Warsaw Court of Appeal judgment
dated 25 January 2013
Case No. I ACa 374/12
Summary by arbitraz.laszczuk.pl:
Following an M&A deal involving the sale of an enterprise (assets) consisting of a chain of 19 hypermarkets in Poland, the buyer brought a claim in arbitration against the seller for a refund of a portion of the purchase price based on alleged breach of several points of the representations and warranties, with items totalling nearly EUR 11 million, including a lack of construction and technical documentation, the presence of a banned refrigerant in the HVAC system, the lack of health and safety permits for working in areas lacking natural light, and defects in one of the fixed assets (a portable canopy worth several million euro).
The arbitral tribunal issued an award in favour of the buyer for less than EUR 2 million, for the overstatement of the value of the fixed assets due to defects in the canopy and for the lack of the health and safety permit for working in areas lacking natural light. The tribunal also held in the award that the seller shall be liable for any future loss caused by the absence of the construction documentation.
The seller filed a petition with the Warsaw Regional Court to set aside the award on the grounds inter alia that it violated public policy because it was internally inconsistent and incapable of performance (particularly with respect to the ruling on liability for contingent future claims).
The buyer filed its own petition with the same court to set aside the award insofar as it denied certain of the buyer’s claims, on the grounds inter alia that the award violated public policy, including the constitutional principles of protection of life and health due to the absence of construction and technical documentation and protection of the environment due to the failure to remove the banned refrigerant, as well as principles of contractual liability for damages.
The regional court joined the two proceedings and denied both petitions. Among the core issues, the court held that the arbitral tribunal was correct in finding that the seller was responsible for failing to deliver the construction documentation, although there was insufficient proof that the buyer had suffered an actual loss yet because of the missing documentation. The court found that the award was internally consistent and understandable in this respect.
Both parties appealed. The Warsaw Court of Appeal held that the legal reasoning applied by the regional court was essentially erroneous but the result was correct. The court found that the award was not inconsistent, was capable of performance, and did not violate principles of contractual liability for damages. Because the claims were monetary in nature, the constitutional principles of protection of life and health and protection of the environment were not relevant to the challenge to the award.
The court of appeal denied the appeals accordingly.
Excerpts from the text of the court’s ruling:
1. A proceeding on a petition to set aside an arbitration award is not an appellate review proceeding by the state court. No ordinary means of appeal lies against an arbitration award, but only a petition to set aside the award. As stressed in the legal literature, such a petition is not an appellate measure but an extraordinary means of judicial oversight by the state court over the activity of the arbitration court. This has the fundamental consequence that the state court generally does not examine the resolution by the arbitration court, and in particular does not review whether it is founded on the facts cited in the justification for the award, or whether the appropriate provisions of substantive law were applied. The state court may set aside an arbitration award only in exceptional instances, indicated in narrowly interpreted provisions of the code. Consequently, in the event of doubt the award should be upheld rather than set aside.
2. In examining the grounds and conditions set forth in Civil Procedure Code Art. 1206 §1(4), what is essential is failure to comply with the requirements for the fundamental rules of procedure before the [arbitration] court arising out of statute or specified by the parties. Such rules include basing the award on the established state of facts, which occurs after considering evidence.
3. The judicial discretion (of the arbitration court) in evaluating the relevance of specific evidence or allegations for making factual findings and issuing a ruling is appropriately broader than that referred to in Civil Procedure Code Art. 233 §1, and the state court “reviews” it only in terms of the “fundamental principles” of procedure before the arbitration court. Thus only if the state court finds that such procedure was not conducted at all or was conducted incompletely, or was obviously conducted defectively, violating the rules of logical understanding, connecting of facts in a chain of cause and effect, selective admission of evidence in the case, taking evidence only from one party, unjustifiably ignoring evidence offered by the opposing party, and so on, can it be found that the requirements referred to in Civil Procedure Art. 1206 §1(4) were not met. The cited provision should be interpreted narrowly, limiting the possibility of setting aside an arbitration award to the principles of a fair trial and procedural violations which could have had an impact on the arbitration award.
4. Violation of substantive law may be grounds for setting aside an arbitration award only when the substance of the award violates fundamental principles of the legal order. It should be borne in mind that the arbitration court is not bound not only by civil procedure regulations (Civil Procedure Code Art. 1184 §2), but also regulations of substantive civil law.
5. The rules establishing the obligation to pay damages may be regarded as comprising one of the fundamental principles of the legal order in the state; in other words, if anyone suffers an injury and the grounds for liability under any of the civil liability regimes are met, then within the bounds provided by law (Civil Code Art. 361 §§ 1 and 2) damages should be awarded against the person responsible.