Maciej Durbas - partner, co-leader of Arbitration Practice, Kubas Kos Gałkowski, Poland

Angelika Ziarko - senior associate, Arbitration Practice, Kubas Kos Gałkowski, Poland

 

Landmark decision of the Polish Supreme Court on the inability to bear the costs of arbitration as a reason for lack arbitral tribunal’s jurisdiction, commented by Kubas Kos Gałkowski


Introduction

Not many recent decisions of the Polish Supreme Court have stirred the “arbitration pot” in Poland quite as much as the one issued on 19 January 2024 (file ref. no II CSKP 897/22). The decision relates to a somewhat controversial topic, i.e., whether the party’s financial situation causing an inability to bear the costs of arbitration may be the reason to deny the jurisdiction of the arbitral tribunal due to the arbitration agreement’s incapability of being performed. In the abovementioned decision, the Polish Supreme Court joined the worldwide discussion on the matter and presented a view that that may be the case in some situations. 


Factual background

The decision at hand was rendered based on the following factual circumstances and pertained to a domestic arbitration.

The plaintiff brought an action before a state court. The defendant argued that an arbitration agreement covered the claim, and on that basis, the Regional Court in Warsaw rejected the plaintiff’s action.

The Regional Court in Warsaw rejected the view that the plaintiff’s financial situation should affect the arbitration agreement. It held that a party bound by the clause should always be seen as responsible for its ability to pay the arbitration fees required by the arbitration rules by which it was bound.

The plaintiff lodged a complaint against the decision in the Court of Appeals in Warsaw. However, the Court dismissed the complaint and shared the view presented by the Regional Court. The Court of Appeals underlined that the grounds of unenforceability of an arbitration agreement should be objective and permanent. In the present case, the plaintiff did not prove that it was permanently prevented from incurring the costs of the arbitral proceedings. The plaintiff has appealed this decision to the Supreme Court, which set aside the decision of the Court of Appeals, which means that the Court of Appeals will rehear the case.


The rationale presented by the Supreme Court

The Supreme Court began the analysis by pointing out that the arbitration agreement was an expression of the parties’ autonomy of will; however, due to the fundamental nature of a constitutional right to a court, the parties’ autonomy could not be perceived as unlimited. The Supreme Court found that a right to a court and adequate judicial protection took precedence over the autonomy of parties and pacta sunt servanda embodied in the arbitration agreement.

Further, the Supreme Court underlined that as an arbitration clause was not tantamount to a waiver of judicial protection, one of the presuppositions for its effectiveness must be the availability of the forum agreed by the parties—in other words, the possibility of obtaining adequate legal protection before an arbitral tribunal.

The Supreme Court underlined that in some instances, the legal fees required to initiate arbitration proceedings may constitute an objective barrier to access to court and arbitral tribunal. However, while before a state court, a party's financial situation may be mitigated by obtaining financial aid (exemption from court fees), such exemption was not a common mechanism in arbitration. In such a scenario, the absence of such a possibility in arbitration may constitute an obstacle and make access to the arbitration effectively impossible. The rejection of an action brought before a state court in the event of an objective impossibility to commence arbitration proceedings based on the plaintiff's impecuniosity, in that case, would be tantamount to depriving the party of judicial protection in general – its case would be heard neither by the state court nor by the arbitral tribunal.

The Supreme Court then referred to and shared the view presented by courts in other jurisdictions (e.g., Germany, Liechtenstein, Portugal) and stated that while objective inability to bear the arbitration fees would not lead to the expiration (termination) of the arbitration agreement, it may entail its incapability of being performed.

In the end, the Supreme Court pointed out that the discussed solution should be perceived as a last resort (ultima ratio) that may only be invoked if the arbitration rules do not allow any other remedies, e.g., the temporary bearing of the costs by the arbitration institution or by the opposing party. It must also be preceded by a careful analysis of the facts of the cases and evaluated on a case-by-case basis, including from the abuse of rights perspective.


Comment

The perception of the Supreme Court’s commented decision varies throughout the Polish arbitration community. Of course, the format of this publication does not allow us to evaluate every aspect of the decision critically.

Our aim was instead to show the legal community the following:

a.   Poland has become yet another jurisdiction where a party’s impecuniosity might affect the arbitration agreement. Therefore, careful evaluation is required when commencing and conducting disputes with parties that might not have the funds to initiate arbitration.

b.   It is not yet clear whether and how other Polish courts will apply the principles outlined in the Supreme Court’s decision, as this decision does not bind the courts from a legal standpoint.

c.    It is not yet clear whether and how the decision will affect the practice of Polish arbitral institutions, the Polish legal regime, and the practice of arbitration.

 


[unofficial translation by Maciej Durbas, Tadeusz Zbiegień, Kubas Kos Galkowski, Poland]

 

II CSKP 897/2

  

ORDER

January 19, 2024

Supreme Court in the Civil Chamber composed of:

Supreme Court Judge Paweł Grzegorczyk (presiding, rapporteur)

Supreme Court Judge Agnieszka Piotrowska

Supreme Court Judge Władysław Pawlak


Court reporter Przemysław Mazur

 

Having recognized at a hearing on January 19, 2024, in Warsaw

cassation appeal of the plaintiff

against the order of the Court of Appeal in Warsaw

of April 27, 2020, VII AGz 35/20,

in the action brought by the plaintiff

against the defendant

for payment,

 

revokes the appealed decision and refers the case to the Court of Appeals in Warsaw for reconsideration, leaving it to this Court to decide on the costs of the cassation proceedings

 

REASONING

Plaintiff filed a lawsuit against Defendant demanding payment of PLN 4 377 490 along with statutory interest for delay.

In its response to the lawsuit, the defendant invoked, before entering into a dispute on the merits, the arbitration agreement contained in § 31(2) of the investment and shareholders' agreement dated July 14, 2011, between the plaintiff, the defendant, and I. S.A.,

By order dated September 6, 2019. The District Court of Warsaw rejected the lawsuit (item I) and ruled on the costs of the proceedings (items II-III).

The District Court pointed out that the first sentence of § 31(2) of the Investment and Shareholders' Agreement of July 14, 2011, implied that any disputes arising out of or in connection with the agreement would be resolved by the Court of Arbitration at the Polish Chamber of Commerce in Warsaw, by a panel of three arbitrators, in accordance with the rules of that court in effect on the date the lawsuit was filed. The District Court found that in the circumstances of this case, both prerequisites for the rejection of a lawsuit listed in Article 1165 § 1 of the Code of Civil Procedure were met, i.e., the arbitration clause covered the dispute between the parties, and the defendant raised the arbitration clause before entering into a dispute on the merits. According to the District Court, the arbitration clause was also not incapable of being performed within the meaning of Article 1165 § 2 of the Code of Civil Procedure, nor had it lost its effect within the meaning of Article 1168 § 2 of the Code of Civil Procedure.

The Court argued that in addition to procedural cases of the arbitration clause losing its effect, the arbitration agreement could also lose its effect on substantive legal grounds due to the need to apply by analogy or directly specific provisions of the Civil Code on legal actions. However, in light of Article 475 § 1 of the Civil Code, the debtors’ difficulties in fulfilling any monetary payment should not be equated with the inability to perform, even in the event of their insolvency. This is because it is accepted that the debtors are always responsible for their ability to pay. In doing so, the court noted that concluding an arbitration agreement constitutes a voluntary restriction of constitutional access to a (state) court. By entering into an arbitration agreement, the parties should expect to pay the fees prescribed by the rules of the arbitration court.

The District Court also firmly rejected the possibility of declaring an arbitration clause incapable of being performed due to a party's subsequent insolvency, having recognized that a party that has bound itself by an arbitration agreement is always responsible for its ability to pay the arbitration fees required by the rules to which it has bound itself under Article 1161(3) of the Code of Civil Procedure.

By order dated April 27, 2020. The Court of Appeals in Warsaw, as a result of the plaintiff's complaint, amended point III of the contested order of the District Court in Warsaw of September 6, 2019, to refrain from charging the plaintiff with the costs of legal representation due to the defendant (item I); dismissed the complaint to the remaining extent (item II) and ruled on the costs of the complaint proceedings (item III).

The Court of Appeals did not share the plaintiff's position that the lack of funds to participate in arbitration could be another reason referred to in Article 1168 §2 of the Code of Civil Procedure, causing the arbitration clause to lose its effect. In the Court's opinion, it is also impossible to consider that the case involves the arbitration agreement’s incapability of being performed within the meaning of Article 1165 §2 of the Code of Civil Procedure and that this holds true even if one assumes that one should not exclude a priori a situation in which a party provides due proof of the impossibility of covering the costs of initiating and conducting arbitration proceedings, which could constitute, depending on the circumstances of a particular case, a basis for declaring that the arbitration agreement is incapable of being performed, to ensure the effectiveness of the fundamental rights of the individual, in the case at hand the right of access to court, which would constitute a basis for excluding the application of Art. 1165(1) of the Code of Civil Procedure and refusal to reject the lawsuit under Article 1165(2) of the Code of Civil Procedure, taking into account Article 77(2) in conjunction with Article 45(1) of the Constitution and Article 6(1) of the Convention for the Protection of Human Rights and Fundamental Freedoms, drawn up in Rome, November 4, 1950 (Journal of Laws of 1993, No. 61, item 284, hereinafter "ECtHR"). Indeed, the interpretation of Article 1165 § 2 of the Code of Civil Procedure with regard to the premise of the incapability of being performed by the arbitration agreement should take into account objective and permanent reasons for the impossibility of initiating and conducting arbitration, which, in the opinion of the Court of Appeals, should also include the existence of objective and permanent reasons that make it realistically impossible to cover the costs of initiating and conducting arbitration, resulting clearly from the evidence gathered in the case, which was not the case in the resolved case. The plaintiff, even though he had the burden of proof, failed to prove beyond a reasonable doubt that he is permanently deprived of the ability to pay the costs of the arbitration proceedings and is unable to raise these funds in any way within a reasonable period. In particular, he has not submitted evidence showing that he has attempted to obtain financing from some institution or private individual, as well as evidence showing that even if such a situation were to occur, as the plaintiff claims, it is not the result of the plaintiff's deliberate actions, such as divesting himself of funds or failing to make adequate savings.

The Court of Appeals also pointed out that the argumentation cited by the District Court referring to Article 475 of the Civil Code is not entirely without merit, as the plaintiff claimed since an arbitration agreement is nothing more than a pre-trial civil law contract to which the provisions of the Civil Code apply. According to the Court of Appeals, many arguments favor the substantive nature of the arbitration agreement. Consequently, the Court of Appeals fully shared and recognized as its own the District Court's reasoning regarding Article 475 § 1 of the Civil Code,

The order of the Court of Appeals was appealed in cassation appeal by the plaintiff in its entirety, alleging violation of Article 1165 § 2 of the Code of Civil Procedure in connection with Article 45(1) of the Constitution and Article 6(1) of the ECHR, Article 365 § 1 of the Code of Civil Procedure, Article 1165 § 2 and Article 1168 § 2 of the Code of Civil Procedure in connection with Article 45(1) of the Constitution, as well as Article 6 and Article 475 § 1 of the Civil Code. On this basis, he requested that the appealed order be amended by dismissing the motion to reject the lawsuit or, alternatively, that the appealed order be reversed and the case be referred to the Court of Appeals for reconsideration.

The Supreme Court considered the following:

An arbitration clause relocates the jurisdiction over the dispute from the jurisdiction of state courts to a court that is not an organ of judicial power within the meaning of Article 10 and Article 173 of the Constitution (cf. the judgments of the Supreme Court of December 13, 2006, II CSK 289/06, May 26, 2017 I CSK 464/16 and February 8, 2019, I CSK 757/17, OSNC 2019, No. 11, item 113). The court of arbitration remains outside the structure of state bodies, and the source of its authority to decide the case stems from the will of the parties expressed in the arbitration agreement. Thus, the consequences of the arbitration agreement are located in the sphere of competence and refer to the choice of the forum for the resolution of a future or already existing dispute. This effect is unambiguously procedural in nature and externalizes itself in the decision of the state court, the content of which is the rejection of the lawsuit or motion taken on the plea of a party filed before entering the dispute on the merits (Article 1165 § 1 of the Code of Civil Procedure) (cf. mutatis mutandis resolution of the Supreme Court of September 7, 2018, III CZP 38/18, OSNC 2019, no. 6, item 63), or, if an action was brought before an arbitration court, in the decision of the arbitration court dismissing a plea of lack of jurisdiction of that court (Art. 1180 of the Civil Procedure Code), if a party raised such a plea, or, alternatively, in the issuance by the arbitral court of a decision on the merits of the case, in which lies an implicit positive decision on its jurisdiction (see, for example, the judgment of the Supreme Court of October 11, 2013, I CSK 769/12, OSNC- ZD 2014, no. D, item 70).

Resignation from the resolution of a dispute by a state court is an expression of the autonomy of the will of the individual (Article 31 of the Constitution) (cf, for example, the decision of the Constitutional Court of March 21, 2011, Ts 279/10, OTK-B 2011, No. 3, item 269, and the judgments of the Supreme Court of May 11, 2007, I CSK 82/07, OSNC 2008, No. 6, item 64, and of February 7, 2018, V CSK 301/17), this autonomy, however, given the fundamental importance of the right of access to a court in a democratic state under the rule of law and its constitutional and juridical legitimacy (Article 45(1) of the Constitution, Article 6(1) of the ECHR and the second paragraph of Article 47 of the Charter of Fundamental Rights, hereinafter - "the Charter"), is not unlimited. By concluding an arbitration agreement, the parties exclude the hearing of the case by the court in the sense of Article 45(1) of the Constitution, but they do not relinquish judicial protection in general.

The parties only choose another, more convenient forum, which, with the subsequent participation of state courts, can provide them with protection equivalent to that obtainable before a state court (cf. Article 1212 of the Code of Civil Procedure). In addition, the parties do not fully derogate from the guarantees stipulated in Article 45(1) of the Constitution, given that an arbitral award is subject to state court review (Art. 1205 et seq, Articles 1212 et seq. of the Code of Civil Procedure), and the interpreters of this control are, among others, the basic principles of the legal order of the Republic of Poland (Articles 1206 § 2(2) and 1214 § 3(2) of the Code of Civil Procedure), the content of which is subject to reconstruction taking into account Article 45(1) of the Constitution, Article 6(1) of the ECHR and the second paragraph of Article 47 of the Charter (cf. also the decision of the European Court of Human Rights of February 23, 1999, No. 31737/96, Osmo Suovaniemi and Others v. Finland, which noted that the voluntary resignation from a state court resolution of the case in favor of arbitration is, in principle, permissible from the point of view of Article 6 of the ECHR, but need not be regarded as equivalent to a waiver of all the rights statuated in Article 6 of the ECHR).

Assuming that an arbitration clause is not equivalent to a waiver of judicial protection, one of the presuppositions for the effectiveness of this act must be the availability of an alternative forum agreed upon by the parties, or in other words - the possibility of obtaining effective legal protection before an arbitral tribunal. An expression of the relationship between the effectiveness of an arbitration agreement and the actual possibility of obtaining legal protection before the court designated in the agreement is Article 1168 of the Code of Civil Procedure, which specifies certain cases where the arbitration agreement loses its effect, related to the inability to hear the case of the arbitration court designated in the clause or composed as agreed by the parties (cf. also Article 1195 § 4 of the Code of Civil Procedure). Although this provision is dispositive in nature, this does not mean that the parties can exclude the effect of the arbitration agreement's becoming ineffective by agreeing, for example, that the arbitration agreement remains effective despite the occurrence of circumstances referred to in Articles 1168 § 1 and 2 or 1195 § 4 of the Civil Procedure Code. In these circumstances, such an agreement would be equivalent to a waiver of judicial protection in general, which does not fall within the construction of a procedural agreement such as an arbitration clause. On the other hand, the parties may specify, for example, other arbitrators should it prove impossible for the arbitrators named first to perform their functions.

The assumption under consideration corresponds with Article 1165 § 2 of the Civil Procedure Code, from which it follows that the court shall not reject a suit, despite the plea of an arbitration clause, if the clause is, among other things, incapable of being performed or has lost its effect. This provision refers to Article II(3) of the Convention on the Recognition and Enforcement of Arbitral Awards of June 10, 1958 (OJ, 1962, No. 9, item 41, hereinafter - the "New York Convention") and Article 8(1) of the UNCITRAL Model Law on International Commercial Arbitration, which use similar terminology. In this regard, it should be assumed that although the boundaries between the cases of invalidity, ineffectiveness, incapability of being performed, or loss of effect of an arbitration agreement are not fully clear, while the loss of binding effect of a clause should be associated with situations of a consequential and essentially irreversible nature, the incapability of being performed is a more flexible concept and may be not only primary and secondary but also of a merely temporary nature.

Both the New York Convention and the UNCITRAL Model Law, followed by the Code of Civil Procedure provisions, do not contain an enumerative or exemplary list of cases of arbitration agreement’s incapability of being performed. What is meant, therefore, as noted in the literature, may be the whole spectrum of situations in which it is impossible to conduct arbitration proceedings but which do not lead to the loss of effect of the arbitration agreement. In all of these cases, the court cannot reject the lawsuit despite the prior conclusion of the arbitration agreement, and the ground for this impossibility is the factual or legal unavailability of the alternative forum agreed upon by the parties while assuming that the intention of the parties to the arbitration agreement is not to waive judicial protection in general.

It is beyond dispute that the availability of judicial protection in a particular case can be affected by the costs required to initiate and conduct legal proceedings. This relationship applies not only to the state judiciary, within the framework of which court costs, by virtue of their amount, can constitute an objective barrier to access to the court (see, for example, the judgment of the Constitutional Court of June 16, 2008, P 37/07, OTK-A 2008, no. 50 and the case law cited therein, as well as the European Court of Human Rights judgments of October 9, 1979, no. 6289/73, Airey v. Ireland, and of June 19, 2001, no. 28249/95, Kreuz v. Poland), but also to arbitration. For in this case, too, the initiation and conduct of proceedings involves financial expense. However, while in the state judiciary, this barrier is mitigated by the well-known institution of exemption from court costs (Art. 100 et seq. of Law on Costs in Civil Cases.), in arbitration, the equivalents of this solution are rare (cf. e.g., Art. 100(2) of the Statute of the Court of Arbitration for Sport at the Polish Olympic Committee, as well as the Guidelines on Legal Aid before the Court of Arbitration for Sport adopted by the Court of Arbitration for Sport in Lausanne, https://www.tas- cas.org/en/general~information/index/).

In the absence of the possibility of exemption from the obligation to pay the fees associated with the initiation and conduct of arbitration proceedings, the obligation to pay these costs may constitute an obstacle that makes access to arbitration effectively impossible. Consequently, the position that the state of the objective impossibility of the Plaintiff to bear the costs, the payment of which is necessary for the initiation and conduct of proceedings before the arbitration court, although does not lead to the loss of binding effect of the arbitration agreement (Article 1168 § 2 of the Code of Civil Procedure), may entail the incapability of being performed within the meaning of Article 1165 § 2 of the Code of Civil Procedure (cf., in foreign case law against the background of similar situations - the decision of the German Federal Court of September 14, 2000, III ZR 33/00, Neue Juristische Wochenschrift 2000, z. 50, p. 3720, in which it was accepted that an arbitration clause is incapable of being performed (undurchfuhrbar) within the meaning of Section 1032(1) of the German Code of Civil Procedure because the plaintiff cannot bear the costs of the arbitration proceedings and it is not otherwise possible to cover them, decision of the Supreme Court of the Principality of Liechtenstein of August 7, 2008, 04 CG.2007.225, Zeitschrift fur Schiedsverfahren 2008, z. 6, p. 306, which held that when an action is brought before a state court by a party to an arbitration agreement unable to bear the costs of arbitration, the unwillingness of the opposing party to pay these costs means that the parties choose the jurisdiction of the state court, as well as the decision of the Constitutional Court of the Portuguese Republic of May 30, 2008, No. 311/08 (753/07), https://www.tribunalconstitucional.pt/tc/en/acordaos/20080311.html and statements indicated in the recitals of the decision of the Swiss Federal Court of September 21, 2021, 4A 166/2021, BGE 147 III 156, as well as, albeit with a different rationale, the decision of the Court of Appeals in Krakow of August 7, 2013 IACz 1251/13).

The rejection of a lawsuit by a state court in the event of an actual inability to initiate and conduct arbitration proceedings, the basis of which is the impecuniosity of the plaintiff, would be tantamount to depriving the plaintiff of judicial legal protection in general. Such an effect should be excluded, given the essence and rank of the right of access to a court on the constitutional and international levels, as well as the purpose of the arbitration agreement, which, as mentioned, is not to deprive the parties of judicial legal protection, but to obtain it in an equivalent form before a body other than a state court. On the other hand, the rejection of the lawsuit - in view of the parallel impossibility of proceeding before an arbitration court - would entail a situation in which the plaintiff, in the absence of financial resources, would not only be unable to effectively demand the resolution of the case through the path preferred by the parties to the arbitration agreement but also to obtain protection before any other court.

The incapability of being performed in the sense presented cannot be seen as a simple correlate of the plaintiff's poor financial situation, which makes it impossible to initiate and conduct arbitration proceedings. The determination of the arbitration agreement’s incapability of being performed should be the ultima ratio in the event that the removal of this obstacle is impossible in the proceedings before the arbitration court with the use of solutions from the arbitration rules that allow the arbitration institution to temporarily assume the costs of the arbitration or otherwise mitigate the burden of their payment, if such are available, or - with the participation of the opposing party, which, seeking to maintain the effects of the arbitration agreement and the recognition of the case by the arbitration court, may declare the payment of the costs necessary for the initiation and conduct of the arbitration proceedings (cf. the widely cited earlier decision of the Swiss Court in this regard Federal Court of September 21, 2021, 4A 166/2021, as well as the rulings of the German Federal Court of September 14, 2000, III ZR 33/00, in which it was noted that the defendant did not declare its willingness to remove the obstacle to the enforcement of the arbitration agreement by upfronting the claimant’s share of the arbitration costs). In addition, the amount of costs that the plaintiff must pay to initiate proceedings in arbitration and in state court must be compared, considering the prerequisites for possible exemption from court costs. If the amount of fees in both cases would be comparable, and it does not appear from the material of the case that a party could obtain exemption from court costs (cf., for example, Article 109 § 2 of the Code of Civil Procedure), there is no need to nullify the effect of the arbitration agreement made. Depending on the nature of the case, it may also be necessary to consider other circumstances, such as particularly strong considerations in favor of the jurisdiction of the arbitration from the point of view of the interests of the opposing party, which may relate in particular to the neutrality of the arbitral forum and the suitability of the award for recognition and enforcement abroad.

The arguments cited by the Court of Appeals, referring to Article 475 of the Civil Code, the possibility of improving the plaintiff's financial situation and the risk of abuse arising from the possibility of making the arbitration agreement incapable of being performed through deliberate actions, do not lead to a different conclusion.

The considerations of the Court of Appeals, made in the footsteps of the District Court and juxtaposing the incapability of being performed due to the inability to bear the costs of the arbitration proceedings with the insolvency of the debtor obligated to meet the monetary performance (Article 475 of the Civil Code), were inappropriate already for the reason that they undervalued the procedural nature of the effects of the arbitration clause (see, for example, the decisions of the Supreme Court of November 7, 2013, V CSK 545/12, of October 13, 2017, I CSK 33/17, OSNC 2018, no. 7-8, item 81 and, respectively, the reasoning of the Supreme Court's resolution of September 7, 2018, III CZP 38/18) by erroneously equating the arbitration agreement with the receptum arbitrii, or juxtaposing the arbitration agreement with a contract of substantive law, in which a party is obliged to fulfill a monetary performance. In the Polish legal order, however, the parties to an arbitration clause, like other procedural contracts, do not put themselves in the role of creditor and debtor to each other and are not obliged to provide mutual benefits within the meaning of Article 353 of the Civil Code. The arbitration agreement only affects the jurisdiction (competence) of the state court and the arbitration court to decide the case, and its consequences come into effect only after the initiation of arbitration proceedings or proceedings before the state court, under the rules of procedural law. The Court of Appeals' reasoning also failed to take into account the specific subject matter of the arbitration clause, which is not a benefit in the sense of civil law but a resignation - although not total - of the right of access to court in the sense of Article 45(1) of the Constitution, and therefore a subjective right of a public and fundamental nature, the disposition of which is not subject to the rules of private law with its appropriate benchmark of general competence.

Even, moreover, if one were to view the case under consideration from the perspective of a collision between the principle of pacta sunt servanda and the right of access to judicial protection, the superior character should be given to the second of these values [cf. the previously cited decision of the Constitutional Court of the Portuguese Republic of May 30, 2008, No. 311/08 (753/07)]. The defendant's interest, in this case, is to protect its confidence in the permanence of the choice of the forum in which judicial protection is to be exercised in accordance with the wording of the arbitration agreement; it is, therefore, instrumental in nature. From the plaintiff's point of view, on the other hand, it is about access to the court in general and, thus, the exercise of a right of a primary and elementary nature. The rejection of the arbitration clause by the state court does not entail the loss of judicial protection for the opposing party, for it will be granted in the proceedings before that court, while the rejection of the lawsuit would lead to depriving the plaintiff of judicial protection in general.

To the extent that the arbitration agreement would have the effect of depriving a poor party of judicial protection, such an act would go beyond the statutory framework of the arbitration clause and would not be reconcilable with the reasonably perceived intention of the parties to the act, which is, as already emphasized, to create an alternative path for judicial resolution of the dispute, not to establish an obstacle to judicial enforcement of claims in the event of impecuniosity of one of the parties. A situation in which the path to resolution of the case by arbitration is closed due to a financial barrier cannot be equated with such inconveniences that may arise from the arbitration agreement, such as the necessity, raised in the response to the complaint, of conducting the proceedings in a foreign language or the presence of non-lawyer arbitrators on the panel. The legal order allows the legal protection provided by an arbitral tribunal to deviate in shape from that provided by a state court, even if this proves inconvenient for one of the parties. However, it does not accept a situation in which, in the circumstances of a particular case, the arbitration agreement would result in a de facto lack of access to judicial protection in general.

Determination of the incapability of being performed in the event of inability to bear the costs of arbitration is not precluded by the hypothetical change in the financial status of the party to the arbitration agreement, which is emphasized in the recitals of the order under appeal and in the response to the cassation appeal. When deciding on whether the plea of the arbitration agreement deserves merit, the state court decides whether, despite concluding the arbitration agreement, the path to pursue the claim in state court should remain open due to the inability to obtain effective protection in arbitration or whether the agreement has a negative effect, which should lead to the rejection of the lawsuit. The authoritative factor in this matter is the state of affairs existing at the time of adjudication (Article 316 § 1 of the Code of Civil Procedure), not the projected state of affairs, which may or may not occur in the future. Any financial situation can be viewed as temporary insofar as it is not excluded that it will change in some way in the future due to fortuitous events. However, it is clear that this kind of expectation and speculation cannot be relevant in assessing a party's financial situation and its ability to bear the costs of arbitration.

Thus, the requirement that the inability to bear the costs of the arbitration proceedings be permanent should be understood to mean the state of affairs objectively existing at the time of the ruling, which is the basis for the court's decision. Recognition of the arbitration agreement as incapable of being performed is not equivalent to the loss of its effect, so the arbitration agreement may, in the future, become the basis for rejection of the lawsuit in other proceedings if the inability to bear the costs of the arbitration proceedings ceases. However, if the state court, guided by the situation existing at the time of ruling, rejected the plea of an arbitration agreement in a final and binding manner (Article 222 of the Code of Civil Procedure), then future favorable changes in the financial situation of the party who brought the action may not affect the jurisdiction of the state court to decide the case, which is fixed by a final decision, but only the need to revoke the exemption from court costs (Article 110 of the Law on Costs in Civil Cases), if such exemption was granted.

The conduct of a party who, in response to a plea of an arbitration agreement, refers to the incapability of being performed, caused by its own intentional actions, is subject to evaluation from the point of view of the rules of good faith and abuse of process (Articles 3 and 41 of the Code of Civil Procedure). This applies to all cases of an arbitration agreement’s incapability to be performed, regardless of the underlying reasons. However, such an assessment must be based on the circumstances of the specific case, and the permissibility of its conduct, and sometimes even its necessity, does not undermine the general assumption that the incapability of being performed within the meaning of Article 1165 § 2 of the Code of Civil Procedure may also have its basis in the inability to bear the costs of initiating and conducting arbitration proceedings.

Although the Court of Appeals analyzed the issue in terms of the loss of effect of the arbitration agreement, not its incapability of being performed, the interpretation of Article 1165 § 2 of the Code of Civil Procedure presented here is not opposed by the Article 147a of the Bankruptcy Law. This provision was introduced by the Act of May 15, 2015. - Restructuring Law (unified text of Journal of Laws of 2022, item 2309) in response to criticism of Articles 142 and 147 of the Bankruptcy Law in its original wording, which provided that an arbitration clause would cease to be effective upon the declaration of bankruptcy of a party (cf. Seventh Parliamentary Print No. 2824, item III). Thus, this regulation was not made under the premise that that the impecuniosity of a party to an arbitration agreement could not be a reason for its incapability of being performed within the meaning of Article 1165 § 2 of the Code of Civil Procedure, but to depart from the previous strict solution by essentially binding the receiver to the arbitration agreement made by the insolvent party while allowing the receiver to avoid the arbitration agreement under the control of the judge-commissioner. In addition, the analyzed provision has a broader scope of application, as it opens the possibility for the receiver to make the arbitration agreement ineffective not only in the event of lack of funds of the bankruptcy estate but also due to other circumstances that may make the enforcement of the claim before the arbitration court difficult to liquidate the bankruptcy estate. In addition, it makes it possible to erase the effects of the arbitration agreement beyond the pending litigation, while the reliance on the incapability of being performed of the arbitration agreement comes into play only when the arbitration agreement becomes the basis of the relevant procedural objection raised in the course of the proceedings. Thus, the considered solution is located at the interface of bankruptcy and arbitration proceedings, is of a special nature, and cannot be the basis for inference a contrario. At the same time, it should be noted - with reference to the arguments of the Court of Appeals regarding the requirement of the consent of the judge-commissioner to the withdrawal of the clause by the receiver (Article 147a(1) of the Bankruptcy Law) - that also the reliance on the incapability of being performed on the basis of Article 1165 § 2 of the Code of Civil Procedure is subject to the court's assessment in each case, with the assurance of its review within the appellate proceedings.

Therefore, the view of the Court of Appeals, denying a priori the recognition of the inability to bear the costs of initiating and conducting arbitration proceedings as a reason for the incapability of being performed, had to be considered incorrect. At the same time, however, the Court of Appeals noted that even if it were to take a different view, the plaintiff had not shown that it was permanently deprived of the ability to bear the costs of the arbitration proceedings. If, in fact, the plaintiff was permanently deprived of the ability to bear the costs of the arbitration proceedings, then the plaintiff failed to demonstrate that this situation was not the result of his fault or intentional action.

On this point, too, the Court of Appeals' position could not stand.

Case material showed that the plaintiff was twice exempted from paying the court fee - for the lawsuit and the complaint against the order rejecting the lawsuit in full. Justifying the exemption from the lawsuit fee, the court registrar pointed out that the content of the documents attached to the application, the veracity of which does not raise any doubts, proves that the plaintiff does not have the means to pay the fee. In addition, in the grounds for the order rejecting the lawsuit, the District Court stated that the plaintiff's financial condition, confirmed by reliable documents, indicated that he had no means to pay the lawsuit fee of PLN 100,000 and that it would be grossly unfair to attempt to enforce this amount from his assets.

The procedural effects of the court's (court registrar's) orders on exemption from court costs (Article 360 of the Code of Civil Procedure) are confined to the limits of the court proceedings in which they were issued. These orders are not characterized by substantive legitimacy of the final decision (Article 365 in connection with Article 366 of the Code of Civil Procedure), and their effectiveness (Article 360 of the Code of Civil Procedure) comes down to the waiver of the party's obligation to bear court fees, within the limits outlined in the operative part. Thus, granting exemption from court costs does not prejudge - on a legal level - that the exempted party cannot bear the costs of initiating and conducting proceedings before the arbitration court. However, the granting of exemption from court costs in a case covered by the arbitration agreement, in which proceedings were initiated before the state court, provides the basis for a factual presumption that the plaintiff cannot, without prejudice to the livelihood of himself and his family, bear the costs of proceedings before the arbitration court in the same, let alone in a higher amount. A different solution would be glaringly inconsistent, indeed, it is difficult to identify rational reasons why an authoritative statement in the proceedings before the state court of the prerequisites for shifting to the Treasury the financing of litigation costs, which include the hypothetical possibility of a party making savings, emphasized by the Court of Appeals (cf. e.g. the decision of the Supreme Court of October 19, 2023, III CZ 144/23), would not affect the assessment of whether a party could incur the same or higher costs, which are conditions for obtaining legal protection before the arbitration court.

It is irrelevant in this regard that, when granting relief from court costs, the court does not examine whether the situation justifying the granting of the application did not arise for reasons attributable to the applicant. The objective impossibility of incurring the costs of initiating and conducting proceedings before the arbitration court may lead to the incapability of being performed also if this condition arose for reasons dependent on the party claiming this condition (e.g., caused by investment failure) unless it is an act of bad faith aimed at thwarting the effects of the arbitration agreement. The provision of Article 1165(2) of the Civil Procedure Code, like Article II(3) of the New York Convention and Article 8(1) of the UNCITRAL Model Law, which are its points of reference, does not provide grounds for the that the incapability of being performed should be treated differently depending on whether it was caused by reasons dependent on or independent of the party claiming it. Nor does the constitutional perspective (Article 45(1) of the Constitution) leads to different conclusions.

As for possible bad faith action, the burden of proving the facts proving such action rests with the party to the arbitration agreement, which derives legal consequences from them. The fact that the financial situation of the party claiming the incapability of being performed is essentially due to the initiation of enforcement proceedings against it does not prove such a situation per se. On the other hand, no other relevant findings that could prove such a situation were made by the Court of Appeals.

The basis for exemption from court costs for an individual is indeed the statement he or she submits (Article 102(1) of the Law on Costs in Civil Cases.), and the assessment of financial standing is made as of the date of ruling on the application. However, if the court finds doubts about the credibility of the statement and the information attached to it about assets, income, and sources of income, the appropriate way to clarify them is to order an investigation, which may also take place as a result of the opposing party's statements (Article 109(1) of the Law on Costs in Civil Cases). The investigation in connection with the opposing party's information can also be ordered ex-post, so the opposing party, despite the impossibility of challenging the order of exemption from court costs, is not deprived of the possibility of its review. Circumstances relevant to assessing the financial status of a party to the arbitration agreement may also be invoked in the proceedings before the state court at the stage of deciding on the validity of the plea of the arbitration agreement.

From the findings of the Court of Appeals, it did not appear that between the issuance of the order exempting the plaintiff from the complaint fee and the ruling on the merits of the complaint, the plaintiff's financial status changed (cf. mutatis mutandis decisions of the Supreme Court of May 6, 2011, II CZ 12/11, of May 28, 2013, V CZ 12/13, of November 27, 2013, V CZ 61/13, of February 13, 2015, II CZ 91/14, of November 10, 2016, IV CZ 45/16 and of June 30, 2022, III CZ 88/22). There was also no withdrawal of the exemption from court costs; on the contrary, the plaintiff was subsequently exempted from the cassation complaint fee as well (p. 999). To the extent that the reasoning of the order under appeal accentuated the requirement that the inability to bear the costs of the arbitration proceedings must be permanent, it was instead necessary to refer to the earlier comments, in light of which the court evaluates the enforceability of the arbitration agreement according to the state - which also refers to the plaintiff's financial situation existing on the date of the ruling on the plea intended to justify the rejection of the lawsuit, and not based on hypothetical projections of future changes in the plaintiff's assets.

In assessing whether a party to an arbitration clause, being an individual, can bear the costs of initiating and conducting arbitration proceedings, the state court verifies the party's assets, not those of his family or third parties. While in the case of legal entities and other organizational units, it is required that such an entity, when applying for exemption from court costs, demonstrate that it could not obtain financing from shareholders or other persons whose economic interest it embodies (cf. Article 103 Law on Costs in Civil Cases, and the Supreme Court's decision of May 28, 2021, IV CZ 2/21, OŚNO 2022, No. 3, item 31), while in the case of individuals, the decision on exemption from court costs refers to their assets, not the assets of the family of which the party to the proceedings is a member. The family's financial situation can be analyzed only within the limits of Article 102 of the Civil Procedure Code. This issue should be viewed in the same way when examining whether the financial situation of a party to the arbitration agreement, which is an individual, makes it possible to cover the costs of the arbitration proceedings. Therefore, there was no reasonable basis for the Court of Appeals' requirement that the plaintiff prove that it was impossible for him to obtain financing from “some institution” or from his adult son. The constitutional guarantee of access to court precludes the denial of judicial protection to a person who is unable, due to his financial status, to initiate proceedings before an arbitration court on the basis of the hypothetical possibility of financing arbitration by unspecified third parties.

In sum, the allegations of violations of Article 1165 § 2 of the Code of Civil Procedure and partially of Articles 6 and 475 § 1 of the Civil Code should have been considered accurate. However, the Court of Appeals did not violate Article 365 of the Civil Procedure Code and Article 1168 § 2 of the Civil Procedure Code. The allegations of violation of Article 45(1) of the Constitution and Article 6(1) of the ECHR actually served to reinforce the allegations of violation of Article 1165 § 2 of the Code of Civil Procedure and thus did not require independent analysis.

Leaving aside the question of the admissibility of issuing a reformatory ruling in a situation where the court of second instance erroneously rejected the statement of claim (Article 398[16] of the Code of Civil Procedure.), it was not possible to change the appealed ruling, because the Courts which reviewed the case as to its merits, by rejecting the qualification of the inability to bear the costs of the arbitration as a case of incapability of being performed and following their understanding of the requirement that the inability must be permanent, did not actually make findings regarding the financial condition of the plaintiff and, above all, the amount of costs that the plaintiff must bear in order to initiate and carry out the proceedings before the arbitration court indicated in the clause. In addition, Article 398[16] of the Code of Civil Procedure requires that the basis for the violation of substantive law be obviously justified, a situation that did not occur in the case concluded by the appealed order.

For these reasons, pursuant to Article 398[15] § 1 of the Code of Civil Procedure, the Supreme Court ruled as in the operative part.


For further information on this topic please contact Maciej Durbas or Angelika Ziarko at Kubas Kos Gałkowski by telephone (+48 12 619 40 40) or email ([email protected] or [email protected]). The Kubas Kos Gałkowski website can be accessed at www.kkg.pl.