THE SUPREME COURT TAKES A STRICT STANCE ON REPRESENTATION IN ACTIONS BETWEEN RELATED COMPANIES
In the resolution of January 12, 2022 (ref. III CSP 24/22), the Supreme Court decided that the so-called self-dealing prohibition extends to actions in which a company is represented by an agent (pełnomocnik) authorized by a person who, in the same action, also represents the other party to that action. The resolution deserves the special attention of the directors of companies belonging to corporate groups, within which cases of one person acting in different capacities for both sides of an action between companies from such group are quite frequent.
What is the so-called prohibition on self-dealing under Polish law?
A situation in which the same person acts for different parties to a legal action is likely to involve a conflict of interest carrying the risk of harming the rights of one of the parties. For this reason, Polish law states that the same person cannot act as an agent to different parties in the same legal action. Likewise, a person cannot act as an agent in a legal action with themself on the other side. Though the following exceptions exist to this general prohibition:
- a situation in which the power of attorney expressly permits the performance of an action by an agent when they are the other party to that action or represent the other party in that action,
- a situation in which the legal act is of such a nature that the possibility of harming the represented party is excluded.
Even if a legal action is performed in breach of the self-dealing prohibition, such an act is not absolutely invalid, as the legislature has allowed for the later confirmation of such an act by the principal with retroactive effect.
Although these restrictions were originally aimed at agents appointed by parties, in judicial practice a precedent has been set for also applying them to actions executed by directors of legal entities acting on both sides. With regard to members of the management boards of commercial companies, the application of those rules raises a number of doubts, particularly with regard to how to appropriately apply the exception for express authorization by the company to the performance of actions.
What has the Supreme Court decided?
In the aforementioned resolution, the Supreme Court confirmed that the prohibition of acts between parties represented by the same persons:
- extends to situations in which the same person acts as a member of the management board of a company as one party to the action, and as a member of the management board of the other party or its agent,
- applies to situations where one party is represented by a commercial proxy (prokurent) and the other party is represented by the same person acting as a member of the management board or agent,
- covers not only situations in which the same person acts on two sides of a given action, but also when the person acting on one side participated in the authorization of the person acting on the other side (e.g., person A acting for company 1 authorized - as a member of the management board of company 2 - person B to represent company 2 in the same action).
What practical takeaways ought we to draw from the Supreme Court's resolution?
The resolution does not formally bind the courts in other cases. It does not appear that the resolution will definitively settle controversies as to the application of the self-dealing prohibition to commercial companies. However, the position of the Supreme Court should undoubtedly be taken into account when shaping the practice of conducting legal actions between companies within a corporate group. In particular, the following steps should be considered:
- ensuring that in contracts between companies in a given group, the persons acting or granting authorization to perform a particular legal action do not participate in the same action by also acting for the other side or authorizing persons acting for the other side of this action (e.g., persons representing company A or granting authorization to act for that company should not represent company B or participate in giving authorization to represent company B in the same action),
- reviewing contracts concluded in the past within the corporate group with regards to whether there were any actions executed in contradiction to the rules determined by the Supreme Court's resolution and, if necessary, confirming the actions performed in breach of these restrictions. Such measures are particularly in the interest of the persons that executed such defective actions as the consequences of such defectiveness may be particularly severe for them and their personal wealth. This is because the failure of the represented company to confirm the action may involve the personal liability of the person representing the company for obligations incurred under such action.
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