When an arbitration case winds up in state court
Confidentiality, speed and cost control by the parties are usually ticked off as advantages of arbitration. But these go out the window when the state court intervenes in an arbitration case.
Although arbitration is regarded as a type of civil litigation, the procedure differs considerably from judicial proceedings before the state courts. It is generally accepted that thanks to its less formal nature, as a kind of private court, arbitration offers quicker results, privacy and confidentiality, and also gives the parties control over the litigation costs. But in arbitration it is important to remember that the state courts continue to play auxiliary, support, oversight and review roles—before, during and after the arbitration proceedings. When the state courts intervene, the advantages of arbitration mentioned above can be lost, thus reducing the attractiveness of arbitration for businesses.
The rules and scope of confidentiality in arbitration are not regulated at the level of international law. There is no convention in place indicating an obligation to maintain confidentiality in international commercial arbitration. This issue is usually not covered in national regulations either.
A lively debate was sparked in the international arbitration literature by an arbitration-related ruling issued by the High Court of Australia in Esso Australia Resources Ltd v Plowman, 183 CLR 10 (1995). In Esso the court held, although not unanimously, that there was no broad duty to maintain the confidentiality of documents and information presented in, or in connection with, an arbitration proceeding. The decision pointed out that an arbitration court is a private court in the sense that it is not open to the public, but ensuring the complete confidentiality of arbitration proceedings is not feasible for many reasons. First, a duty of confidentiality does not apply to witnesses, who are free to disclose to third parties what they learned from the arbitration. Second, in some instances the arbitration award must be disclosed in proceedings before the state court. Third, in some cases, the fact of participation in arbitration as well as the substance of the award must be disclosed to third parties such as an insurer or the tax authorities, or in compliance with reporting obligations by public companies.
Consequently, it was held in the Australian case that there is no general duty of confidentiality with respect to documents or information disclosed during arbitration, arising either under the law or out of the private nature of arbitration. The parties may agree to protection of such information under a confidentiality clause, but such an agreement is binding only on the parties, and perhaps the arbitrators, but does not control others involved in the arbitration.
But an English ruling in a similar case took an entirely different position. In Ali Shipping Corp. v Shipyard Trogir, 2 All ER 136 (1998), the Court of Appeal refused to permit disclosure of documents in one arbitration which derived from another arbitration, even though both parties to the proceedings were represented by the same persons. The court held that a duty to maintain the confidentiality of documents and information obtained in arbitration arises by law, as it directly follows from the privacy of proceedings before the arbitration court. The court pointed out that there could be exceptions to this duty of confidentiality, however.
Thus the confidentiality of arbitration may be understood in different ways. The Polish Civil Procedure Code lacks regulations governing the confidentiality of proceedings before arbitration courts, and thus, in theory, either the English or the Australian understanding could be adopted here.
The rules of arbitration institutions governing confidentiality of arbitration proceedings may indirectly be regarded as regulating this issue. For example, under Civil Procedure Code Art. 1161 §3, unless otherwise agreed by the parties they are bound by the rules of the permanent arbitration court in force as of the time they make the arbitration clause. In turn, the rules of Polish and foreign arbitration courts generally provide (although not uniformly) for a duty to maintain confidentiality.
But the rule of the confidentiality of arbitration is significantly limited in relation to the state courts. Part Five of the Civil Procedure Code exhaustively sets forth the situations in which the state court may intervene in proceedings pending before an arbitration court, as well as the scope of post-arbitration review. While formally speaking the arbitration proceeding ends upon issuance of the award, this does not mean that after that time the confidentiality of the arbitration proceeding ceases to be relevant. When information that was confidential in the arbitration proceeding becomes the subject of proceedings before the state courts, the information becomes public, as the rule of openness of state court proceedings replaces the rule of confidentiality in arbitration.
Art. 1159 §3 of the code does provide for the possibility of the state court ruling in closed session in arbitration-related cases, but this applies to only a narrow range of cases, namely those involving appointment of an arbitrator or presiding arbitrator (Art. 1171–1172), removal of an arbitrator (Art. 1177), appointment of a substitute arbitrator (Art. 1178 §2), and setting the arbitrator’s fee (Art. 1179 §2). In that situation, the court may summon the parties to appear and be heard at the closed session or take their written statements. The court will also rule in closed session on interim relief to secure claims pursued in arbitration, under the general rule set forth in Art. 735 of the code. The court may nonetheless order that the matter be heard in open session, and a ruling on an application to limit or vacate interim relief is always issued following an open hearing (Art. 742 §2). The commentaries take the view that the reason for ruling on such matters in closed session is to expedite the rulings, but no doubt it also serves to maintain confidentiality.
The other competencies of the state courts involve ruling on an objection to the jurisdiction of the arbitration court (Art. 1180 §3), receiving evidence or taking other actions at the request of the arbitration court (Art. 1192), ruling on a petition to set aside an arbitration award (Art. 1205), and enforcement or recognition of an arbitration award (Art. 1214 and following). The proceedings in these matters are open, which depending on the type and scope of the action by the state court can reduce or entirely eliminate the confidentiality of the arbitration proceeding—or at least it carries that risk.
Efforts should be made to strengthen the confidentiality of proceedings before the state courts related to arbitration cases, before, during and after the arbitration proceeding is conducted. This effect could be achieved by ruling on arbitration-related cases in closed session, or by introducing regulations enabling open hearings to be closed. The openness of judicial proceedings is a constitutional principle, but it may be limited to protect valid private interests.
There is no reason not to introduce the rule that these cases should be heard in closed session when the possibility provided for in Civil Procedure Code Art. 1159 §3 exists.
An objection to the jurisdiction of the arbitration court should also be considered in closed session. Given that this proceeding is in the nature of judicial oversight, it is limited to an analysis of the arguments presented to the arbitration court by the parties which served as the basis for the arbitration court’s jurisdictional ruling. Thus there is no need for the state court to make additional factual findings or admit testimony which would require a hearing to be scheduled. Under current law, ruling on an objection to the jurisdiction of the arbitration court in closed session renders the proceedings invalid because it supposedly deprives the party of an opportunity to defend its rights. This appears to be a consequence of a failure to reflect that this is a case of judicial review.
The issue is essentially the same in the case of the state court’s ruling on a petition to set aside an arbitration award. An award can be set aside only on the grounds exhaustively listed in Civil Procedure Code Art. 1206, and the state court is prohibited from ruling on the merits of the dispute decided in arbitration. Because of the up-or-down nature of this review—to uphold or quash the award—there appears to be no justification for requiring the matter to be heard in open court. If it is necessary to obtain clarifications from the parties beyond what they stated in the petition and the response, the court may in any event order the parties to exchange pleadings, indicating the issues the parties should address, or summon specific persons to appear and testify, or may ultimately schedule a hearing in the case. Alternatively, the parties may seek permission to present additional arguments, but practically speaking the parties tend to repeat at the hearing the arguments previously stated in their pleadings.
For the same reasons, there is no real need to schedule a hearing on an application for recognition or enforcement of a foreign arbitration award, particularly since an interlocutory appeal in such a case, like a case seeking enforcement of an award issued in Poland, is decided in closed session.
A reasonable option for strengthening confidentiality in proceedings before the state courts in arbitration-related cases would be to introduce solutions empowering the court to order that the case be heard in closed session—either at the request of the parties or at the court’s own initiative. Currently, the hearing may be closed at the request of the parties if the court finds that there is a risk of disclosure of trade secrets or other valid grounds. These circumstances are evaluated by the court, which does not always find them to be justified. Thus, for the sake of clarity, the code should expressly permit the hearings to be closed because the case relates to arbitration, or at least allow the parties to apply for such an order for this reason.
The speed of arbitration is a consequence of the flexibility of the rules as well as the absence of an appeal. The parties may shape the course of the proceedings and agree on scheduling of specific actions. They also have influence over the selection of arbitrators, which means that they can appoint as an arbitrator a person with the relevant experience who is skilled at actively managing the dispute. A party acting in bad faith can always find some way to delay the proceedings, for example by abusing the right to challenge an arbitrator, prolonging the periods for taking specific actions in the proceeding, and so on. Nonetheless, a comparison of the duration of proceedings in commercial cases in the state courts and in commercial arbitration comes down in favour of arbitration. For example, the average duration of cases before the Court of Arbitration at the Polish Chamber of Commerce in 2010–2013 was 313 days. By comparison, according to the optimistic statistics of the Ministry of Justice, the average duration of a commercial case (until a legally final ruling is obtained) was about 20 months in a Warsaw court in 2011, and about 10 months in Gdańsk, Kraków or Wrocław (it should be assumed that these statistics also reflect undisputed orders for payment). But according to the World Bank’s Doing Business report, as of 2012 the average resolution time for a court case in Poland, from filing of the statement of claim through execution of the judgment, was 830 days.
The resolution time for an arbitration case will be prolonged if it is necessary to take actions through the state court. Part Five of the Civil Procedure Code seeks to expedite such cases by providing for the possibility of interlocutory appeal only in certain instances, but the list of matters where interlocutory appeal is permitted is more extensive than in the UNCITRAL Model Law on International Commercial Arbitration. The Model Law provides for proceedings before the state court at a single instance in rulings on an objection to the jurisdiction of the arbitration court or on recognition or enforcement of an arbitration award or a settlement reached before an arbitration court.
Prolongation of the resolution time of arbitration-related cases results first from the fact that they are treated like any other court case and considered in the order of filing. Second, in many instances it is required to schedule a hearing. Third, there is a right of appeal in many of these proceedings (and in the case of a ruling on recognition or enforcement of a foreign award or a settlement reached before a foreign arbitration court, even an additional level of review through a cassation appeal), and additionally an interlocutory appeal is available in the case of court orders. While it is true that, for example, applying to the state court for a ruling on an objection to jurisdiction does not stay the arbitration proceeding, nonetheless a slow ruling on jurisdiction may expose the parties to unnecessary costs, particularly if the state court ultimately holds that the arbitration court does not have jurisdiction. In extreme cases, the claim may even become time-barred in the meantime, preventing the claimant from refiling in state court after it is held that the case should not have been filed with the arbitration court.
It appears from an analysis of the duration of arbitration-related cases decided by the state courts in Poland that cases that can be decided in closed session usually are decided without a hearing and relatively quickly (taking 2 to 6 months to obtain a legally final ruling). Post-arbitration proceedings typically last much longer, however.
It is often assumed that pursuing claims in arbitration is cheaper than in the state court. This is generally correct if we also recognise that the costs of a dispute are not limited to the out-of-pocket fees and expenses. When a business is a party to a dispute, it in fact suffers much greater losses than the sum of the expenditures. A dispute interferes with the normal functioning of the enterprise and requires certain financial reserves to be established. It also upsets the operations of management and requires their attention. A comparison of the filing fees in state court and in arbitration shows that proceedings in arbitration may be somewhat cheaper when pursuing fairly modest claims, but more expensive when the amount in dispute is high. And because of the private nature of arbitration, no relief from costs is available.
But looking more broadly at the costs of the dispute, it appears that the flexibility of arbitration procedure allows the parties to plan the course of an arbitration proceeding more effectively than would be the case in litigation before the state courts.
The possibility of planning and scheduling specific stages of the proceeding, such as the exchange of pleadings, the hearing dates, and the deadline for issuance of an award, allows the parties to make better use of the time necessary to conduct the dispute. The common practice in arbitration of scheduling several days of hearings back-to-back (as opposed to the practice in Polish state courts of scheduling hearings dates at lengthy intervals) means that the parties do not have to prepare over and over again for hearings and can avoid the related costs for counsel, witnesses and the parties themselves. Efficient proceedings and a quick resolution of the dispute also keep interest from running up. With active involvement of the arbitrators, the issues that are genuinely disputed can be identified early on, making the pleadings less voluminous and limiting the scope of the evidence required, thus also minimising the stress to the parties and the costs of the dispute.
But again, these advantages disappear when the arbitration award reaches the docket of the state court, because of the prolongation of the proceedings discussed above. It might therefore be argued that while it is difficult to state unequivocally whether it is better to conduct a dispute in arbitration or in the state court, mixing these two systems will usually cause the benefit from the original choice to be lost.
Monika Hartung, Dispute Resolution & Arbitration Practice, Wardyński & Partners