Is an arbitration clause unenforceable if one of the parties is unable to cover the arbitration fees?
In a controversial ruling, the Supreme Court of Poland has held that a party’s objective inability to bear the costs of arbitration may render an arbitration clause unenforceable within the meaning of Art. 1165 §2 of the Civil Procedure Code. This issue has already been addressed by leading courts in Finland, Germany, Portugal and the UK, and more broadly by the European Court of Human Rights.
The court evaluates the party’s assets and not its ability to obtain financing
In the order of 19 January 2024 (case no. II CSKP 897/22), the Supreme Court of Poland observed that in the case of natural persons in the Polish state courts, the decision on whether a litigant should be exempt from court costs (as an indigent) refers to the litigant’s assets, not their family’s assets. The family’s financial situation may only be analysed within the limits of Art. 102 of the Act on Court Costs in Civil Cases.
The court extended this reasoning to the examination of whether the finances of an individual who is a party to an arbitration clause are adequate to cover the costs of arbitration proceedings. The court added that it is irrelevant whether the claimant could have obtained financing “from some institution.” This makes it clear that in assessing the claimant’s inability to cover the costs of arbitration, the courts must not consider the option of third-party litigation funding.
The Supreme Court took a similar position in the order of 20 March 2024 (case no. II CSKP 1187/22) (in a similar panel of judges), which shows that there is a developing line of jurisprudence on this issue. In that case, the Supreme Court pointed out that an arbitration clause may be rendered unenforceable by a party’s inability to pay the costs of arbitration, when the party has demonstrated the extent of the costs and their inability to cover the costs due to financial or life circumstances, including health.
This issue was addressed earlier in Poland by the Kraków Court of Appeal, which, in the order of 7 August 2013 (case no. I ACz 1251/13), held that there was an “objective inability” to cover arbitration costs when the degree of affluence of the party and the predictability of the costs at the date of execution of the arbitration, relative to the amount of the arbitration fees, poses an excessive barrier to accessing arbitration.
The Supreme Court took a similar line its order of 19 January 2024: “In the absence of relief from the obligation to incur fees associated with initiation and conduct of arbitration proceedings, the obligation to incur these costs may constitute an obstacle making access to arbitration effectively impossible. Thus it is reasonable to adopt the position that the claimant’s state of objective inability to incur costs that must be paid to initiate and conduct proceedings before the arbitration court, while it may not cause the arbitration clause to lose its binding force (Civil Procedure Code Art. 1168 §2), may, however, render the clause unenforceable within the meaning of Civil Procedure Code Art. 1165 §2.”
In an additional wrinkle, the court pointed out that the objective inability to pay the arbitration fees may lead to the unenforceability of the arbitration clause even if this condition arose for reasons attributable to the party claiming indigence (e.g. due to failed investments), unless the party is acting in bad faith, seeking to evade the consequences of signing the arbitration clause.
An arbitration clause waives the right to a court…
In 1980, the European Court of Human Rights observed in Deweer v Belgium (application no. 6903/75) that inclusion of an arbitration clause in an agreement constitutes a waiver of the right to a court as indirectly defined in Art. 6(1) of the European Convention on Human Rights. As this article of the convention does not include any guarantees in arbitration proceedings, when an arbitration clause is interpreted as a waiver of convention protection, it is also a waiver of the state model of judicial protection.
As the ECtHR explained: “The ‘right to a court,’ which is a constituent element of the right to a fair trial, is no more absolute in criminal than in civil matters. It is subject to implied limitations…. By paying the 10,000 BF which the Louvain procureur du Roi ‘required’ by way of settlement…, Mr. Deweer waived his right to have his case dealt with by a tribunal. In the Contracting States’ domestic legal systems a waiver of this kind is frequently encountered both in civil matters, notably in the shape of arbitration clauses in contracts, and in criminal matters in the shape, inter alia, of fines paid by way of composition. The waiver, which has undeniable advantages for the individual concerned as well as for the administration of justice, does not in principle offend against the Convention.”
…but human rights protections still apply
This issue is interpreted from a different perspective by Germany’s Federal Constitutional Court (Bundesverfassungsgericht) and the Finnish Court of Appeal. They suggest that although signing an arbitration clause excludes the right to resort to a court based on the state model, if a party is objectively unable to incur the costs of arbitration, the implied principle of the right to a court under Art. 6(1) of the European Convention on Human Rights should take precedence. In short, this means that the function of an arbitration clause is not to exclude the right to a court if that is the only guarantee of protection of human rights.
By knowingly choosing arbitration, the parties accept the associated costs
A somewhat different conclusion was reached by the High Court of England and Wales in El Nasharty v J. Sainsbury Plc, [2007] EWHC 2618 (Comm), in which the insolvent claimant in commercial litigation was unable to cover the advance costs specified in the ICC arbitration rules, and instead filed suit in the English state court alleging that the contract containing the arbitration clause was signed under duress and should be avoided. The defendant sought to stay the proceeding based on the existence of the arbitration clause.
The court took the view that the problem of forfeiting the right of access to a court under Art. 6(1) of the European Convention on Human Rights due to a party’s financial problems will not arise if the party was aware of the arbitral institution’s transparent rules for assessing costs at the time the party entered into the arbitration agreement. As the court reasoned, “inherent in any finding of waiver will be a finding that the Claimant freely and voluntarily entered into an arbitration agreement which imported a transparent published cost regime…. Furthermore inability of one party to meet his financial obligations under the ICC or comparable Rules or procedures does not render the arbitration agreement inoperative or incapable of being performed….”
It seems to me that the position of the English court presents a good compromise. The parties should anticipate potential financial problems at the stage of concluding the arbitration clause, especially if these problems might arise directly from the issues related to the given dispute, as suggested in the earlier cases cited by the court.
Opening the gates to abuse by litigants?
Notwithstanding the above, carrying over these considerations to the Polish arena in relation to the Supreme Court order of 19 January 2024, a claimant in such a situation should be expected to demonstrate, first, the ineffectiveness of attempts to initiate arbitration, and second, due diligence in seeking to obtain third-party funding, which, regardless of the court’s comments in that direction, is becoming increasingly widespread in Poland. Excluding these two elements creates a large margin of error in assessing whether a party has realistically acted in bad faith, with the aim of avoiding the foreseeable consequences of signing an arbitration clause.
However, there is no doubt that under the current line taken by the Supreme Court in its recent rulings, especially the order of 19 January 2024, unenforceability of the arbitration clause (Civil Procedure Code Art. 1165 §2) may arise from the bare demonstration by the claimant of the extent of the costs and the claimant’s apparent inability to cover the costs due to his financial situation—excluding any requirement to demonstrate due diligence in seeking to obtain financing from institutions offering third-party litigation funding, or to show that the claimant’s financial situation arose for reasons beyond the claimant’s control (i.e. there is a presumption of good faith).
Franciszek Wiącek, Dispute Resolution & Arbitration practice, Wardyński & Partners
