In three recent cases, the Supreme Court of Poland has addressed issues surrounding construction of wind farms on land owned by another party. Projects of this type generate not just electricity, but also legal issues that must be resolved on a case-by-case basis.
Supreme Court of Poland judgments of 5 October 2012 (Case Nos. IV CSK 244/12 and IV CSK 213/12) and judgment of 7 February 2013 (Case No. II CSK 230/12)
Tenancy, or an unclassified agreement similar to tenancy?
In recent months the Supreme Court of Poland accepted for hearing three cassation appeals by an investor in wind farms, and subsequently held in favour of the investor in all three cases.
The first of the legal issues concerned the legal classification of an agreement for construction of a wind farm on land that was not owned by the investor. In the judgment of 5 October 2012 in Case No. IV CSK 244/12, the Supreme Court held that the investor’s receipt of income from the sale of electricity generated by wind turbines located on land provided to the investor under a contract for the investor to use for operating such equipment on the land is not “collecting the fruits” of the land within the meaning of Civil Code Art. 693 §1.
The court stressed that the agreement providing the party this type of entitlement in exchange for periodic payments defined as a percentage of the value of the electricity sold is a type of unclassified agreement, concluded pursuant to the principle of freedom of contract, which to the extent not addressed by the agreement may be governed as relevant by the Civil Code provisions on tenancy agreements.
The court based its holding on the assumption that the movement of air over the land cannot be regarded as a natural property of the real estate. Only if the wind were a natural property of the land could it be concluded that conversion of wind energy into electricity and transmission of the electricity to the grid of a transmission system operator constitutes collecting the fruits of the land.
Disclosure of agreement in land and mortgage register
In another judgment also issued on 5 October 2012, in Case No. IV CSK 213/12, the Supreme Court took up the issue of the permissibility of disclosing an agreement classified in this manner in the land and mortgage register.
Unfortunately, because of procedural errors by the court of second instance, the Supreme Court did not directly address this issue. Nonetheless, the court did not dispute the correctness of the relief requested, which was based on disclosure in the land and mortgage register of the right to use the land to design, build and operate a wind farm on the land.
It should be accepted that the permissibility of disclosing such a right in the land and mortgage register follows from the requirement stated in Case No. IV CSK 244/12 to apply the regulations on tenancy to the agreement in question as relevant, and thus also Art. 16(2)(1) of the Act on Land and Mortgage Registers and Mortgages. Disclosing the specific rights to the land held by the investor would also make the entry in the register more transparent and more accurately reflect the legal status of the real estate.
Protection against fraudulent conveyances and the permissibility of termination
In the judgment of 7 February 2013 in Case No. II CSK 230/12, the Supreme Court cited the legal classification of the agreement in the judgment in Case No. IV CSK 244/12 and stressed again that this type of agreement, in light of the contractual entitlements set forth therein, the period for which it was concluded, and the manner in which the fee is calculated, establishes a legal relationship that is closest to a tenancy agreement under the Civil Code.
The court generalised from this position in such a manner that—apparently—not only an agreement for construction of a wind farm but also an agreement for projects of other types should be classified in the same way. The court stated that an agreement giving a party the right to use land to carry out projects on the land is a type of unclassified agreement which, insofar as not regulated by the wording of the agreement itself, should be governed as relevant by the Civil Code provisions on tenancy.
In its deliberations, the Supreme Court also took up the issue of the permissibility of terminating this type of agreement at the stage when the project is under development. In this case, the landowner had submitted to the investor a notice of termination of the agreement pursuant to Civil Code Art. 3651, i.e. with the justification that the obligation between the parties is continuous in nature and for an indefinite period. The landowner then proceeded to conclude an agreement concerning the same land with another company.
The court agreed that because the parties had not specified the time by which the activities required to launch operation of the wind farm would be performed, the party’s obligation could be classified at this stage as being for an indefinite period. However, the court firmly rejected the position of the court of second instance that the obligation is also continuous in nature.
Essence of continuous obligations
The legal reasoning set forth in the justification for the Supreme Court’s judgment perfectly reflects the essence of a continuous obligation. The court pointed out that in obligations of this type, the debtor’s obligation consists of a certain ongoing behaviour for the duration of the contractual relationship in accordance with the substance of the obligation. Such behaviour does not lead to extinguishment of the continuous obligation, however, because the creditor has an interest in its continuation. Meanwhile, in the agreement concluded by the parties, during the development phase of the project the interest of the owner was not served by the continuation of the obligation, but to the contrary, by the fastest possible completion of the project.
The Supreme Court pointed out that the parties’ agreement was clearly aimed at increasing the stability of the legal relationship between them by limiting the grounds that would bring the relationship to an end. This aim was justified by the scale of the planned project, the amount of time required to develop it, and the related costs. But the assessment of the legal relationship binding the parties which was made by the court of second instance assumed that the agreement could be terminated unilaterally, even after a building permit was obtained but before the decision issuing the building permit became legally final, which was the result of an erroneous understanding of the continuous obligation. Clearly, this holding by the Supreme Court may result in increased stability of development projects in the wind energy sector.
Knowledge of third-party claim (Civil Code Art. 59)
In Case No. II CSK 230/12, the Supreme Court also interpreted Civil Code Art. 59 in the context of knowledge of a claim of a third party. This provision requires presentation of affirmative evidence in this respect so that a subsequent agreement can be found to be a fraudulent conveyance, i.e. frustrating in whole or part the satisfaction of the claim under the earlier agreement.
The court explained that to provide such evidence of knowledge, it is sufficient to show that the parties to the fraudulent conveyance knew of the earlier agreement, which is equivalent to knowledge of the claims arising under the earlier agreement. The court thus rejected the position of the court of second instance under which the third party could enjoy the protection provided by Civil Code Art. 59 by demonstrating that it will demand compulsory realisation of its claim, e.g. by resort to the courts, because this provision does not permit such distinctions.
The assurance by one party to the fraudulent conveyance that the earlier agreement had been terminated is also irrelevant in this regard, because that only allows the other party to regard the risk associated with the fraudulent conveyance as lower, but does not eliminate the knowledge it already has of the existence of the claim.
Significance of rulings for legal practice
This set of three rulings by the Supreme Court of Poland is expected to have a major impact on the legal practice in this area. These rulings are already being cited in numerous cases before the lower courts. The limited supply of land suitable for operating wind farms and the increasing competition between companies active in this sector may lead to further judicial disputes in the future, in which the line of precedent that is currently developing may be very useful.
Dr Marcin Lemkowski, Dispute Resolution & Arbitration Practice, Wardyński & Partners