Conversion of state court proceedings into arbitration proceedings | In Principle

On 1 July 2023, another major amendment to the Polish Civil Procedure Code enters into force. The changes involve general provisions, consideration of the merits, interim relief, enforcement, and arbitration. In this article, we will examine the amendments to Part Five of the Civil Procedure Code—the arbitration chapter.

Changes to the Civil Procedure Code in Poland regarding arbitration are generally moving in the right direction, expanding the types of disputes that may be resolved by arbitral tribunals, as well as creating incentives for parties to enter into arbitration agreements.

An earlier amendment, dated 31 July 2019, expanded the catalogue of cases that parties can submit to arbitration. Since then, arbitrability has extended to:

• “Property” disputes (for the most part monetary claims), except claims for spousal or familial support (alimenty)
• Non-property disputes if they could be resolved by a settlement
• Disputes arising from corporate relations (within a company, partnership, cooperative or association).

Redirecting a case to arbitration

The latest amendment enables the parties to a dispute brought before a state court to move the case to arbitration. Under the newly added Art. 1161¹ of the Civil Procedure Code, until final resolution of the dispute, the parties can redirect the case to arbitration. For this purpose, after a dispute has arisen, the parties must enter into an arbitration agreement, known as a compromise agreement.

Part Five of the code already provides for similar solutions in individual employment disputes and disputes involving consumer contracts. In such cases, the arbitration agreement must be made in writing (Civil Code Art. 78), and an exchange of statements via telecommunications is excluded. However, with regard to these two categories of matters, the conclusion of a compromise clause should take place before the case is brought to court and not in the course of the proceedings before the state court.

In our opinion, the introduction of Art. 1161¹ of the Civil Procedure Code and the place of this provision indicate the permissibility of extending this provision to individual employment cases and disputes over consumer contracts. After all, since the case is pending in state court, the requirement for an arbitration agreement after the dispute has arisen is satisfied. Compared to other cases, the only difference will be the obligation to conclude a compromise clause in writing (unlike other cases, where it is also sufficient to exchange statements by telecommunications).

Scope of conversion

As Art. 1161¹ refers to the possibility of submitting to arbitration a dispute in a case pending before a state court, the question arises whether this possibility applies only to the particular dispute and the claims covered by it, or all other disputes arising out of or related to the legal relationship which is the source of the claims redirected to arbitration. In light of Art. 1161 §1, we believe that the compromise clause should cover all disputes arising or likely to arise out of a given legal relationship, and not just the claims covered by the dispute in the proceedings before the state court. In other words, by exercising the option provided for in Art. 1161¹, the parties waive the jurisdiction of the state court over all disputes arising or likely to arise from the given legal relationship, and not only those currently asserted before the state court. This view is supported by the absence of any justification for bifurcating the jurisdiction of the arbitration court after conclusion of an arbitration agreement.

If the parties decide to move the case from state court to arbitration, they will be required to submit the compromise agreement to the state court, and the court will assess the agreement for lawfulness and consistency with public policy, and to ensure that it is not intended to circumvent the law and is valid and effective. This means that the admissibility of concluding a compromise agreement will be assessed like the withdrawal of a statement of claim, waiver or limitation of a claim, conclusion of a settlement in conciliation proceedings or before the competition and consumer court, and acknowledgment of a claim.

Effects of conversion

If the court upholds the compromise agreement, it will discontinue the proceedings at the mutual request of the parties. In view of Civil Procedure Code Art. 744 §1, discontinuance of the proceedings will result in the lapse of previously ordered interim relief, and as a result will give rise to the possibility under Art. 746 §1 to seek compensation for damage caused by enforcement of interim relief. Thus it seems that conversion of court proceedings into arbitration proceedings will be of little benefit to claimants or counterclaimants who have obtained interim relief for their claim before the action was brought, or during the course of the proceedings.

This does not seem to be the effect intended by the drafters. To avoid it, a minor amendment to Art. 746 §1 would suffice, namely to exclude from its application cases redirected to arbitration under Art. 1161¹, while setting a time limit within which the claimant would have to initiate arbitration proceedings (i.e. it would be necessary to specify for how long after discontinuance of the proceedings before the state court existing interim relief would remain in force). This would be analogous to Art. 733 §1, which specifies the time within which a claimant who has obtained interim relief prior to commencement of state-court proceedings must file a statement of claim on the merits, or else the interim relief will lapse.

Art. 1161¹ §2 also provides that the limitations period on claims redirected from state court to arbitration begins to run anew from the date on which the order discontinuing the proceedings becomes final. In view of the doubts as to whether discontinuance of the proceedings (Art. 355) nullifies the substantive legal effects of bringing an action in court, it is appropriate to expressly indicate that filing of a statement of claim in state court interrupts the running of the limitations period, even though the proceeding is subsequently discontinued following redirection of the case to arbitration, although from a legislative perspective, including this provision in the Civil Procedure Code instead of the Civil Code, along with the other provisions on limitations periods, may be questionable.

The foregoing provision is supplemented by Art. 1165 §1¹, pursuant to which the court is obliged to dismiss at its own initiative a statement of claim or application to institute non-adversarial proceedings if it concerns a dispute discontinued pursuant to Art. 1161¹ §2. The purpose of this provision is to preclude the state court from re-examining a dispute that is the subject of a case discontinued pursuant to a compromise agreement.

According to the explanatory memorandum to the bill, “This is intended to encourage the parties to carefully consider their decision to submit a dispute to arbitration. If they actually decide to do so, but are not satisfied with the arbitration award, they will not be able to refile a statement of claim or application to initiate non-adversarial proceedings before a state court.”

As asserted above, waiver of the jurisdiction of the state court in favour of arbitration applies to disputes arising out of or related to a legal relationship. Therefore, in our view, under Art. 1161¹ §2 the court should reject a subsequent statement of claim not only involving the specific claims redirected to arbitration, but also involving any other claims arising from or related to the legal relationship that was the source of the claims redirected to arbitration.

While it is true that this provision is significant for parties making a conscious decision to redirect the case from state court to arbitration, the literal wording providing that rejection of a newly filed case applies only to a dispute that was the subject of a case discontinued pursuant to Art. 1161¹ §2 is overly narrow.

Court costs in case of conversion

Along with the introduction of Civil Procedure Code Art. 1161¹, the Act on Court Costs in Civil Cases is also amended to provide that in the event of discontinuance of the proceedings at the mutual request of the parties before the court of first instance following conclusion of a compromise agreement, three-fourths of the court filing fee is to be refunded.

While this is reasonable, it may prove unsatisfactory to the claimant or counterclaimant, and thus discourage the diversion of cases from state court to arbitration. Additionally, if any evidentiary proceedings were already conducted before the state court, generating costs (e.g. for appearance of witnesses or preparation of expert opinions), it should be assumed that such costs will also be subject to the state court’s decision and will be borne by the parties.

Unfortunately, there are no rules in the code for incurring such costs, and the rules for allocation of costs under the Civil Procedure Code, other than perhaps the principle that each party bears its own costs, a proportional allocation of costs, or the principle of equity, do not seem adequate for a situation where the dispute is redirected to arbitration.

Summary

This amendment to the Civil Procedure Code is a step in the right direction, but it needs to be refined regarding three issues:

• Interim relief obtained before the case is redirected to arbitration
• The amount of the court fee to be refunded
• The rules for allocation of costs incurred in state court before the case is redirected to arbitration.

It seems that the purpose of the amendment is to relieve the burden on state courts in Poland, especially in large cities, where there is a backlog of cases and a long wait between filing suit and obtaining a judgment. Undoubtedly, arbitral tribunals will hear cases faster and in a much more flexible procedure. However, persuading the parties to choose arbitration over court proceedings requires the removal of obstacles (such as the collapse of interim relief following discontinuance of the state court proceeding) and creation of broader incentives to choose this approach (for example by increasing the percentage of the refunded court fees).

Monika Hartung, attorney-at-law, Dispute Resolution & Arbitration practice, Wardyński & Partners