The Appellate Court in Warsaw recently [Case No. I ACa 457/18[1]] considered whether the EU state aid regulations form part of the Polish public policy, when considering an application to set aside an arbitral award. The Court decided that EU competition law has to be taken into account when considering the issue of breach of public policy by an arbitral award.
Background facts
The Claimant – a joint-stock SPV – and the Respondent – the Polish State Treasury represented by the Minister of Transport and Maritime Economy – concluded the Concession Agreement of 12 September 1997 for the construction and exploitation of a highway (CA). On the basis of the CA the Claimant had the right to among others collect tolls from lorries for the use of the constructed highway. The CA contained an arbitration clause subjecting any disputes to the jurisdiction of an ad hoc arbitral tribunal under the UNCITRAL Arbitration Rules.
In connection with the CA the Parties concluded several annexes, including Annex No. 6 of 14 October 2005. This Annex was introduced as a result of the EU regulations and changes in Polish law which effectively excluded the possibility to collect tolls by the entities such as Claimant in parallel to tolls collected by the state. Under Annex No. 6 the parties agreed on a mechanism for compensation of the loss suffered by the Claimant due to the changes in law. However, in the letter of 13 November 2008 the Respondent stated that it evades legal consequences of the Annex No. 6 claiming an error as to the data being the basis for the amount of compensation due to the Claimant.
As a result, arbitration proceedings were initiated by the Claimant. In the course of these proceedings, the Parties agreed that the issue of state aid is irrelevant for the assessment of the claims.
In the arbitral award of 20 March 2013 (corrected on 30 April 2013), the tribunal found that: (1) the Respondent’s statement of 13 November 2008 was ineffective, (2) Annex No. 6 is a valid and enforceable contract, and (3) the Respondent’s counterclaims for declaring that Annex No. 6 is invalid, or at least ineffective, as well as the establishment that the Claimant is obliged to return the payment made under Annex No. 6, were dismissed. The arbitral tribunal in a split decision (with the arbitrator appointed by the Respondent filing a dissenting opinion), decided that there was a presumption of validity of Annex No. 6 as the burden of proof that the Respondent had erred in concluding Annex No. 6, was on the Respondent. This burden was not met, and, thus, the Respondent lost the case.
In light of this, the Respondent filed a motion for setting aside the award in the Regional Court in Warsaw.
The factors considered
In its motion to set the award aside, the Respondent claimed that the award breached the public policy of Poland, as it breached the basic principles of Polish law such as the limitations to freedom of contract, or refusal of the tribunal to consider the Respondent’s claims of error upon the conclusion of Annex No. 6. The Claimant argued for the dismissal of the Respondent’s motion.
During the proceedings, the Respondent raised an additional argument – the fact that the European Commission (EC) rendered a decision in which it considered the state aid granted under Annex No. 6 as unlawful due to lack of its notification by the Respondent (Article 108.3 of the TFEU), as well as its incompatibility with the internal market (Article 107.1 of the TFEU).[2] It should be noted that in this decision the EC considered only part of the compensation granted under Annex No. 6 as state aid, and obliged Poland to take steps in order to re-collect this part of compensation from the Claimant.
The first instance court considering these arguments decided to dismiss the Respondent’s motion. With regard to the state aid issue, the court pointed out that the return of state aid is a different topic, subject to separate proceedings, currently held before the competent court in Poznań. As such, the first instance court did not agree that the state aid concerns were sufficient to set aside the award.
The Respondent appealed this decision claiming that the court of first instance did not establish correctly the issue of arbitrability of the dispute between the parties, and further – the court incorrectly assessed the scope of Polish public policy by omitting in its reasoning the EU law and EC decision. The Claimant requested the court to dismiss this appeal.
In the course of the appellate proceedings, the EC supported the Respondent’s motion.
The decision
The appellate court set aside the entire award.
The court decided that the Respondent’s objection with regard to the issue of arbitrability was not justified, as there were no grounds to claim that proceedings for the establishment of validity (or invalidity) of a contract cannot be referred to arbitration.
However, the court agreed that the award breached Polish public policy. Referring to cases such as Eco Swiss[3] or Claro[4], the court decided that it is bound to treat equally a claim of breach of EU law and Polish law when faced with Polish public policy concerns. The court stated that CJEU’s judgments also confirmed that EU competition regulations are part of the EU public policy.
In the court’s view, the fact that the arbitral tribunal in the award overlooked the EU law introducing limitations for states with regard to granting state aid creates a risk to the uniform application of EU competition law. The court also noted that the public policy reasons prohibit a situation in which there would be two concurrent decisions – the arbitral award confirming the validity of Annex No. 6 and the EC decision confirming that the state aid granted under Annex No. 6 is unlawful due to the lack of the necessary notification and its incompatibility with the internal market.
The court considered that while the EC cannot judge the issue of validity of Annex No. 6, the arbitral tribunal should have conducted such an analysis on its own, even if neither of the Parties in the arbitration referred to these regulations. The court further stated that since neither of the parties presented any statements or proof with regard to the notification of the state aid, the tribunal had no grounds to assume that the state aid granted under Annex No. 6 was legal. Thus, the tribunal should have established that Annex No. 6 is invalid. As the tribunal made a contrary assumption and it did not execute its obligation to order the return of the unlawful state aid and establish the invalidity of Annex No. 6, the award breached Polish public policy.
The significance
The court’s key observation pertains to the issue of interpretation of public policy under Polish law.
Firstly, the court concluded that EU law may be observed in establishing the public policy of Poland. In this respect, the fact that the court agreed that EU law has a bearing on the public policy of Poland is not surprising. It has been long established with regard to post-arbitral proceedings that courts may consider issues of EU law when faced with the motions for annulment of arbitral awards. This is because EU law in principle forms part of the domestic legal systems of EU states. The fact that in such post-arbitral proceedings states may request the CJEU to issue preliminary judgments on EU law further confirms this principle. However, the judgment cannot be read as a confirmation that in every EU state the EU law will be automatically applicable to public policy considerations in cases of challenges to an arbitral award, as, depending on the wording of the relevant state law, grounds for setting aside may be limited in a way excluding the application of domestic or EU policy. Nor can it be read as a confirmation that every provision of EU law forms part of the public policy of states that consider EU law as part of their legal system.
Secondly, the court considered the scope of the public policy of the EU in respect to competition law. The court decided that the provisions of the EU law regulating competition in the internal market form part of the EU public policy, and thus, also the Polish public policy. However, the conclusions of the court should be applied with caution. The court relied in this respect on the Eco Swiss case, which referred to a specific regulation of the EU law which provided for its direct and binding application not only to states, but to all entities in the EU. In this respect, it should be noted that not all provisions of the TFEU pertaining to competition are addressed to all entities and not only states. The fact that in this case the court did not consider the differences between the TFEU provisions, but rather automatically applied the Eco Swiss case’s conclusions, may undermine the interpretation of the scope of public policy proposed in the court’s judgment. Given the approach to the scope of public policy in other, also recent, Polish judgments in which it has been considered to be rather narrow, there may be doubts as to the correctness of the reasoning proposed in this particular case.
Finally, the court considered that as part of the obligations of an arbitral tribunal in light of the Polish public policy, an arbitral tribunal should also consider issues not raised before it by either of the parties but stemming from the applicable law. Yet again, this interpretation of the duties of an arbitral tribunal under Polish law raises questions. In arbitration, a tribunal is required to answer questions brought before it by the parties. While there are views that arbitral tribunals should also apply rules of law, which it identifies as vital to a case, it is for the parties to present their views on such identified regulations and only then for the tribunal to rule upon them. In the judgment, the issue that the court identified as omitted by the tribunal in breach of Polish public policy was the EU law pertaining to state aid. However, in this case there was an explicit consent of both parties that the state aid is a separate issue, not to be contemplated by the tribunal, which falls within the exclusive competence of the EU. This exclusive competence was also confirmed by the EC itself. As such, the court’s expectation that the arbitral tribunal should have of its own volition decided on the lawfulness of the state aid seems to be questionable.
As a side concern, there may be further doubts as to the correctness of the judgment in respect to the conclusion that in case of breach of EU law, the consequence is always invalidity of the legal relationship subject to the breach. In case of unlawful state aid the EU law does not provide for the consequences of the breach. Further, there are convincing grounds under the Polish law for limiting the result of breach only to the obligation to return the unlawful state aid, and not the invalidity of the underlying legal relationship. In line with that, in the current case, the EC did not oblige the state to invalidate Annex No. 6, but only to re-collect part of the funding granted under this Annex. In this respect, the court’s conclusion that the award confirming the validity of Annex no. 6 is incompatible with the EC decision, seems unfounded. As this was an additional reason for the court’s conclusion on the necessity to vacate the award on the grounds of public policy, this raises further doubts as to the correctness of setting aside of this award.
As the case has been referred to the Supreme Court, the conclusions presented in the judgment may yet be overturned. On 1 December 2020, the Supreme Court agreed to hear the case.[5]
[1] Judgment of the Appellate Court in Warsaw of 26 November 2019, Case File No. I ACa 457/18.
[2] The EC decision of 25 August 2017 on the state aid SA.35356 (2013/C) (ex 2013/NN, ex 2012/N) Available here.
[3] Eco Swiss China Time Ltd v Benetton International NV., C-126/97.
[4] Elisa María Mostaza Claro v. Centro Móvil Milenium SL, C-168/05.
[5] The status of the case heard before the Supreme Court is available here (in Polish).
