Polish Supreme Court judgment
dated 20 March 2015
Case No. II CSK 352/14
Summary by arbitraz.laszczuk.pl:
In 2009, R. sp. z o.o. and W. SA entered into a contract for R. sp. z o.o. to perform construction work on a wastewater treatment plant. The general conditions of the contract included a clause calling for arbitration before the Lewiatan Court of Arbitration according to its arbitration rules, but with two instances of arbitration, i.e. an appellate level of arbitration. However, the Lewiatan arbitration rules did not provide for cases with two instances of arbitration.
In 2011, W. SA filed a claim in arbitration against R. sp. z o.o. with the Lewiatan Court of Arbitration. R. sp. z o.o. objected to the jurisdiction of the arbitral tribunal. In the parties’ submissions, R. sp. z o.o. admitted that it saw no possibility of agreeing to supplement the arbitration clause to specify the procedure to be followed by the appellate arbitration panel, while W. SA took the view that the incomplete nature of the provision with respect to the procedure to be followed by the appellate panel rendered that aspect of the arbitration clause ineffective and the arbitration should be conducted at only one instance.
The arbitral tribunal issued a ruling upholding its jurisdiction. It held that the arbitration clause was defective because the tribunal was required to act in compliance with the arbitration rules, which did not provide for arbitration at two instances. That portion of the arbitration clause was avoided as incapable of performance and invalid, but the rest of the arbitration clause was maintained pursuant to a savings clause in the contract.
R. sp. z o.o. sought a ruling from the regional court on the jurisdiction of the arbitral tribunal. The court upheld the jurisdiction of the arbitral tribunal, holding that the arbitration clause was valid and enforceable notwithstanding the discrepancy between the clause and the arbitration rules with respect to an appellate instance of arbitration; pursuant to the arbitration law, the appellate arbitration panel should conduct the proceeding as it saw fit.
The arbitral tribunal of the first and only instance issued a “final” award in 2012 in favour of W. SA for over PLN 460,000. R. sp. z o.o. applied to the Lewiatan Court of Arbitration to supplement the award by specifying the rules of procedure for the appellate instance of arbitration. The tribunal denied the application as filed late and also stated that the award could be supplemented on the merits, not with respect to procedure.
R. sp. z o.o. applied to the regional court to set aside the award. The court held that the arbitration court’s failure to consider the case at two instances violated the fundamental procedures agreed by the parties. Because the parties had modified the arbitration rules, the arbitration court could either follow the modified procedure agreed by the parties or refuse to accept the case for consideration, which would result in lapse of the arbitration clause. If the parties could not agree on the specific procedures to be followed by the appellate arbitral tribunal, the tribunal should follow the procedure it sees fit. The court accordingly set aside the award in its entirety in 2013.
On appeal by W. SA, the Łódź Court of Appeal upheld the findings by the regional court and denied the appeal.
On cassation appeal by W. SA to the Supreme Court of Poland, the court also held that the failure to consider the case at two instances of arbitration violated the fundamental rules of procedure agreed by the parties. Their agreement was not impossible to carry out because of the parties’ failure to agree on specific procedures to be followed by the appellate arbitral tribunal. The Supreme Court found that the court of appeal erroneously held that the arbitral tribunal of the first instance should have determined the procedure to be followed by the arbitral tribunal of second instance, because, in line with the principles of arbitration law, absent agreement of the parties the appellate arbitral tribunal should follow the procedures it sees fit. However, this error in reasoning by the court of appeal did not affect the result in the case. The Supreme Court denied the cassation appeal accordingly.
Excerpts from the text of the court’s ruling:
1. Parties who have submitted a dispute to a permanent arbitration court for resolution in accordance with its rules may in provisions accompanying the arbitration clause or by later agreement modify the provisions of the rules. … Acceptance by the permanent arbitration court (or its authorities) of changes to the rules made by the parties is another issue. The arbitration court may consent to conduct the proceeding in compliance with the rules as modified by the parties, or not accept the changes. However, if it does not accept the changes, the permanent arbitration court can only refuse to accept the case for consideration (Civil Procedure Code Art. 1168 §2), but it cannot conduct the proceeding according to the rules in the version that does not reflect the changes made by the parties if they refuse to give up those changes. If the permanent arbitration court has accepted the case for consideration, then it is required to respect the intent of the parties as manifest in the changes they have made to the rules of the arbitration court.
2. The priority of the intent of the parties over the rules of the permanent arbitration court applies as well when the parties have agreed that the arbitration proceeding is to include two instances, while the rules provide that the proceeding has one instance.
3. If the parties agree that the proceeding before the arbitration court is to include more than one instance (Civil Procedure Code Art. 1205 §2), then the arbitration regulations of the Civil Procedure Code and the principles and rules resulting therefrom also apply to the appellate arbitral tribunal, including establishment of the rules and manner of proceeding before that tribunal and ruling by that tribunal.
4. The rule specified by the parties that the arbitration proceeding is to include the possibility of appealing against the arbitration award issued at the first instance undoubtedly falls within the group of fundamental rules for purposes of Civil Procedure Code Art. 1206 §1(4). Violation of that rule by resolving the dispute at only one instance is a violation that could affect the result in the case, because the appeal could result in a different resolution.
5. Under the circumstances of the case, there was a violation of Civil Procedure Code Art. 1206 §1(4) by considering the dispute and issuing an arbitration award at only one instance, contrary to the rule agreed by the parties of arbitration proceedings at two instances.