an arbitration award may concern issues of the procedure followed only if fundamental principles of procedure before the arbitration court, arising out of a statute or specified by the parties, were not complied with (Civil Procedure Code Art. 1206 §1(4)). In essence this has to do with failure to comply with fundamental principles of civil procedure, but it was not demonstrated that the arbitration court failed to comply with such principles.