Gdańsk Court of Appeal judgment
dated 16 September 2020
Case No. V ACa 162/20
Summary by arbitraz.laszczuk.pl:
K.P. and J.O. entered into a construction works subcontract with J.K., J. S., a general partnership (spółka jawna), based in G. For works performed up to the date of the withdrawal from the contract, that is 15 October 2012, K.P. and J.O. issued VAT invoices. Despite the expiry of the payment date, the company did not make the relevant payment.
K. P. and J. O. filed a lawsuit to the Permanent Arbitration Court at the G. Regional Chamber of Legal Advisers (the “Permanent Arbitration Court”). They demanded PLN 329,989.50 be paid. In the statement of defence the respondent, among other things, demanded dismissal of the claim and the costs of the proceedings. Additionally, it filed a counterclaim and stated that the petitioners had not performed in whole the obligation arising out of the concluded contract and had received renumeration for the works actually performed.
The Permanent Arbitration Court rendered an award of 16 December 2014, but it was set aside. Finally, the Permanent Arbitration Court reheard the case and delivered an award.
K.P. and J.O. filed a petition to set aside a part of the arbitration award under Art. 1206 § 1 point 4 and art. 1206 § 2 point 2 of the Polish Civil Procedure Code (the “PCPC”). According to petitioners, the award was contrary to the fundamental rules of arbitration procedure and the fundamental principles of the legal order of the Republic of Poland. They claimed that the Permanent Arbitration Court had ruled on a request other than referred to in the lawsuit. Additionally, among other things, they stated that the Permanent Arbitration Court rendered an arbitration award infringing the pacta sunt servanda principle (vide Polish Supreme Court judgment dated 13 January 2014, Case No. V CSK 45/13). The respondent demanded the petition be dismissed.
The Court of Appeal in Gdańsk set aside the arbitration award in part and decided on the costs of the proceedings. It found that, among other things, procedural fairness is an element of the right to a fair trial, including the possibility to be heard, and that is, in fact, the essence of the constitutional right to a court. The Court of Appeal indicated that the fundamental rules of arbitration procedure had been infringed in the proceedings before the Permanent Arbitration Court. As a result, the allegation regarding the infringement of Art. 1206 § 1 point 4 of the PCPC was well-founded. Going beyond the limits of the statement of claim interfered, among others, with the principle of the equal rights of the parties. Additionally, the Court of Appeal drew attention to the fact that there is a great deal of autonomy in the arbitration procedure, which is entirely consistent with the intention of the lawmakers, limiting the availability of review by a state court. If parties decide to submit a dispute to arbitration, they need to take these circumstances into account, including also little external control of arbitration awards. Additionally, failure to comply with the procedural rules may only be a ground for a petition to set aside an arbitration award, if it concerns the basic principles. What is more, a petition to set aside an arbitration award shall not lead to review of the merits of the arbitration award. Public policy has not only a substantive, but also a procedural dimension, and the fundamental principles of procedural law are also protected. The term used in Art. 1206 § of the PCPC, namely ‘fundamental principles of the legal order’, indicates that it refers to such violations of substantive regulations that would result in violation of the principles of the rule of law, and the award violated the fundamental legal principles in force in the Republic of Poland and conflicted with the legal order in force, that is, it violated the principles of the political and socio-economic system. The Court of Appeal found also that application by an arbitral tribunal of the substantive law applicable in the case is subject to review by a common court only insofar as required by the evaluation of an arbitration award, made by the court on its initiative, under the public policy clause set forth in Art. 1206 § 2 point 2 of the PCPC, in terms of the award’s possible inconsistency with the fundamental principles of the Polish legal system.
Taking the above into consideration, it should be deemed that the Adjudication Panel infringed the pacta sunt servanda principle, because on the one hand it determined that the parties had entered into the construction works subcontract and then, in view of the difficulties in assessing the evidentiary material, it in fact had evaded doing that by ruling on damages.
The Court of Appeal indicated also that a state court does not examine whether an arbitration award is contrary to substantive law or is founded on the facts determined in the award, or whether the facts have been properly determined. A state court considers the case only from the point of view of the grounds for setting aside an arbitration award, which are exhaustively set forth in Art. 1206 of the PCPC. It pointed out that setting aside an arbitration award is justified only by such an offence against substantive law that would result in a determination that undermines the rule of law. A violation of the rule of law should be understood to mean an offence against fundamental legal institutions if it results in a ruling that violates the principles of the rule of law in force.
It is worth noting than in the judgment the Court of Appeal in Gdańsk made a reference to, among other things, the followings judgments of the Polish Supreme Court: dated 14 November 1960, Case No. II CR 1044/59, dated 8 December 2006, Case No. V CSK 321/06, dated 11 May 2007, Case No. I CSK 82/07, dated 12 September 2007, Case No. I CSK 192/07, dated 3 September 2009, Case No. I CSK 53/09, dated 13 February 2014, Case No. V CSK 45/13.
Excerpts from the text of the court’s ruling:
1. A petition to set aside an arbitration award is a legal remedy combining features of an extraordinary remedy at law, especially a petition for the revival of the proceedings, and an action for the formation of law or a legal relationship in which the claimant (petitioner) demands a state court to render a judgment on setting aside an existing legal relationship established by an arbitration award. A state court’s judgment granting the petition is of quashing nature, as in such a situation the state court can only set aside the arbitration award, and only insofar as demanded by the petitioner (…).
2. A petition to set aside an arbitration award is not intended to be a remedy leading to consideration, by a state court, of the merits of the dispute resolved by an arbitral tribunal. In fact, there is considerable autonomy in arbitration procedure (…) limiting the possibilities of review by the state court. If parties decide to submit a dispute to arbitration, they need to take these circumstances into account, including also little external control of arbitration awards. This does not mean, however, that if a dispute is submitted to arbitration, the parties have to agree to all kinds of procedural and substantive shortcomings of the arbitral tribunal (…).
3. Considering a petition, a state court examines a case only on the grounds set out in the Polish Civil Procedure Code. Art. 1206 of the PCPC exhaustively lists the grounds on which a petition to set aside an arbitration award may be based. The difference between the grounds of a petition indicated in Art. 1206 § 1 and § 2 of the PCPC is that the grounds set out in § 1 are taken into account by a state court only at the request of a party, the grounds set out in § 2 are taken into account ex officio (…).
4. [I]t is deemed that the case in which an arbitral tribunal rules ultra petita or aliu should not escape the control of the state court. This assumption shall be considered well-founded also in the light of the Polish Civil Procedure Code, with the proviso that the character of arbitration may justify an approach to the assessment of the limits of the claim being more flexible than in the case of state courts.
5. [A]lthough Art. 1188 § 1 of the PCPC does not indicate obligatory elements of a statement of claim in arbitration proceedings, including the exact wording of the claim (cf. Art. 187 § 1 point 1 of the PCPC), nonetheless the necessity to concretize the claim as an element determining the subject matter of the arbitration proceedings may be derived indirectly from Art. 1202 first sentence of the PCPC; it may also result from the rules agreed by the parties or set out in the arbitration rules (…).
6. The principle of equal rights of the parties is a fundamental principle of arbitration proceedings indicated directly in Art. 1183 first sentence of the PCPC.
7. Procedural public policy may be a basis for assessment of an arbitration award in two aspects. First, subject to the assessment is the compliance of the procedure which led to issue of the arbitration award with the fundamental procedural principles of legal order. Second, subject to the assessment are the effects of the award from the point of view of their compliance with the procedural legal order, i.e. whether they are compatible with the procedural legal system, for example, whether they do not infringe res iudicata, the rights of third parties.
8. An arbitration award may be said to be contrary to the fundamental principles of the legal order only with respect to constitutional principles of the socio-economic system or the fundamental principles governing specific fields of substantive law (…).
9. [P]ublic policy within the meaning of Art. 1206 § 2 point 2 of the PCPC includes not only the principle of freedom of contract and the pacta sunt servanda principle, but also principles limiting the freedom of contract and stability of contracts.
10. [A]pplication by an arbitral tribunal of applicable substantive law for resolution of a dispute, which it is generally required to do under Art. 1194 § 1 of the PCPC, is thus subject to review by a state court considering a petition to set aside an arbitration award only insofar as application of such law is required by the public policy clause, which is considered by the court ex officio.