Public policy clause as a ground for an application to set aside an arbitral award

The Polish Supreme Court in its judgment of 15 June 2021 (file no. III CSKP 102/21) indicated that the public policy clause allows for review of the arbitral award only to a limited extent, but it is not an appellate procedure and cannot replace it. Its purpose is to review the compliance of the award with the fundamental principles of the Polish legal system so that its enforcement does not contradict the main principles of the entire legal system.

Factual background

The Arbitral Tribunal at the Polish Chamber of Commerce issued an award that was appealed by two companies (parties to the dispute) to the Court of Appeals. The two companies filed an action for setting aside the arbitral award, alleging, inter alia, that the claim had been awarded despite the debtor’s raising a plea of prescription, violation of the statutory standard for interpretation of contractual provisions, allowing abuse of subjective right, violation of the prohibition on retroactivity of law, and violation of the principle of autonomy of will of civil law relationship entities.

The appellate court dismissed the application and pointed out that it is not the jurisdiction of the state court in an application to set aside an arbitration award to determine the merits of the dispute between the parties to the arbitration. This court also pointed out that one of the grounds of application could be a breach of the public policy clause. Although rules of prescription serve to ensure certainty of trade, and such certainty remains in the interest of public policy, the body of legal rules governing the prescription of civil law claims does not constitute fundamental principles of the legal system. Similarly, the appellate court addressed the allegation of abuse of subjective rights and the standard for interpretation of contract provisions. As to the prohibition of retroactivity, the appellate court pointed out that the application of the law to past facts is not retroactive, but only may be an improper application of the intertemporal rule. The review of such arbitral tribunal error is not subject to review by a state court in a proceeding arising out of an application to set aside an arbitral award.

Both companies filed a cassation appeal to the Polish Supreme Court against the judgment of the appellate court. They alleged, inter alia, the improper application of Article 1206 § 2(2) of the Code of Civil Procedure (CCP), which establishes a public policy clause as the grounds for an application to set aside an arbitral award.

Supreme Court decision

The Supreme Court dismissed the cassation appeal. It reminded us that an application for setting aside an arbitral award does not serve the purpose of substantive review of the arbitral tribunal’s award by a state court, similar to an instance-based review in court proceedings. A state court may not, in an application to set aside an arbitration award, determine the merits of the dispute between the parties to the arbitration. This would oppose the nature of arbitration, render its existence pointless, and oppose the autonomy of the will of the parties who have submitted the resolution of their dispute to the jurisdiction of the arbitral tribunal, foregoing the jurisdiction of the state court.

The public policy clause allows only limited review of an arbitral award. It is intended to review the compliance of this award with the fundamental principles of the Polish legal system so that its enforcement does not constitute a contradiction of the main grounds of the entire legal system.

Infringement of substantive law by the arbitral tribunal, i.e. its incorrect interpretation or application of the law, does not itself constitute a violation of the rule of law, as the infringement of substantive law must be of such a nature that it led to the issuance of a judgment which content violates the fundamental principles of the rule of law. Not every infringement of particular legal rules automatically means a violation of the public policy clause in an application to set aside an arbitration award. It must be a demonstrable violation of fundamental principles of the legal system.

Comments

The issuance of an award by an arbitral tribunal often entails the need to initiate proceedings before a state court. This is known as post-arbitration litigation. The nature of these proceedings comes down to state court review of arbitral jurisprudence. Such review occurs, in general, in two cases: (i) a party is unwilling to comply with the arbitral award; or (ii) the arbitral award violates public policy. In the first case, the review takes place within the proceedings for recognition or enforcement of the arbitral award or award on agreed terms. In the second case, the review is exercised in proceedings to set aside an arbitral award.

The subject of an application for setting aside is a final award of an arbitral tribunal rendered in the Republic of Poland adjudicating the claims of the parties. The law provides for several grounds (pleas) that may be a reason for setting aside an arbitral award (Article 1206 of the CCP), e.g. the non-existence, ineffectiveness, or invalidity of the arbitration agreement, deprivation of a party of the opportunity to defend its rights before the arbitral tribunal, res judicata, obtainment of an arbitral award by means of a criminal offense, etc. In a proceeding to set aside an arbitral award, the state court does not hear and decide the merits of the dispute between the parties to the arbitration. It reviews the case only for the existence of the grounds listed in Article 1206 of the CCP. Having established the existence of grounds, the state court shall set aside the arbitral award in whole or in part. Thus, the control exercised over arbitration by a state court is not equivalent to deciding the case ex novo, not only on the factual ground but also on the legal ground (Supreme Court judgment of June 19, 2019, file no. I CSK 23/19). As a rule, the state court is bound by the grounds raised by the applicant, except for those indicated in Article 1206 § 2 of the CCP (Supreme Court judgment of 3 September 2009, file no. I CSK 53/09). An application now has a legal nature more akin to an appeal. The application now has a legal nature more akin to a recourse than an independent lawsuit.

Almost all of the grounds for the application are formal (procedural) in nature with one exception. An arbitral award that is contrary to the fundamental principles of the legal system of the Republic of Poland shall be set aside. It is referred to as the public policy clause (ordre public). Within the fundamental principles of the legal system, and only them, the state court may make a substantive legal assessment of the arbitral award. The possibility of such an assessment under the public policy clause demonstrates that Polish law honors the sustainability of an arbitral award. A substantive challenge to an arbitral award can only occur exceptionally if the effect of the award leads to a violation of fundamental principles of the legal system.

In its ruling, the Supreme Court stressed that post-arbitration litigation concerning an application to set aside an arbitral award is not an appellate proceeding. A substantive review of an arbitral award—in particular relating to an incorrect interpretation of the law or its application—may result in the award being set aside only if the arbitral tribunal’s violation of substantive law constitutes a demonstrable violation of fundamental principles of the legal system.

This ruling is apt. The public policy clause allows for a limited review of the merits of an award of the arbitral tribunal. This review, however, cannot constitute a complete assessment of the merits of the arbitral award. In applying the public policy clause, the question is not whether the award under review complies with all mandatory rules of law, but whether it has had an effect contrary to fundamental principles of the legal system.

It is worth noting that on the same day (June 15, 2021) the Supreme Court also issued a judgment in the case V CSKP 39/21, in which it stressed the function and purpose of the proceedings triggered by an application to set aside an arbitral award, as well as the scope of the state court’s review in assessing the violation of the ordre public clause. The legal arguments expressed by the Supreme Court in both judgments are consistent.

Marcin Michalik, Senior Associate, attorney-at-law