Katowice Court of Appeal order
dated 12 December 2012
Case No. V ACz 914/12
Summary by arbitraz.laszczuk.pl:
A Polish company ordered goods from a foreign company (apparently from Belarus). The contract had a clause requiring the parties to attempt to resolve any disputes by negotiations, and if negotiations failed disputes would be resolved by arbitration before the International Arbitration Court at the Belarusian Chamber of Commerce and Industry. An annex to the contract provided that in the case of late payment, a “fine” would be charged equal to 0.5% of the value of the goods for each day of delay.
The seller obtained an arbitration award against the buyer for over EUR 23,000 and applied to the Katowice Regional Court for enforcement of the award. On reconsideration, the court found that the applicant had submitted all the required documents, the respondent had been notified of the course of the arbitration, and there were no grounds for refusing enforcement. More specifically, the award of a “fine” for late payment did not violate Polish public policy because Polish law provides for a comparable institution in the form of a contractual penalty for breach of contractual obligations. The regional court issued an enforcement clause for the award accordingly.
On interlocutory appeal to the Katowice Court of Appeal, the Polish company alleged that it had not been properly informed of the arbitration and thus had been deprived of the ability to defend its rights. The arbitration clause was ineffective because the parties had not exhausted negotiations prior to commencement of the arbitration. The award also violated Polish public policy because it granted a claim for a “fine” for late payment which is not recognized in Polish law, in an amount that was grossly excessive.
The court found that the company had been properly notified of the arbitration because there was acknowledgement of receipt of the papers by the company’s responsible secretary.
Concerning negotiations as an apparent prerequisite for the effectiveness of the arbitration clause, the court pointed out that the parties had not specified any particular procedure for such negotiations. They had exchanged correspondence in which the Polish company asked for an extension of the payment terms, which the other company refused to grant. The court found that this exhausted the negotiation requirement, and moreover the objection that the arbitration clause was ineffective for this reason was precluded because the respondent had failed to assert it before the arbitration court. In response to the request for arbitration, the respondent did not object to the jurisdiction of the arbitration court but only objected to the arbitrator and deputy arbitrator nominated by the claimant and requested that the arbitration court appoint different arbitrators, which it did. Thus the objection that the arbitration agreement was ineffective was precluded under Art. V of the European Convention on International Commercial Arbitration of 1961, which Poland and Belarus were both parties to.
Concerning the alleged violation of Polish public policy by award of a “fine” for delay in payment, in an excessive amount, the court found that this sanction was the direct equivalent of interest on delay in performance of a monetary obligation, which was provided for in the law of Poland (which under the relevant conventions was applicable to the contract as the place where the contract was made). The question then was whether the amount of interest was excessive, and if so, whether that meant that the award could not be enforced under the New York Convention because it violated public policy in the country where enforcement was sought (Poland). The court found that under the Polish law at the time, a contract charging interest above the legal maximum violated “principles of social coexistence” rather than “public policy.” If a contract provided for payment of interest greater than the legal maximum, the contract itself was not invalid but the claim for interest was capped at the legal maximum. The court ultimately found that the regulation imposing a legal maximum rate of interest was mandatorily applicable, but it did not rise to the level of a fundamental element of the legal order. Consequently, the award did not violate public policy simply because the amount of interest awarded was allegedly too high.
The court of appeal denied the interlocutory appeal accordingly.
Excerpts from the text of the court’s ruling:
1. The ineffectiveness of an arbitration clause results from events arising after the clause is made which nonetheless do not affect its validity. It must be stressed in this respect that the arbitration clause itself is treated as an act of a dual nature, that is, of both substantive and procedural law. This leads to the conclusion that when making an arbitration clause, the parties can condition its effectiveness, as with any other contract, on the passage of a certain time or fulfilment of a certain suspensory condition. The Convention on the Recognition and Enforcement of [Foreign] Arbitral Awards, in particular Art. II, does not provide for limitations in this respect. On the contrary, Art. II(2) indicates a broad interpretation of the concept of “agreement in writing under which the parties undertake to submit to arbitration all or any differences”, which justifies the conclusion that this wording is not infringed by introduction into the agreement of regulations prior to the arbitration proceeding.
2. The essence of the New York Convention is the requirement for the parties to proceed in accordance with good faith and fair practice, and thus a prohibition against acting contrary to these principles. This interpretation stands in the way of actions disloyal to the other participants and the arbitration court, and deprives of justification objections by a party to the proceeding of the non-existence or invalidity of the arbitration clause in a proceeding for recognition or enforcement of an arbitration award in Poland, even though preclusion of such an objection is not expressly provided for in the regulations of the convention, if the party joined issue on the merits of the dispute before the arbitration court without asserting the court’s lack of jurisdiction.