The internationalisation of transactional agreements and borrowings from the common law
Along with the systemic transformation from the 1980s to 1990s and the inflow of foreign investment into Poland, the country was exposed to forms of contract already applied in international trade. It wasn’t that before then the law in Poland had been homogeneous and “truly Polish.” Historically, numerous factors contributed to the development of the Polish legal system, with a dominant role played by solutions from the German and French systems.
But the trend I am discussing here was closely tied to the appearance in Poland of foreign investors who, for understandable reasons, expected the agreements they reached here to be as similar as possible to the forms they were already familiar with. In practice, the constructions they employed were primarily those with their source in countries governed by the common law, and this state of affairs has continued down to the present day.
In simple terms, the greatest influence of the common law is visible in fields connected with the international flow of money. From a legal point of view, these are transactions involving the sale, or more broadly the exchange, of goods, as well as closely related measures connected with obtaining and securing financing.
From the perspective of transactions as such, the common law and the solutions functioning in that system have exerted relatively little influence over the legislative sphere in Poland. It is true that commercial law, including the law governing the operation of companies, is the subject of far-reaching harmonisation within the European Union. Thus many solutions function similarly—but not the same—in English law and in Continental systems.
Undoubtedly a key example of the influence of the common law on statutory regulations within commercial law can be found in the regulations governing the involuntary redemption of shares. These are patterned on the English institution of the “squeeze-out” of minority shareholders by shareholders with a large enough majority (90% or 95% of the shares, depending on the redemption procedure).
Another example is the regulations applicable to public companies, e.g. with respect to tender offers for shares or hostile takeovers of companies.
Of course this is not a complete catalogue of the traces of solutions with an Anglo-Saxon genesis found in Polish regulations relevant to M&A transactions. Nonetheless, it would be hard to identify many other such solutions of a legislative nature.
Borrowings in contracts
The influence of the common law is decidedly richer in commercial practice. This is a manifestation of a broader trend also visible in other legal systems. This consists of carrying over certain borrowings of solutions proper to common-law systems into documents (contracts) under which transactions are conducted involving Polish assets (shares, movables, and to some degree also real estate). These transactions, it must be stressed, are still governed by Polish law, where the transplanted solutions either do not exist or, often, exert different legal consequences.
The latter can be especially problematic. To imagine the source of potential problems, it should be borne in mind that (oversimplifying somewhat) a characteristic feature of common-law systems is that the contract concluded by the parties sets forth the entirety of their mutual rights and obligations (with a few exceptions provided for in regulations of law). Consequently, if the parties do not expressly address a particular issue in the terms of their contract, this issue does not form a part of the contractual relationship binding them. This is thus an approach differing greatly from Continental legal systems, one of which is the Polish system. Under Polish law, as highlighted particularly by Art. 56 of the Civil Code, the consequences of a legal act (including a contract concluded by the parties) is determined not only by its express terms, but also by the provisions of the code, principles of social coexistence, and established custom. Thus, under Polish law, it is the entirety of these aspects—not only the words of the contract—that constitute the contractual relationship binding the parties.
Typical construction of contract
In practice, the resort to Anglo-Saxon patterns in M&A transactions begins at the very stage of structuring the contract negotiated by the parties. The structure includes the following elements (not necessarily in this order):
- The subject of the contract (e.g. shares in a company)
- The method of determining the price, where two alternative mechanisms are encountered: “closing accounts” (i.e. with a tentative price calculated according to specified criteria prior to closing, which is subject to verification and adjustment as of the closing date) or “locked-box” (when the price is essentially fixed prior to the transaction, subject to possible change only if unforeseen “leakage” occurs, reducing the value of the subject matter of the transaction)
- The conditions for the transaction to become effective (i.e. to reach closing), known as “conditions precedent”
- Other obligations of the parties (usually the seller) preceding closing of the transaction, referred to as “covenants”
- A definition of “material adverse change,” i.e. situations whose occurrence prior to closing will entitle a party (or parties) to be released from the obligation to complete the transaction (for example, a significant decline in value of the shares being acquired)
- Adoption of the closing date and identification of the actions the parties must perform on that date, in a defined order, in order to complete the transaction
- Representations and warranties by the parties addressing for example their legal condition and capacity to conclude the contract, including first and foremost the seller’s representations and warranties involving the legal and factual condition of the subject of the transaction
- Indemnification clauses, i.e. provisions concerning conditions where party is required to make up a loss suffered by the other party, or release it from responsibility if certain conditions occur (this typically involves protecting the buyer in the event that specific risks involving the subject of the transaction, identified during due diligence, actually materialise)
- Dispute resolution procedure—not just making a choice of court or arbitration, but also outlining the specific procedure to be followed for asserting and addressing claims, including deadlines for raising claims and the like.
Consequently, practically every M&A contract contains (at least in theory) a complete set of provisions governing the deal, from defining what will happen and how it will happen for the parties to mutually carry out the contract, through detailed solutions to be followed if a disagreement or dispute arises between the parties.
The aim of this exhaustive treatment of the contract is to ensure that it serves as a free-standing regulation of the entirety of issues that may arise involving the parties’ performance of the contract. The point is that a court resolving a potential dispute will not turn to generally applicable regulations but will seek a resolution to the dispute under the contract itself (which, I would again stress, should in principle exhaustively regulate the relations between the parties to the transaction).
Particularly in the case of a contract between professional entities (i.e. excluding consumers), Polish civil law permits the parties to frame their mutual rights and obligations flexibly and freely. But this does not mean that to achieve the legal consequences that a contract (under its terms) would exert if it were subject for example to the law of England and Wales, it will suffice to make an ordinary choice of Polish law in the contract.
This is because in the absence of an express exclusion of certain dispositive regulations (e.g. concerning statutory warranties), in the event of a dispute between the parties it will be necessary to conduct an interpretation of the text of the contract and determine the actual intent of the parties contained in the contract (for example, in this case, to determine whether their actual aim was to exclude statutory warranties).
Selected examples of provisions
Probably the most attention has been devoted in the Polish legal literature to the topic of representations and warranties. Without delving into the debates and conclusions on this topic, it should be pointed out that given the lack of an equivalent institution in Polish law, simply including representations and warranties of the parties in a contract may generate doubts of interpretation in practice. This is because it is not clear what effect the parties wanted to follow from the fact of making representations and warranties.
The situation is similar with put and call options. For example, simply stating in a contract for sale of a portion of the shares in a company that the buyer has a call option for the remaining shares may not exert legal effect, but in the event of a dispute might even make it impossible to determine the factual intent of the parties.
The solution in this situation is to somehow translate common-law institutions into Polish legal language. This can be done in various ways, but typically is done by:
- Indicating the consequences of making false or misleading representations and warranties—the parties may for example stipulate that if a representation by the seller (e.g. that the shares he is selling constitute all the shares in the company) proves to be untrue (as, in this example, there are other shares in the company), then the buyer will be entitled to certain rights (e.g. to renounce the contract or demand redress for the resulting loss, particularly through payment of a contractual penalty)
- Describing the right held by the party and how it may be effectively exercised—in the example of a call option the agreement might include an offer of sale by one party (the seller) which the party holding the option (the buyer) may accept within a certain time and under certain conditions, thus leading in effect to exercise of a call option.
Sometimes in this respect Polish law allows several alternative solutions to be used, any of which would effectively implement common-law solutions under Polish law. (In the option example, we could imagine achieving this through the form of an irrevocable authorisation by the seller to sell the remaining shares, which the buyer could exercise under certain conditions, i.e. the conditions for exercise of the option.)
Risk of incomplete incorporation of concepts
Another problem is casual copying in contracts governed by Polish law of formulations that lack the meaning or relevance they would have if used for example in a contract governed by English law. An example would be the phrase “time is of the essence,” the practical consequence of which is that failure to perform a contractual obligation within the designated time is deemed to be a material breach of contract, giving the other party (depending on the type of contract) the right to renounce the contract and not just seek damages for any loss resulting from the delay. If such a provision were simply translated into Polish but later interpreted relying on linguistic or systemic rules proper to Polish law, the original consequences of the breach (intended under English law) might not occur under Polish law.
Here we should mention another problem that may arise in drafting contracts governed by Polish law but based on patterns from common-law systems (or broadly copying such patterns), namely the use of standard contractual clauses, referred to in English as “boilerplate clauses.”
These are provisions covering miscellaneous issues that are not the subject of intense negotiations between the parties, but must be included in the contract if (as discussed above) the contract is to govern the parties’ contractual arrangements comprehensively.
The most often encountered clauses of this type include force majeure, severability and assignability clauses. As the names of these clauses suggest, their wording will often overlap greatly with provisions of the Polish Civil Code (usually without modifying the dispositive regulations, but only repeating them).
In practice, such provisions are usually drawn from a repository of readymade clauses or copied and pasted from previous contracts. Moreover, unlike the principal terms (essentialia negotii), often inadequate attention is devoted to boilerplate clauses. This can lead to smaller or larger lapses, or inconsistencies in terminology within the contract, and in extreme cases can even undermine the parties’ true intentions, contained in the earlier key provisions, including those set forth in separately drafted agreements. A classic example is inclusion in a contract of a merger clause (also known as an “entire agreement clause”), which provides that the contract being signed supersedes all previous agreements between the parties—when the true intension of the parties is to conclude a new contract alongside the existing contracts, not replacing them.
Polish law provides the parties great leeway in framing their contractual relations. Thus in bilateral and multilateral agreements among professionals, the parties can greatly limit or even exclude statutory regulations and replace them with solutions chosen by the parties. In practice this often means solutions drawn from common-law systems.
It must be borne in mind, however, that if the contract is ultimately governed by Polish law, the interpretation of these provisions will also be conducted on the basis of Polish law. Thus it is not sufficient to simply lift certain clauses from contracts governed for example by the law of England and Wales, as in effect the actual content of the contract (and thus the meaning of specific provisions) may diverge from what was intended by the parties.
It should also be pointed out, by the way, that if the parties are constructing a closed contractual universe with the intention of excluding certain solutions provided by the Polish legal system, it may be helpful to stipulate that any disputes that arise under the contract be resolved not by the Polish state courts, but in arbitration.
This article is from Transactions, one of our 30th-anniversary publications
Maciej A. Szewczyk, attorney-at-law, M&A and Corporate practice, Wardyński & Partners