Polish Court of Appeal rules that the refusal to consider offsetting by an arbitration tribunal violates public policy

The Polish Court of Appeal has recently issued an important ruling related to the possibility of revoking an arbitration award. The respondent –a Polish limited liability company whose name has not been disclosed (buyer)–, claimed that the arbitral tribunal deprived him of the possibility to defend his interests and violated public policy, due to its failure to recognize offsetting claimed by him before the initiating of arbitration proceedings by the claimant, –also a Polish limited liability company whose name has not been disclosed either (supplier)–. In response to buyer’s allegations, the supplier contended that refusal to recognize offsetting in arbitration proceedings did not deprive the buyer of the possibility to defend his interests, as the buyer had the possibility to pursue his claim in separate proceedings.

Facts of the case

The parties concluded a framework sale agreement and other agreements based on which the supplier was to supply energy to the buyer. In the arbitration proceedings, the supplier demanded payment of invoices for supplies, which were not paid by the buyer. The buyer acknowledged the debt, however at the same time based his defense on the basis of previously executed offsetting. The buyer’s receivables, which were offset against the supplier’s claims, arose from a separate agreement not covered by the arbitration agreement between the parties.

The arbitral tribunal decided that it did not have jurisdiction to recognize offsetting on the basis of the agreement, in which the parties did not refer disputes to arbitration. Taking a different approach would mean that the party basing its defense on offsetting could unilaterally amend the agreement, which was submitted to the judgment of common courts.

As a result of this assumption, the arbitral tribunal issued an award in favor of the supplier.

Ruling of the Court of Appeal

The Court of Appeal decided to revoke the award. Although the Court did not share the buyer’s position that the arbitral tribunal deprived him of the possibility of defending his interests, it confirmed that refusal to consider revocation violated public policy.

The buyer alleged that the arbitral tribunal did not take a position in relation to the claim of offsetting. In the opinion of the Court of Appeal, the allegation was not consistent with the facts of the case. According to the written grounds of the award, it was clear that the arbitral tribunal considered the offsetting while analyzing the case and made a few references to the fact in the award. Another issue was for the tribunal to decide that it did not have jurisdiction to recognize the offsetting defense, which resulted in a contradiction between the award and the basic rules of public policy.

The Court of Appeal held that the award breached the following rules of public policy: (i) safety and certainty of trading, (ii) the right to a fair trial, and (iii) the right to comprehensive recognition of the case.

The fact that the legal relationship as the basis for offsetting was not covered by the arbitration clause was irrelevant. The dispute between the parties resulted from the agreement that was submitted to arbitration. Recognition of defense based on offsetting cannot be qualified as recognition of the dispute. Offsetting is effectively equivalent to making a payment. The right to offset is a subjective right and cannot be limited. Arbitration clauses do not refer to defense allegations such as offsetting. In addition, the fact that as a result of the defense based on offsetting, the tribunal has to verify the existence of the debt means that the tribunal acts within its jurisdiction determined by the arbitration clause. There is no legal provision that excludes the possibility of offsetting a receivable covered by an arbitration clause against a receivable not covered by such clause.

The Court considered that the failure to recognize the defense based on offsetting breached the protection and due process of trading also due to the fact that it obliged the buyer to comply with an obligation that is claimed to already have been met. The buyer was exposed to serious financial consequences, such as the obligation to pay interest on the undue debt and the risk of his offset receivables being considered as time-barred.

The Court of Appeal also emphasized that submission of the dispute to arbitration cannot lead to the conclusion that the parties waive their right to thorough and reliable proceedings that guarantee the legal protection of their interests. Due process requires recognition of well-founded claims of offsetting.

Refusal to consider offsetting and dismissal of all motions of evidence aimed at confirming the existence of receivables offset against those of the supplier also resulted in the lack of comprehensive recognition of the case and, therefore, the lack of recognition of its substance. Such a breach also constitutes a violation of basic rule of civil proceedings that forms part of Polish public policy.

The Court of Appeal’s decision is certainly of significant importance in future arbitral proceedings. The key point in the Court’s findings was the fact that offsetting is substantive and not a procedural issue and therefore should be considered when recognizing the dispute submitted to arbitration.