Warsaw Appellate Court judgment
dated 10 December 2008
Case No. I ACa 655/08
Summary by arbitraz.laszczuk.pl:
In 2003, G.H., an individual subcontractor, entered into a contract to perform electrical work for a limited-liability company that was a member of a consortium that won a public tender to modernize a water purification plant for a Polish municipality.
The contract included a clause providing that the parties would make their best efforts to resolve any disputes arising in connection with the contract amicably. If they failed to reach agreement, “disputes shall be submitted for resolution by the Court of Arbitration at the Polish Chamber of Commerce in accordance with the rules of such court. The parties also agree that pursuit of claims for contractual penalties and substitute measures shall be excluded from the jurisdiction of such arbitration court.”
The contract also provided that “additional works arising in the course of performance of the contract, outside the scope of the works described in [an appendix to the contract] but necessary for performance of the contract as a whole, which the contractor could not foresee despite due diligence, shall be notified to the principal in writing, under penalty of invalidity, before such works are commenced, and performance of the works and the fee for performing them shall be agreed with the principal in the form of an annex to this agreement, made in writing under penalty of invalidity.”
After completion of the subcontract, the subcontractor demanded payment from the general contractor for additional work, which was refused on the grounds that the fee was not due because the additional works were not agreed in writing as required by the contract.
On 13 October 2005, the subcontractor filed a claim in arbitration against the general contractor for about PLN 322,000 for the additional works. In its response, the general contractor sought denial of the claim but did not allege the lack of an arbitration clause. In 2007, the arbitration court issued an award in favour of G.H. for about PLN 183,000. The award was signed by all three arbitrators, but R.G., the arbitrator appointed by the general contractor, dissented and filed a separate opinion.
The general contractor filed a petition with the Regional Court for Warsaw-Praga to set aside the award. The petitioner alleged inter alia that it was denied a defence because the arbitration court refused to admit any of the evidence proffered by the general contractor, while admitting the evidence proffered by the subcontractor, thus also violating the principle of equal treatment of the parties. The petitioner alleged that the award was issued in violation of the procedure provided in the rules of the arbitration court because the arbitrators had not met to deliberate on the award, and the two arbitrators in the majority had prepared the award for signature by the dissenting arbitrator, R.G., without his participation. The petitioner also alleged that the dispute was not covered by the arbitration clause because the claim was based on a theory of unjust enrichment and thus did not arise out of the contract. The petitioner sought to admit certain evidence before the regional court, including the testimony of arbitrator R.G. to show the circumstances under which the award was issued; the evidence was not admitted.
Relying on the new arbitration law that went into effect on 17 October 2005, the court denied the petition to set aside the award. The court denied the claim based on the arbitration court’s refusal to admit evidence proffered by the general contractor on the grounds that the rules of the arbitration court permitted the tribunal to rule on evidence within its own discretion. The court also found that the objection to the jurisdiction of the arbitration court over the claim for unjust enrichment was waived under the rules of the arbitration court because of the general contractor’s failure to raise the objection in its response to the claim, and at any rate the dispute concerned payment for additional works, which were provided for in the contract, and thus was related to the contract.
On appeal, the Warsaw Appellate Court held that the regional court should have considered the objections to the procedure before the arbitration court under the prior wording of the arbitration law in effect on 13 October 2005, when the arbitration was commenced, rather than the new arbitration law that went into effect four days later. However, the change in law did not affect the substance of the ruling by the regional court.
The appellate court held that it was clear from the dissenting opinion by arbitrator R.G. that the panel of arbitrators had deliberated over the award. The deliberations were conducted by e-mail, which the court held was permissible. It would not have been permissible at any rate to admit testimony by R.G. concerning the course of the deliberations because the deliberations must remain confidential.
Unlike the regional court, the appellate court found that an award for unjust enrichment would have been beyond the scope of the arbitration award because such a non-contractual claim does not arise out of the contract. While the theory of recovery was not specifically addressed in the justification for the award, the appellate court nonetheless found that it was clear from the justification that the award reflected the fee for additional works, which were provided for in the contract, in the amount of the additional works properly documented by the claimant, and thus the award was within the scope of the arbitration clause. The works for which a fee was awarded were those which were duly raised by the subcontractor and agreed with the general contractor; the requirement that the additional works be agreed in writing was met with respect to these works, but in separate writings by the parties rather than in one annex to the contract signed by both parties.
With respect to the procedure before the arbitral tribunal, however, the appellate court held that the rulings on admission of evidence were so one-sided that they effectively violated the principle of equal treatment of the parties and thus the fundamental principles of procedure before the arbitration court, effectively denying the petitioner the right to a defence. On this basis, the appellate court amended the judgment below to set aside the award.
Excerpts from the text of the court’s ruling:
1. While it is true that Civil Procedure Code Art. 697–711, in the wording in force through 16 October 2005, do not contain a provision that includes the content of Art. 1185, currently in force, which provides that the arbitrators’ deliberations may occur at any place, there should be no doubt that the arbitration court also had such authority under the regulations previously in force. … The arbitrators may meet for joint discussion, conduct a telephone conference, or consult with one another through an exchange of written correspondence.
2. An arbitrator’s duty to maintain confidentiality with respect to both the content and the course of the arbitrators’ deliberations is regarded as extremely important, which is why the view should be adopted, as stated in the literature, that the obligation to maintain confidentiality excludes an arbitrator from testifying before the court as to circumstances the arbitrator learned of while performing such function.
3. Under Civil Procedure Code Art. 1206 §1(2), a demand to set aside an arbitration award may be regarded as justified if the party demonstrates that it was deprived of the ability to defend its rights in the proceeding before the arbitration court. This provision refers to the necessity in the arbitration proceeding to observe requirements concerning the principle of the equality of the parties, hearing out the parties, and the ability for a party to address evidence and allegations presented by the opposing party. … The right to equal treatment of the parties extends further than the right to be heard. This principle requires the arbitration court more specifically to assure that the parties are treated equally during the course of the entire proceeding, which means identical treatment of the parties in a similar situation. The prohibition on discrimination against either of the parties applies to the entire proceeding before the arbitration court, but in practice it applies first and foremost to the evidentiary procedure.
4. It should be regarded as a violation of the principle of equal treatment of the parties to conduct an evidentiary procedure essentially limited to the evidence presented by the claimant, including all evidence from the testimony of witnesses, while at the same time refusing to hear the witnesses indicated by the respondent, in a situation where it clearly appears from the allegations of the respondent that the witnesses will testify as to circumstances highly relevant to resolution of the case.
5. In the arbitration clause, the parties are required to identify the subject of the dispute or the legal relationship out of which the dispute has arisen or may arise. Thus as the parties in the agreement submitted to the Court of Arbitration at the Polish Chamber of Commerce disputes arising in connection with the agreement, it should be found that they had in mind not any and all disputes that might exist between them, including disputes with respect to claims for unjust enrichment, but only disputes concerning claims arising on the basis of the agreement as concluded, that is, contractual claims.