A lost opportunity: Corporate arbitration and reform of Polish arbitration law | In Principle

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A lost opportunity: Corporate arbitration and reform of Polish arbitration law

The amendment to the arbitration law that enters into force on 1 January 2016 should increase the popularity of Poland as an arbitration forum. Lawmakers did not take full advantage of the opportunity to expand the scope of arbitration, however, ignoring calls for changes in the arbitrability of corporate disputes.

The Act of 10 September 2015 Amending Certain Acts to Support Amicable Methods of Dispute Resolution will introduce a series of changes in the Civil Procedure Code governing proceedings before arbitration courts. Although at first glance these changes might seem slight, they are designed to eliminate the greatest weaknesses of Polish arbitration law and make Poland a more arbitration-friendly jurisdiction. But it is hard to resist the impression that lawmakers did not go as far as they could have toward making Poland a popular forum for arbitration.

A debate has been underway for a long time in the Polish arbitration community over the possibility of resolving corporate disputes in arbitration, particularly concerning the validity of resolutions of corporate authorities. Changes in the arbitration law to enable greater corporate arbitration were called for. But while the amendment entering into force in January is intended to expand the scope of arbitration, the Parliament failed to introduce any changes affecting corporate arbitration.

Importance of corporate disputes in the Polish legal system

The right to review the correctness or validity of authoritative decisions taken in connection with the functioning of a company is a very important element of any system of corporate law. This is a fundamental instrument for protecting the rights of individual shareholders. In practice this right may take the form of a right to seek to directly set aside decisions by corporate authorities (i.e. to file a legal challenge to shareholders’ resolutions), or standing to exert indirect influence over decisions by management (a derivative suit—actio pro socio—against members of the management board). Polish corporate law provides for both forms of protection of the rights of shareholders, but in practice the right to challenge resolutions plays a more important role.

The primacy of the right to challenge resolutions is common in Continental legal systems and results from the stronger systemic position of representative bodies over management bodies. In Polish companies, the most vital decisions are taken in the forum of the shareholders’ meeting of a limited-liability company or the general assembly of shareholders of a joint-stock company. Therefore the ability to seek review of decisions by these bodies—rather than for example decisions by the management board—is more important for the interests of individual shareholders.

Advantages of resolving corporate disputes through arbitration

Disputes over the validity of resolutions, given their great significance for individual shareholders, arise frequently in practice. They also have their own peculiarities. Corporate disputes are typically complex, particularly in terms of party structure (with multiple entities involved). Usually the amount in dispute is high and a special skill set is required to resolve the dispute. In the case of claims seeking to set aside resolutions, it may be necessary for example to determine under highly specific circumstances whether a given decision will cause injury to a shareholder. This requires great experience and professional knowledge on the part of the person deciding the dispute.

This means that two commonly recognised features of arbitration are particularly advantageous in the context of corporate disputes: the right to freely select the arbitrator and the confidentiality of the proceedings. The freedom to choose the language of the proceedings can also be an advantage.

With freedom to choose the arbitrators, unlike in the state courts, the parties can ensure that the dispute will be decided by a person attuned to the specific area. In the German legal scholarship, it was a view to the need for professional resolution of corporate disputes that led to calls by commentators to permit corporate resolutions to be challenged in arbitration.

The principle of confidentiality included in most contemporary arbitration rules can help defuse corporate disputes. Challenges to corporate resolutions often arise between litigants who continue to work together as business partners. For the sake of their ongoing relations and further effective functioning of the company, the dispute should be decided in a constructive atmosphere. This is encouraged by confidentiality as such but also by the nature of arbitration proceedings. It is not without reason that arbitration is known as a gentlemen’s court.

A third possible advantage of arbitration for corporate disputes is the relative freedom to choose the language of the proceedings. The option of conducting all or certain aspects of the case in a language other than Polish can be a great help in the case of companies where some of the shareholders are foreign.

Corporate arbitration in Germany—a lesson for Polish lawmakers?

In Poland the issue of resolution of corporate disputes by arbitration courts is viewed primarily in the context of the abstract criterion of the arbitrability of disputes as provided in the Civil Procedure Code and the scope of cases which can be excluded from the jurisdiction of the state courts.

By contrast, in Germany, where corporate arbitration is permissible and enjoys great success, whether to allow this solution was analysed primarily in functional terms. The question was whether an arbitration court would be in a position to resolve disputes of this type equally as effectively as the state courts, while at the same time ensuring all parties to the dispute certain minimum legal guarantees.

In a landmark judgment issued in 1996 (known as the “Arbitrability II” case—Schiedsfähigkeit II), the German Federal Court of Justice held that there is no barrier to resolution of corporate disputes in arbitration, even without a change in law. The court also laid down criteria that must be met by arbitration rules in order to ensure the parties legal protection equal to that afforded by the state courts. To comply with these criteria, the German Institute of Arbitration, the country’s leading arbitration centre, developed a special set of rules for corporate disputes.

Resolving the issue of corporate arbitration in Poland by this route—without involving the Parliament—does not appear feasible. Nonetheless, the solutions functioning for many years in Germany could serve as a good pattern for Polish lawmakers. Hopefully they will soon perceive the advantages offered by corporate arbitration and, following solutions tested elsewhere, finally introduce the necessary changes in Polish arbitration law.

This step would make arbitration even more common as a method for resolving disputes, while at the same time relieving the overburdened state courts of some of their caseload.

Jakub Barański, Litigation Practice, Wardyński & Partners