Polish Supreme Court judgment
dated 20 January 2016
Case No. IV CSK 282/15
Summary by arbitraz.laszczuk.pl:
In December 2006, W. sp. z o.o. (seller) and A. sp. z o.o. (buyer) entered into a sale contract for a complex of commercial buildings and a related property management contract where W. sp. z o.o. as the manager agreed to manage the same property for A. sp. z o.o. as the property owner.
The sale price was EUR 16,446,000. In the sale contract, the seller warranted that the property would generate annual rental income of at least EUR 1,300,000 for the first four years. As security for this warranty, the buyer retained EUR 488,000 from the sale price and promised to release this retention in annual instalments if the promised income was generated. If the promised income was not generated, the shortfall could be set off against the instalment of the security to be repaid and the amount of the security would be supplemented by the seller accordingly.
The sale contract also provided that if the management contract were terminated within the scope specified in Appendix 2 to the management contract (commercial management of leasing of the property) for reasons attributable to the buyer, the rental income warranty would lapse and the buyer would be required to release the retention to the seller.
In March 2007 the buyer terminated the property management contract in part (with respect to commercial management of leasing of the property), without standing any grounds, paying the seller a total management fee of over PLN 520,000. The seller deemed the rental income warranty to have lapsed accordingly, and demanded release of the EUR 488,000 retention. The seller pursued this claim in an ad hoc arbitration and in 2010 obtained an award in this amount. The arbitral tribunal found that the termination without stating grounds or alleging improper management of the property was made for reasons attributable to the buyer, and thus the warranty had lapsed and the retention had to be released. The tribunal rejected the buyer’s defence that the management contract was invalid (apparently because the seller lacked a property manager’s licence), but also found that even if the management contract were invalid the buyer would have to release the retention because the existence of a valid management contract was a condition of the rental income warranty.
On 17 December 2010 the buyer demanded payment by the seller of over EUR 1 million for breach of the rental income warranty and over PLN 520,000 as a refund of the management fee which was allegedly not due because the management contract was invalid. By letter dated 28 December 2010, the buyer declared that it set off these amounts allegedly owed by the seller against the amount of the arbitration award.
Also on 28 December 2010, the seller obtained a legally final enforcement clause for the arbitration award from the regional court. On the basis of that writ of enforcement, the bailiff managed to execute over EUR 246,000 before the buyer commenced a separate action to quash the writ of enforcement. The execution proceeding was then stayed in January 2011 as interim relief to secure the buyer’s claim to quash the writ of enforcement.
In the meantime, the buyer also filed a petition to set aside the arbitration award, which was denied by the regional court in 2013, and the appeal against that judgment was denied by the court of appeal in 2014.
In 2012 the regional court quashed the writ of enforcement in the amount of over EUR 132,000 and otherwise denied the relief sought by the buyer. Both sides appealed, and in 2014 the court of appeal held that the writ of enforcement should be quashed in a lesser amount of almost EUR 112,000.
Both of the lower courts found that the claim to quash the writ of enforcement was moot with respect to amounts already executed by the bailiff and had to be dismissed in that respect. Otherwise, they held that they were bound by the arbitral tribunal’s finding that the rental income warranty had lapsed due to termination of the management contract, and thus the buyer’s claim for breach of the rental income warranty could not be set off against the amount of the arbitration award. However, the lower courts also held that they were not bound by the arbitral tribunal’s holding that the management agreement was valid, holding instead that the management agreement was invalid because the buyer lacked a property manager’s licence as required by the Real Estate Management Act. Consequently, the regional court upheld the buyer’s claim of setoff in the amount of over PLN 524,000 (equivalent to over EUR 132,000) in the form of unjust enrichment, which amount was reduced by the court of appeal to EUR 112,000 as the claim for refund of over EUR 20,000 was found to be time-barred.
Following issuance of the ruling by the court of appeal, the bailiff succeeded in executing all of the amounts due under the writ of enforcement.
The buyer then filed a cassation appeal with the Supreme Court of Poland, alleging inter alia that the court of appeal had erred by impermissibly conducting an interpretation of the arbitration award, in holding that it was bound by the finding in the justification for the award that the rental income warranty had lapsed, rather than being bound only by the operative wording of the award.
The Supreme Court firstly held that the cassation appeal had to be denied because the underlying claim, to quash the writ of enforcement, could no longer be maintained, as in the meantime the writ had already been executed on in its entirety and consequently had lapsed.
In any event, the court held, the cassation appeal was groundless because the lower courts had properly held that they were bound by the finding of the arbitral tribunal that the rental income warranty had lapsed. The award exerted res judicata effect and precluded re-examination of the issue of the lapse of the warranty, which formed the legal and factual basis for the award. The legally final finding by the lower courts that the property management contract was invalid was preclusive as to the validity of the setoff of PLN 524,000 which should be refunded because it was not due under the invalid management contract, but was also preclusive on setoff of amounts allegedly due for breach of the rental income warranty, which lapsed due to the invalidity of the management contract which was a condition for the rental income warranty.
The Supreme Court denied the cassation appeal accordingly.
Excerpts from the text of the court’s ruling:
1. Accepting that an arbitration award does not have binding force or res judicata effect would totally undermine the purpose for the existence of arbitration.
2. Pursuant to Civil Procedure Code Art. 1212 §1, the state court is bound, under the rules set forth in Civil Procedure Code Art. 365, by a legally final and enforceable arbitration award, which also has res judicata effect in the respect indicated in Civil Procedure Code Art. 366.
3. Under Civil Procedure Code Art. 365, both the court and the parties are bound by a legally final and enforceable arbitration award issued in the case pending with their participation. This binding force means that such award is of a preclusive nature in another case between the same parties if the specific relationship exists between the award and the subsequently pending case consisting in the legally final prior ruling impacting the resolution of the pending case.