Łódź Court of Appeal judgment
Dated 12 December 2013
Case No. I ACa 692/13
Summary by arbitraz.laszczuk.pl:
In 2009, the investor, a joint-stock company, entered into a contract with the contractor, a limited-liability company, for construction of the façade and roof in a project for expansion and modernization of a wastewater treatment plant. The contract included an arbitration clause calling for arbitration before a specific permanent arbitration court in Poland, but also provided that the arbitration was to include two instances. (There was an exception for cases involving checks and promissory notes, which were to be decided by the state courts.) There was also a savings clause providing that if any provision of the contract was invalid or unenforceable, the other provisions would remain valid and enforceable. The rules of the arbitration court provided that arbitration was to be conducted at one instance, and did not include any provisions governing appellate arbitration proceedings.
In 2011, the investor filed a monetary claim against the contractor in the Warsaw Regional Court. The contractor asserted the arbitration agreement as a defence. The court held that there was a valid and enforceable arbitration agreement and dismissed the case accordingly. In 2012, the Warsaw Court of Appeal denied the contractor’s appeal, finding that the arbitration agreement was “defective” because of the provision calling for two instances of arbitration but that this was an additional element that did not affect the validity of the arbitration agreement as such, particularly given the existence of the savings clause in the contract.
Consequently, the investor commenced arbitration against the contractor at the arbitration court in question, seeking payment of over PLN 440,000. In its response, the contractor moved to dismiss the claim because the arbitration court lacked jurisdiction. After consulting with the parties and receiving their submissions on the issue of the validity of the arbitration clause, the arbitration court overruled the contractor’s objection and upheld its jurisdiction. It held that the clause calling for a second instance of arbitration was invalid and incapable of performance because it conflicted with the rules of the arbitration court, but under the savings clause the arbitration agreement as such, without that provision, was valid.
The contractor then applied to the Łódź Regional Court for a ruling that the arbitration court lacked jurisdiction, setting aside the ruling by the arbitration court and dismissing the arbitration claim. In 2012, the court denied the application, holding that the arbitration clause was valid. With respect to the inconsistency between the rules of the arbitration court and the clause calling for a second instance of arbitration, the court stated that pursuant to the arbitration law, the arbitration court could conduct the second instance of arbitration under the procedure it saw fit. Neither party appealed against this ruling by the regional court.
On 3 April 2012, the arbitral tribunal issued an award in favour of the investor for over PLN 460,000 (principal and interest). A copy of the award, certified by the arbitration court as final and unappealable, was served on the contractor on 4 May 2012. On 11 May 2012 the contractor applied to the arbitration court to establish the rules for conducting the appellate arbitration proceeding and on 25 May 2012 applied for supplementation of the award to specify the appellate procedure. In June 2012, the arbitration court’s arbitration committee rejected the request to establish the appellate procedure because it lacked competence to consider it, and the arbitration court rejected the application to supplement the award to specify the appellate procedure because it did not comply with the 14-day period to request supplementation of the award, and moreover it would have been denied because the award can be supplemented only with respect to the ruling on the claim and not in order to specify the appellate procedure.
The contractor applied to the Łódź Regional Court to set aside the award. The court pointed out that because the arbitration agreement provided for two instances of arbitration, in theory the application to set aside the award should refer to the award issued at the second instance of arbitration, but because the award was certified by the arbitration court as final and unappealable it should be regarded as final for purposes of an application to set aside the award. The court recognized that permanent arbitration courts regard some provisions of their rules as so essential that they cannot be modified by agreement of the parties, and if the arbitration court here regarded the rule of a single instance of arbitration as fundamental it could have declined to accept the case, but it did accept the case. If the parties failed to establish the rules for conducting the appellate arbitration proceedings, the arbitration court should have conducted the appellate proceeding as it saw fit. Instead, it refused to do so and certified the award at the first instance as final. The court consequently held that the arbitration court had failed to comply with fundamental rules of arbitration procedure. The court also found that after service of the award, the contractor had sought with adequate promptness for the arbitration court to supplement the award and establish the rules for the appellate procedure. The regional court set aside the award accordingly.
On appeal, the Łódź Court of Appeal first found that the record of the earlier state court proceedings concerning the validity and effectiveness of the arbitration clause were before the regional court considering the application to set aside the award, but the regional court was bound only by the holding in the operative wording of the previous rulings that the arbitration agreement was valid and effective; it was not bound by the findings in the justification for the earlier rulings that the arbitration agreement was “defective” because of the provision requiring a second instance of arbitration proceedings.
The court of appeal shared the reasoning of the regional court that where the parties agreed that the arbitration would have two instances, which was inconsistent with the rules of the arbitration court, the arbitration court should have refused to accept the case or, accepting the case, conduct the appellate arbitration proceeding as it saw fit. When the parties could not agree on the rules of appellate procedure, the arbitration court should have established them. By refusing to conduct the arbitration proceedings at a second instance, the arbitration court violated the fundamental rules for procedure before the arbitration court, and the award was therefore properly set aside. The court of appeal denied the appeal accordingly.
Excerpts from the text of the court’s ruling:
1. In a situation where the parties did not reach agreement on establishing the rules for the appellate proceedings and how they would be conducted, the arbitration court, in light of the parties’ intent clearly expressed in the arbitration clause, inconsistent with the rules in force at the arbitration court, should have either refused to accept the case for consideration or, pursuant to Civil Procedure Code Art. 1184 § 2, conducted the appellate proceedings in the manner it saw fit.
2. In a situation of inconsistency between the arbitration agreement calling for two instances of arbitration proceedings and the rules of the arbitration court calling for one instance, priority should be accorded to the intention of the parties, and thus the arbitration clause. As the parties first mutually agreed on the rule of two instances before the arbitration court they selected, and second, failed only to agree on the rules for procedure at the second instance, the arbitration court was obligated to establish these rules itself.
3. As the parties referred to proceedings at two instances in the arbitration clause, failure to comply with this requirement by the arbitration court must be regarded as a violation of fundamental rules of procedure before the arbitration court (Civil Procedure Code Art. 1206 § 1), resulting in granting the petition and setting aside the challenged award.