Szczecin Court of Appeal judgment
Dated 21 March 2013
Case No. I ACa 855/12
Summary by arbitraz.laszczuk.pl:
A Polish bank filed a claim against its customer, PPHU D. sp. z o.o., before the Court of Arbitration at the Polish Bank Association for over PLN 6.5 million allegedly due under a EUR/PLN hedging transaction (offsetting call and put options) negotiated by telephone and email in 2008 on the basis of a framework agreement, incorporating standards terms and conditions, entered into in 2007. During the telephone call, a transcript of which was submitted in the arbitration, and a related email, the parties agreed on the amounts, exchange rates, exercise dates and settlement terms of “zero-cost” options, but failed to specify a fee (called a premium) for the options. The arbitral tribunal held that pursuant to the standard terms and conditions, determination of the premium was a necessary condition for formation of each individual option contract, and because the parties had not established the premium in this transaction the terms were incomplete and there was no contract. The contract could not be ratified by the parties’ subsequent behaviour because the contract was non-existent. The arbitral tribunal issued an award accordingly denying the bank’s claim in its entirety.
The bank applied to the Szczecin Regional Court to set aside the award. On the substance of the award, the bank alleged that it violated public policy, specifically fundamental principles of contract interpretation, in that the tribunal had found that a premium had to be established for the zero-cost options in question, when, according to the bank, it is the nature of zero-cost options that they do not involve a premium.
The regional court found that the arbitral tribunal had thoroughly analyzed the parties’ contractual dealings in arriving at its interpretation that determination of the premium was a necessary element of a zero-cost option contract between the parties. Indeed, the bank’s own terms and conditions for currency options contracts specified that the parties should agree on the premium for each transaction. The fact that the arbitral tribunal reached a conclusion which the bank did not agree with did not result in the award violating fundamental legal principles.
On procedural grounds, the bank asserted for the first time that the presiding arbitrator, Prof. W.P., should have been disqualified because of an undisclosed conflict of interest. Two of the members of his law firm, advocate B.U. and legal adviser J.R., were representing another client in a lawsuit against the same bank. Consequently, the award should be set aside because it violated the bank’s constitutional right to a fair trial or, in the alternative, violated the requirements for the composition of the panel and fundamental rules of procedure before the arbitration court.
The regional court found that the presiding arbitrator had conducted an adequate conflict search within his law firm, which had 11 partners and 10 other qualified lawyers, but had failed to discover the conflict, which fell within the “Orange List” of potentially disqualifying conflicts under point 3.4.1 of the IBA Guidelines on Conflicts of Interest in International Arbitration (which the parties agreed should be followed in this case). The bank asserted that the presiding arbitrator should have notified the parties of the conflict, a position which the regional court rejected based on its finding that the presiding arbitrator was not aware of the conflict. The bank was aware of the conflict, however, and had failed to assert it within 7 days of learning of the conflict as required in the arbitration rules of the Court of Arbitration at the Polish Bank Association, and indeed failed to assert it at all before the arbitration court, which could then have ruled on the matter. Instead, the bank held back this knowledge for use in the proceeding to set aside the award. Therefore, the bank had waived any objection to the composition of the arbitral tribunal. This alleged conflict of interest could not be asserted for the first time in the proceeding to set aside the award.
Consequently, the Szczecin Regional Court denied the petition to set aside the award.
The Szczecin Court of Appeal upheld the factual and legal findings of the regional court and denied the appeal accordingly.
Excerpts from the text of the court’s ruling:
1. Even though (if the parties did not agree otherwise) the arbitral tribunal shall resolve a dispute applying the regulations of substantive law applicable to the legal relationship, violation of substantive law by the arbitral tribunal is grounds for a petition to set aside the award only if as a result of the violation, the award is contrary to fundamental principles of the legal order of the Republic of Poland. In other words, if despite a violation of substantive law the award cannot be said to be contrary to fundamental principles of the legal order, the mere violation cannot constitute an effective basis for demanding that the award be set aside.
2. The construction of a petition to set aside an arbitration award indicates that this measure is not used to conduct substantive review by the state court of the correctness of the resolution by the arbitral tribunal, similar to appellate review in judicial proceedings.
3. An award is contrary to fundamental principles of the legal order when this concerns constitutional principles of the socio-economic system or leading principles governing specific fields of substantive law. The fundamental principles of the legal order constituting the basis for evaluation of an arbitration award should be understood not only as constitutional norms, but also the leading norms in specific fields of law. … The procedural legal order may be the basis for evaluation of an arbitration award in two aspects. First, the compliance of the procedure which led to issuance of the arbitration award with fundamental procedural principles of the legal order is subject to evaluation. Second, the consequences of the arbitration award from the point of view of their compliance with the procedural public order are subject to evaluation, i.e., whether they are reconcilable with the system of procedural law, e.g. whether they violate res judicata or the rights of third parties.
4. A party forfeits the right to challenge an arbitration award through a petition to set aside the award due to failure to raise objections to an arbitrator subject, in the party’s view, to removal, if the party did not demand removal in the proceeding before the arbitral tribunal.
5. The requirements established for persons serving as arbitrator should be combined with the entitlement of a party to the proceeding to obtain knowledge about any potential ties between the arbitrator and the entities appearing in the proceeding. Generally it is left to the party to evaluate whether the circumstances constitute grounds for a decision whether to select an arbitrator or a decision to challenge the arbitrator. In this sense, the arbitrator’s own assessment is irrelevant, as the essence of the fairness of the procedure is connected with external evaluations made by others.
6. Indeed, the right to a fair trial provided in Art. 45(1) of the Polish Constitution, an element of which is consideration of the case by an independent court in a fairly conducted proceeding, does fall within the fundamental principles of the legal order whose violation the state court must examine at its own initiative. However, it is indicated in the case law and the legal literature that Art. 45 of the Constitution does not apply at all to arbitration, only the state courts.
7. The institution of recusal of a judge is provided for by the Civil Procedure Code both in proceedings before the state court and in proceedings before an arbitration court. The fundamental difference in the regulation of this institution is that in a proceeding before an arbitration court, the code does not provide for removal of the arbitrator or presiding arbitrator by operation of law, as is the case with respect to a judge in proceedings before the state court (Civil Procedure Code Art. 48). The grounds for challenging an arbitrator indicated in Civil Procedure Code Art. 1174 §2 are circumstances raising justified doubts as to his impartiality or independence, as well as lack of qualifications specified in the parties’ agreement. The grounds for recusal of a judge listed in Art. 48 and 49 do not apply to challenge of an arbitrator, but in interpreting the concept of circumstances raising justified doubts as to impartiality or independence Art. 48 and 49 may have auxiliary application. In a proceeding before a state court, under Civil Procedure Code Art. 379(4), participation by a judge recused by operation of law becomes grounds for the invalidity of the proceeding and constitutes grounds to vacate the judgment by the appellate court, as well as by the Supreme Court, and this ground shall be considered by both of these courts at their own initiative (Civil Procedure Code Art. 378 §2 and 39311). … The Civil Procedure Code does not provide for such absolute invalidity in proceedings before an arbitration court. If a party did not challenge an arbitrator or presiding arbitrator despite possessing knowledge of the grounds for challenge, there are no legal grounds to challenge the arbitration award. As an exception only, participation in an arbitration panel by an arbitrator or presiding arbitrator whose rights and obligations could be affected by the result in the case could constitute grounds for setting aside the award, which did not occur in this case. This is because violation of the principle that no one can be a judge in his own case (nemo in re sua judex) would undoubtedly conflict with the fundamental principles of the legal order of the Republic of Poland.