Polish Supreme Court judgment
dated 11 October 2013
Case No. I CSK 769/12
Summary by arbitraz.laszczuk.pl:
In November 2002, State Enterprise P. entered into a FIDIC construction contract, as the Employer, with a consortium of contractors, including the Polish company B. SA and branches of two foreign companies, the joint-stock company F. (known in Poland as F. SA Branch in Poland) and the limited-liability company E. (subsequently becoming a professional partnership, known in Poland as E. SLP PP Branch in Poland), as the Contractor. The contract included a clause calling for arbitration before the Court of Arbitration at the Polish Chamber of Commerce. It was signed for each of the foreign contractors by the person appointed and entered in the National Court Register to represent the foreign company at the branch. At the same time, the consortium members entered into a joint-venture agreement governing the relations among them.
Pursuant to FIDIC clause 4.2, the consortium provided performance security in the form of a bank guarantee. In 2007, the Employer drew on the bank guarantee, without specifying the grounds or notifying the Contractor under FIDIC clause 2.5, and retained PLN 41 million.
The consortium members commenced arbitration against the Employer seeking an award jointly in the amount of over PLN 54 million for the Employer’s unjustified drawing of the bank guarantee. The Employer counterclaimed for damages allegedly resulting from improper or late performance of the contract. In 2009 the arbitral tribunal issued a partial award granting the claimants’ claim in full on the grounds that the Employer had not complied with the contractual conditions for drawing on the bank guarantee. The arbitration continued on the other issues, particularly the Employer’s counterclaims.
The Employer filed a petition to set aside the partial award. In 2010, the regional court dismissed the proceedings against the two branches of foreign enterprises, holding that as branches they did not have legal capacity to be sue or be sued, and consequently also dismissed the petition to set aside the award as against them, but in the case against the Polish contractor set aside the partial arbitration award in its entirety.
Pursuant to an interlocutory appeal by the foreign branches, the court of appeal issued an order in 2011 setting aside the order of the regional court dismissing the proceedings with respect to the foreign branches, holding that the parties to the proceedings were the foreign enterprises as such, acting through their Polish branches. On remand from that appeal, the regional court issued a judgment in 2012 setting aside the partial award also with respect to the two branches of foreign enterprises.
The Polish contractor filed an appeal against the 2010 judgment setting aside the award as against it, and the foreign branches filed an appeal against the 2012 judgment setting aside the award as against them. In a judgment issued in 2012, the court of appeal amended the judgments of the regional court and denied the petition to set aside the partial arbitration award.
The Employer filed a cassation appeal with the Supreme Court of Poland. Among other grounds, the Employer alleged that the partial award violated public policy because it was rendered in favour of two claimants, the Polish branches of foreign enterprises, which lack legal capacity; it was incapable of being performed, as the award was made in favour of the consortium members jointly without specifying which claimant should be paid what; one of the claimants in whose favour the award was issued, E. SLP, allegedly had not suffered any injury; the notion of joint creditors underpinning the award was not recognized under Polish law; and the arbitral tribunal violated the rules of the Court of Arbitration at the Polish Chamber of Commerce by ruling on the return of the bank guarantee before ruling on the Employer’s counterclaims for breach of the construction contract.
The Supreme Court held that the foreign enterprises, acting through their Polish branches, were the parties to the arbitration agreement, duly represented by their registered representatives at the branches, with legal capacity. The partial award did not violate public policy because all of the claimants were parties to the bank guarantee and their economic interests were all affected by the alleged improper drawing of the guarantee. The partial award did not violate public policy in the manner in which the sum demanded for return of the improperly used bank guarantee was awarded jointly to the three claimants, because it was not inconsistent with the Civil Code provisions on joint creditors. The arbitral tribunal court did not violate the arbitration rules by issuing a partial award because the issue of the validity of the Employer’s drawing the bank guarantee was distinct from the issues of breach of contract raised in the counterclaims.
The Supreme Court denied the cassation appeal accordingly.
Excerpts from the text of the court’s ruling:
1. Participation in a judicial proceeding by entities lacking judicial capacity would result in the invalidity of the proceeding, while issuance of an arbitration award with respect to such entities would be regarded as a violation of the fundamental principles of the legal order of the Republic of Poland, because it would violate one of the fundamental procedural rules that only a party vested with judicial capacity can be a party to proceedings. Moreover, such an award would also violate the fundamental principle of civil law that only entities vested with legal capacity can be the subject of civil-law rights and obligations.
2. If a party raises the objection that the arbitration court lacks jurisdiction or the objection that a demand asserted by the opposing party exceeds the bounds of the arbitration clause (Civil Procedure Code Art. 1180 §2), and the arbitration court deems these objections unfounded, the arbitration court may issue an award, stating therein that it deemed the objections raised to be unfounded, or overrule the objections in a separate order. In the first instance, the correctness of the position of the arbitration court on the objection raised by the party may be reviewed in a petition to set aside the arbitration award. However, if the arbitration court issues an order overruling the objection, review of the correctness of this position by the state court may occur only under the procedure provided for in Civil Procedure Code Art. 1180 §3, i.e. by the party who raised the objection applying to the state court for a ruling within two weeks after service of the order on the party. The party’s failure to initiate such procedure for review of the order issued by the arbitration court deprives the party of the possibility of effectively basing a petition to set aside the arbitration award on the same objections constituting grounds for a petition to set aside an arbitration award under Civil Procedure Code Art. 1206 §1 (1) and (3).
3. The arbitration court’s violation of regulations of law, even regulations that are mandatorily applicable, does not necessarily mean violation of fundamental principles of the legal order, even if the arbitration court resolves the dispute according to the law governing the given relationship, when under Civil Procedure Code Art. 1194 §1 the parties did not authorize it to decide on the basis of general principles of law or equity.
4. The intervention by the arbitration court with respect to the demand presented concerned … the method of fulfilment of the performance demanded. In procedural law there are no more specific rules of a fundamental nature referring to ruling on the manner of fulfilling the performance demanded in the statement of claim by several persons. The case law permits a certain intervention by the court here, e.g. awarding the demanded amount in solidum instead of jointly and severally, and vice versa. … From the point of view of the principle that it is up to the parties to frame their demands [dyspozytywność] it is essential that the identity of the subject of the demand be maintained, and the scope and factual grounds justifying upholding the demand. With respect to the demand that was asserted, the arbitration award maintained the identity of the debtor and the creditor, the type of relief, its amount and indivisibility, and also the factual grounds justifying granting the relief.
5. The essence of this agreement [a consortium] is at least similar to the agreement of an ordinary partnership [spółka cywilna], and sometimes contains the essential elements thereof, which justifies application of the regulations governing ordinary partnerships as relevant to the relations between members of the consortium, including the regulations concerning joint commonality [wspólność łączna]. … It does not violate the public policy clause for the arbitration court to award damages to three entities “jointly” despite the lack of a legal relationship among these entities creating joint commonality among them.
6. The arbitration court’s ruling on the basis of the regulations of applicable law, if the parties do not provide otherwise (Civil Procedure Code Art. 1194 §1), is one of the fundamental principles of procedure before the arbitration court. Therefore violation of this principle by the arbitration court may be asserted as an allegation of violation of Civil Procedure Code Art. 1206 §1(4). Under this allegation, however, the state court cannot be expected to review the substantive correctness of the award issued by the arbitration court.
7. The position that suffering injury as a result of non-performance or improper performance of an obligation arising out of a contract does not justify wilful satisfaction of the claim for damages out of the established security, contrary to the conditions agreed with the counterparty, does not violate fundamental principles of the legal order, i.e. the principles of the rule of law (Constitution Art. 2), protection of property rights and equality of counterparties cooperating with one another (Constitution Art. 20), economic liberty (Constitution Art. 22), and equality before the law (Constitution Art. 32(2)).