Pannonia Bio Zrt v Edward Marciniak & Anor

This is the hearing of theclaimant's claim under section 67 of the Arbitration Act1996 challenging the decision of an LCIA arbitrationtribunal contained in an interim award dated 1 July 2024by which the tribunal concluded that it had substantivejurisdiction to determine a claim brought against theclaimant by the first defendant referred to hereafter asD1. This being a challenge under section67, I must arrive at my ownconclusions concerning substantive jurisdiction - see National Iranian Oil Company v CrescentPetroleum Company [2023] EWCA Civ 826 [2024] 1 WLR 7 at [25].However, I refer as necessary below to the award inorder to set the claim in its correct context.

The claimant is a Hungarian company whichproduces and sells industrial alcohol. The firstdefendant is a Polish national who, while a sole trader,entered into two contracts with the defendants knownrespectively in these proceedings as the July contractand the September contract. Each contract was governedby English law and each was subject to an LCIAarbitration clause. The July contract was entered intoon 30 July 2018, and the September contract on 24September 2018. The industrial alcohol, the subject ofthe contracts, was delivered by the claimant to thedefendants and transported by truck to Poland via theCzech Republic. The July contract product was inspectedon arrival in Poland by Polish customs officials and theSeptember contract product was inspected by Czechcustoms officials when it passed through the CzechRepublic on its way to Poland.

On 14 June 2019, after delivery of the product hadbeen completed under each of the contracts concerned,the first defendant incorporated his business underPolish law by establishing a limited company calledChemia Bomer Edward Marciniak Sp.z.o.o pursuant toArticle 551 and 584 of the Polish Commercial CompaniesCode. That company was later converted to anothercompany but the subsequent conversion is immaterial forpresent purposes. In the result, the company succeeded to the businessformerly carried out by the first defendant upon theinitial transformation I have referred to. This claimis concerned with the effect of that transformation onthe ability of the first defendant to bring a claim fordamages for alleged breach of each of the July andSeptember contracts in respect of losses which, as Iexplain below, were not transferred from the firstdefendant to the successor company when thetransformation to which I have referred occurred.

Returning to the chronology, about six weeks lateron 24 July 2019 the Polish tax authorities imposed finesand duties on the first defendant because the industrialalcohol, the subject of the July contract, did not meetEU denaturing requirements, and so was not exempt fromEU excise duty. On or about the same date the Polish authorities passed on adecision to similar effect by the Czech tax authoritiesarrived at for similar reasons in respect of theproduct, the subject of the September contract.

On 12 May 2023 the first and second defendantscommenced arbitration proceedings by two references forarbitration prepared in accordance with the LCIA Rules,one in respect of a claim under the July contract, theother in respect of a claim under the Septembercontract. Each proceeded on the basis that the firstdefendant and the second defendant as ultimate successorto the first defendant were entitled to claim damages for breach of the Julyand September contracts. No non-contractual claims weremade by either of the arbitral claimants. If such aclaim was now to be made it would require either afurther reference and consolidation with the existingreferences or, possibly, amendment of the existingreferences for arbitration so as to raise a newnon-contractual cause of action if such is available.

The first defendant has claimed to be entitled tocommence arbitration proceedings under the arbitrationagreements in each of the July and September contractson the basis that he was "original party" to eachagreement, and is entitled to recover from the defendantdamages for breach of contract in respect of losses saidto have been suffered by him in the form of duties andfines imposed on him by the relevant tax authorities inPoland and the Czech Republic as a result of the supplyby the defendant of product which was supplied in breachof the terms of the July and September contracts.

It is common ground that by Article 112(b) of thePolish Tax Ordinance a single shareholder companyestablished under the procedure used by the firstdefendant to transform his business into one operated bya company is liable jointly and severally with the individual for tax arrears that accumulated from theindividual's economic activities down to the date whenhis business was transferred or transformed into that ofthe successor company applying the principles to which Irefer below.

The claimant's case is, and it is common groundthat, the first defendant chose to transform his soletrader business to that carried on by a company pursuantto Article 584(2) of the Polish Commercial CompaniesCode. The claimant maintains that by operation ofArticle 584(2).1, upon transformation being completed"the transformed company shall have all the rights andobligations of the entrepreneur ...". In this context, the first defendant is theentrepreneur in relation to the business or enterpriseformerly carried on by him and which was the subject ofthe transformation.

It is submitted on behalf of the claimant that theeffect of this was that all rights and obligations underthe July and September contracts, including the right tohave any disputes thereunder resolved by arbitration,were transferred from the first defendant to the"transformed company" with the result that he had nocontinuing claim for damages for breach of contractunder either the July or September contracts with anysuch claim as he had being transferred to the successorcompany.

In the result, the claimant maintains that the firstdefendant had no claim for breach of contract availableto him at the time he purported to refer his claim fordamages for breach of contract to the tribunal, nor anyright to have any claim against the claimant resolved byarbitration under the arbitration agreements containedin the July or September agreements to which he hadceased to be a party following transformation, so it issubmitted as a matter of Polish law and in the result, the tribunal has, and should have concluded that it had, nosubstantive jurisdiction to determine the firstdefendant's claim.

The first defendant's case is more complex. Hemaintains that on a proper construction of Article 584its effect is not to achieve a universal succession to the successor company, as the literal wording of Article584(2).1 might suggest, and that on a proper analysiseither the transforming entrepreneur, here the firstdefendant, retains the right to sue for damages forbreach of contract or the liabilities said to giverise to the loss the subject of the claim are notthemselves transferred to the successive company whentransformation is completed, so that in consequence where the first defendant remained jointly and severallyliable with the successor company for the duties andpenalties levied by the Polish and Czech tax authoritiesfollowing transformation, it therefore followed that heretained the right to have his claim for damages forbreach of contract determined by arbitration inaccordance with the arbitration agreements embeddedwithin the July and September contracts. This necessarily means, if correct, that the effectof transformation was not to substitute the successorcompany for the first defendant as party to the July andSeptember contracts, but to add the successor company asa party. The claimant's case is thatsuch an analysis is heterodox as a matter of Polish lawand ought to be rejected.

The suggestion that the first defendant may haverecourse to a non-contractual claim was a new issue,and, in my judgment, is unarguable for at least thefollowing reasons: firstly, the first defendant has notany claim other than a claim for damages for breach ofcontract which has been referred to arbitration down tothe date of this judgment, and in my judgment, and asalready explained, such a claim is not one that isavailable to the first defendant in the currentreferences to arbitration as they are currently framed.

Secondly, I do not see how any non-contractual causeof action that might have been available to him beforetransformation will remain any more available to himafter transformation than his alleged contractual claimsif, on proper analysis, all the rights andliabilities he had in his capacity as an entrepreneuroperating the business that was to be transformed,transferred to the successor company on transformation.

Thirdly, even if that is wrong and he has anon-contractual claim that is available to him, I do notsee how he is able to require the claimant to arbitratethat claim, assuming (without deciding at this stage) that following transformation the first defendant ceasedto be a party to the arbitration agreements within theJuly and September contracts.

Finally, if that is wrong and the first defendanthas a non-contractual claim available which, however, isnot the subject of -- or capable of being subjected toarbitration in the circumstances that have arisen -- Idon't accept that there is no forum available to thefirst defendant because the first defendant will be ableto resort to the relevant state courts.

In those circumstances, the first defendant, as itseems to me must succeed by reference to his contractualclaim, or fail in his case concerning jurisdiction.

As I have indicated, the section 67 challenge takeseffect as a new hearing and is not merely a review ofthe arbitrator's decision. That said, it is relevant tonote, if only for contextual purposes, the decision ofthe tribunal and the reasons for it.

The tribunaldetermined that it had substantive jurisdiction inrelation to the first defendant's claim against theclaimant. At paragraph 22 and following of its firstinterim award, having noted that the first defendant hadincorporated his business well after the delivery of theproduct but before the taxation's decisions had beencommunicated to him, the tribunal concluded that Article584(2).1 had the effect of transferring to the successorcompany only those rights and obligations capable ofbeing transferred from the original contracting party,here the first defendant - see paragraph 32 of the award.

The tribunal concluded that since the first defendant retained his tax andpenalty liabilities following transformation, it followed that the firstdefendant " ... retained the right to invoke thearbitration agreements so as to have the right to bringand enforce whatever rights remained vested in himbecause the benefit of the arbitration agreement wouldonly transfer to the first defendant's successor insofaras it was necessary to enforce rights that weretransferred to them".

The tribunal rejected an argument by the firstdefendant based on the Contracts Right of Third PartiesAct 1999 which was not relied upon at the hearing beforeme. It also rejected an argument based on a Polishjudgment dated 19 July 2022 to the effect that there wasan issue estoppel between the parties that precluded theclaimants from concluding that the first defendant wasnot entitled to rely on the arbitration agreement withinthe July and September contracts. Again, the defendantdid not rely upon that point in these proceedings.

The submissions of the parties were as I havesummarised earlier, and, in essence, remained the sameas those that were made to the arbitral tribunal.

Insupport of its submissions that literal effect was to be given to Article584(2)(i), the claimant further submitted (a) theclaimant's expert evidence was to this effect and was tobe preferred; (b) the defendant's approach was flawedbecause it focused in part on Polish law relating to theeffect of arbitration agreements which was ultimately aquestion of English, not Polish, law; and (c) the defendant was wrongto contend that the outcome for which the claimantcontended should be rejected on the basis that it wassurprising in its effects. That outcome was merely theresult of the first defendant failing to appreciate theeffect in law of the steps he chose to take leading tothe transformation of his sole trader business into thatof a business operated by a successor company using theprovisions to which I have referred. It was entirely inappropriate, so it was submitted,for this court or for the arbitrators to depart from anorthodox application of the law in order to protect thefirst defendant from the legal consequences of his ownacts.

The defendant's submissions were as summarisedabove, and in addition was that Article 584(2)(i) couldnot be read as having the effect for which the claimantcontended as a matter of literal construction, giventhat the claimant accepted that there were exceptions tothe literal effect of the language used. It wassubmitted that since it was common ground that the lossremained with the first defendant, there wasno reason why his ability to claim damages by referenceto losses that could not be transferred ontransformation would be lost to him on transformation ofhis business to that of the successor company.

In support of that submission it was submitted byMr Atkins KC on behalf of the defendant that if the testfor what was transferred was what was required toconduct the business following transformation, it wouldfollow that the first defendant's claim would not betransferred since it was for historical losses thatremain vested in the first defendant. The defendant further submitted that it made little sense to talk of an assignment ofthe benefit of an arbitration clause which, of itself, confers no substantive rights and obligations.

In my judgment it isimportant to maintain a very clear distinction at allstages between the tax liabilities on the one hand and theeffect, as a matter of Polish law, of the statutory transformationof a business carried on by a soletrader to one carried on by a corporate entity on commercial agreements entered into before transformation and on arbitration agreements embeddedwithin any such commercial agreements.

Whilst I accept, and indeed it is common ground thatthe tax liabilities which form the basis of the firstdefendant's claim against the claimant, are liabilitiesthat the first defendant retained followingtransformation, I do not consider that of itself assistsin resolving the issues that arise, which dependexclusively on the effect of transformation as a matterof Polish law. The true focus of the claim is not on the taxliabilities that were incurred by the first defendant atthe time when he was a sole trader but with whathappened to the benefit and burden of the July andSeptember contracts and their associated arbitrationagreements following transformation. I do not acceptthat because the liabilities, the subject of the claimby the first defendant, remain with the first defendantfollowing transformation, it therefore followed that hecontinued to be a party to the July and Septembercontracts. The two issues are, as I have said,unrelated other than by coincidence.

It is difficult to see how, on any view, the effectof transformation could be to change the July andSeptember contracts from contracts between the claimantand the first defendant to a contract between theclaimant and both the first and ultimately the seconddefendants when the effect of Article 584(2).1 is expressly transform the contracts from contracts between theclaimant and defendant to contracts between the claimantand the successor company. There is nothing in thecommercial companies code, the decisions of the Polishcourts to which my attention has been drawn, or theacademic literature on which the experts rely thatsuggest that the effect of transformation could be tocreate a tripartite contract out of what was formerly abipartite contract.

In many cases that would defeat the legitimatepurposes of transforming a sole trading business intothat of a business carried on by a company, and if anysuch principle applied it would be necessary to spellout in either the primary legislation or the academicwriting in relation to it the basis on which such anexception could work and its parameters. As I have said, there's nothing within theliterature which comes close to identifying and thendelineating such an exception.

I do not accept the submission that there is anycredible reason for concluding that the remainingbenefit of the July and September contracts would not betransferred to the successor company on completion ofthe transformation. Firstly, there's nothing on theface of Article 584(2) that would justify such aconclusion. Subsection (1) is expressed in generalterms, as I have recorded earlier in this judgment.

Whilst I accept that subsection (2) recognises thatthere may be rights that may not be transferred ontransformation, it does not follow from that provisionthat the remaining benefit of the July and Septembercontracts would not be transferred to the successorcompany on transformation. The contracts, or thefirst defendant's remaining rights thereunder, are not,on any view, any of " ... the permits, concessions andreliefs granted to [D1] before ... transformation ..." I accept the evidence of Professor Szumanski thatwhat is referred to within subsection (2) of the Articleare public law exceptions to what is otherwise thegeneral effect in law of transformation. This much isapparent in my judgment from the reference withinsubsection (2) to " ... the act or decision granting thepermit, concession or relief ..." with the word "act"referring to primary legislation and decisions tosecondary legislation and/or administrative decisions bystatutory or quasi-statutory bodies. This point derives further support from the exception applying only wherethe act or decision concerned provides for the permit,concession or relief not to transfer on transformation. The existence of the narrowly cast exception in subsection (2) serves to emphasise the otherwise general effect of transformation. It is that general effect that gives rise to the need for the public law derived exceptions referred to in subsection (2). There are obvious public law reasons why expressexceptions to what is otherwise a general principleshould apply in relation to particular permits grantedby public bodies where, for example, there was a fit andproper person qualification or a financial solvency testapplicable to the grant or continuation of the permit orconcession concerned. There is nothing within the statute or thejurisprudence which is connected with it that suggeststhat the provision within sub-subsection (2) of theArticle extends to any private law relationships orindeed to any relationship at all other than those whichare expressly identified within the documents referredto in the sub-subsection.

It was submitted that there were impliedqualifications to what was otherwise the general effectof Article 551(5) and 584(2) of the Commercial CompaniesCode. This was said to follow, for example, from thefact that on transformation the sole trader ceases to bean entrepreneur because the relevant enterprise has beentransferred to the successor company on transformation,but nonetheless that continues physically to exist,unlike the position that would apply where a businesswas transformed from Company A to Company B with thetransferring company being dissolved by operation of lawafter transformation.

In my judgment this does not lead to the conclusionsfor which the first defendant contends. The entrepreneur only ceases to be an entrepreneurin relation to the enterprise being transformed with theresult that what is transferred are all the rights andobligations connected with the enterprise beingtransformed. Although Mr Adkin submitted that therewas no obvious purpose in transferring therights under a performed agreement, I do not agree. Itwill be of importance to a successor company to receiveas part of the rights and obligations of the commercialentrepreneur the right to enforce contractual or claimdamages or other financial compensation due in respectof past breaches. Indeed, that is precisely what thesecond defendant has used the July and Septembercontracts to do in respect of the current arbitral references. Now is not the time to comment on whether theultimate successor company is entitled to recover anindemnity or contribution from the claimant in respect of the pre transformation tax liabilities to which it became jointly and severally liable following transformation. However, even ifthat is not so, the claim transferred to the successorcompany was, nonetheless, valuable because it enables itto make the claims it does in the current arbitralproceedings aside from the tax liabilities the subjectof the first defendant's claim.

Returning to the general principles of Polish law,I'm satisfied that Professor Szumanski's evidence isevidence I should accept. His careful analysis based onwell-established legal principles satisfied me thatI should accept his evidence. He identifies threejurisprudential routes that lead to the conclusionsidentified above. Of these, universal succession, whileapplicable to the transformation of one company toanother, is not, in all respects, the most satisfactoryjurisprudential basis on which to analyse thetransformation of an enterprise carried on by an individual soletrader to a corporation. I accept his evidence concerning the doctrine ofquasi-continuity because conceptually Article 584(2).1 is intended to operate in relation to individuals as Article 553.1operates in relation to companies in all materialrespects, other than the obvious one in relation to thecontinued existence after transformation of the individual who wasformerly the entrepreneur in relation to the transformed enterprise. The key feature of all the theories whichProfessor Szumanski identifies is that the rightand obligation of the individual passes to the company.To that principle there are only narrowly-defined,principally public law, exceptions, but they arenarrowly-formulated exceptions to what is otherwise ageneral rule which underpins the concept oftransformation as a matter of Polish law.

Although the claimant places some reliance on the suggestion that the transfer is limited only to theenterprise concerned does not assist. What matters is the content of the way in which theconcept operates in relation to particularindividually-operated businesses subjected to thetransformation process. Once the underlyingjurisprudential concept is understood then it is clearthat what is transferred is the whole of the sole trader's businessto a single shareholder company. It is a transfer fromone entity to another. I accept, therefore, that at thepoint when transformation takes effect, the naturalperson, here D1, ceases to be subject to the rights andobligations relating to the relevant enterprise otherthan the narrow defined and express exceptions to whichI have referred, and all the rights and otherobligations of the business are transferred to thesuccessor company subject to those exceptions.

That being so, the contractual causes ofaction on which the first defendant relies in the arbitral references transferred to the successor company on completion of the transformation process prior to the commencement of the arbitral references. Included within what was transferred was whatever rightsthe first defendant had formerly hadagainst the claimant under the July and September contracts and inconsequence there was no contractual right left to thefirst defendant, and thus nothing he could refer toarbitration, at the date when he purported to commence the arbitral proceedings and therefore no basis on which thetribunal could acquire substantive jurisdiction inrelation to claim by the first defendant against theclaimant for breach of either contract.

If and to the extent the first defendant has anon-contractual claim against the claimant arising out of the supply of the allegedly contractually non-conforming alcohol, something I express no viewabout, and if and to the extent such a claim is capable of surviving transformation, again something which I express no view about because the issue was not one that was or could be explored at this hearing, I would be prepared to accept that (as the first defendant’s Polish law expert contended) as a matter of construction, such a claim would come within the scope of the arbitration agreements. However, that is whollyimmaterial because following transformation the firstdefendant ceased to be a party to the arbitrationagreement, just as he ceased to be a party to thesubstantive July and September contracts. If and to the extent the first defendant has such a claim available to him that survives transformation, there is nothing to prevent him litigating it in the relevant state court.

In the course of her oral evidence, the defendants’Polish law expert endeavoured to suggest that at anyrate, if looked at from a Polish law perspective, thenthe arbitration agreement did not contain rights orliabilities or obligations that could be transferred aspart of the transformation process. The question ofwhat substantive content there is in an arbitrationagreement is, as it seems to me, a matter of English lawrather than Polish law. I see no basis for concluding as a matterof English law that an arbitration agreement is incapable of statutory assignment or novation or otherwise so lacks substance as to be incapable of transfer as part of the Polish statutory transformation process. An arbitrationagreement binds both parties to resolve any disputes thesubject of the arbitration agreement exclusively byarbitration and to use only thearbitral process for the purposes of resolving theirdispute. Those are obligations that can be and routinely are enforced by anti-suit claims as breach can result in claims in damages for breach of contract by reference to wasted costs and delay as well. There is for those reasons clear substancein an arbitration agreement to the extent that it isrelevant. In my judgment, the arbitration agreements were agreements that were capable of being transferred and were transferred upon transformation if just the same wayas the contracts within which the arbitration agreements were included.

I reject the evidence of the defendant's expertbecause I consider the evidence of Professor Szumanskito be more soundly wedded to established legal theory,and to be, on analysis, entirely orthodox in itsapproach. The defendant's Polish legal expert maintainsultimately that an entrepreneur retains the causes ofaction acquired prior to transformation, butfails to explain at all convincingly how it is that thatis consistent with either the express terms of Article584(2) of the code or any principled or identifiableexception to it or how, even if that is so, that results in the arbitration agreements being only partly transferred or made tripartite agreements when previously they were not. It is entirely unclear how the conceptworks with any of the underlying theories identified byProfessor Szumanski or why those theories and, inparticular, the theory of quasi-continuity that he setsout does not underpin Article 584(2) and lead to theconclusions for which the claimant contends.

Although some reliance was placed on a judgment ofthe Supreme Court of Poland of 3 September 2019, in myjudgment that does not assist in the current debate. Inmy judgment, what is said in that case is consistentwith what I have said above. It excludes the concept ofgeneral succession but that is not the jurisprudentialbasis on which Professor Szumanski relies for theconclusions that he reaches. Rather, what that caseemphasises is that there may be public law exceptionsthat apply to what would otherwise be the generalprinciples that follow from transformation. The SupremeCourt recognised expressly the effect of Article 584(2)was the transformation of the subject matter of theenterprise activity. In my judgment, that is consistentwith the theory of quasi-continuity, and, in particular,with the transfer of the rights and obligations thatarise under a contract to the exclusion of the soletrader following transformation.

In thosecircumstances, and for those reasons I conclude that thetribunal was wrong to decide that it had substantivejurisdiction in relation to the first defendant's claimagainst the claimant, and I'll hear the parties now asto the appropriate order to make.