The legal environment in Poland has changed substantially over the last three years as a result of changes instituted by the conservative Law and Justice government. How can investors navigate their way through increasing regulatory pressures?
The reformist ambitions of the conservative Polish government have put businesses – especially those in key sectors such as energy, pharmaceuticals, banking, and retail – under increasing regulatory pressure. Of course, this regulation, often instituted with distinct protectionist undertones, is by no means a uniquely Polish phenomenon. What can one expect?
Playbook of a Hands-On Regulator
The familiar themes of this phenomenon include the expansive use of executive powers, testing the boundaries of legal authority, instrumental use of popular legal frameworks, and stronger, focused enforcement. To respond, investors need to take a measured and pragmatic stand: identify policy shifts early on, carefully pick our battles, and be ready to turn to court if dialogue fails.
When governments feel thwarted in their ability to shape policy by passing laws, they look for alternatives. However, unlike Victor Orban in Hungary or FDR in the United States, the current Polish government lacks the power to introduce its own “new deal” by removing systemic obstacles on the constitutional level. Instead, the Law and Justice (PiS) majority takes an expansive view on the boundaries of the government’s powers and use them to the fullest.
Indeed, a number of the new regulations have been issued under flimsy statutory authority, and even if they are ultimately invalidated, many will have a lasting impact on the market,.
The current argument over the Supreme Court justices appointed by the Parliament in breach of the Constitution is a good illustration of this, as, after the European Court of Justice enjoined the appointments, the ruling majority simply presented a new law that formally complies with the injunction, while at the same time keeping the judiciary in check.
The government is likely to continue to shroud regulations in popular legal frameworks such as consumer protection, competition and antitrust, labor relations, and fair access to public contracts. For example, a draft bill including a more aggressive interpretation and enforcement of antitrust laws in the media industry is a threat to foreign investors which may prompt their exit from certain markets or lines of business in Poland. Similarly, a draft act on responsibility of collective entities exposes investors to the risk of government interference and increases the cost of compliance.
Taking the Bull by the Horns
The flurry of regulatory activity in Poland makes the legal environment less stable. In such circumstances, it is essential for the business community to reach out to the government in order to understand what is coming and why and to keep a dialogue open. It is crucial to identify realistic objectives. Client experience shows that overreaching regulations are best dealt with by engaging the regulating authority early.
Bilateral Investment Treaties Protection: Another Form of Engagement
At times, due to politics, economic calculus, or bureaucracy, clients are inevitably going to face unfavorable circumstances. When that happens, investors can look to Bilateral Investment Treaties (BITs) for protection. BITs are international agreements between states, providing citizens and companies from a contracting state with a right to bring a direct claim against the other state for breaches of international standards established by these agreements. Poland is currently a party to approximately 60 BITs, including those with almost all the EU Member States, the United States, Canada, and China. As opposed to litigation in domestic courts, treaty arbitration puts the investor on equal footing with the government. To benefit from BIT protections, investors should review the structure of their current investments in Poland and check the scope of the protection under the relevant investment treaties.
Recently, the Polish government terminated a number of BITs. However, the effects on the existing investments would be rather marginal, if any. This is so due to the so-called “sunset clauses” that extend BIT protections to existing investments for an additional period post-termination – typically 10-20 years. On the other hand, investments made after the date of the termination of the relevant treaty would not enjoy the protection available under the BITs and would be subject to Polish law only.
Whether in arbitration under an investment treaty or in local courts, dispute resolution options are exactly that: different ways to resolve a disagreement. It usually pays off to take a calculated risk and check the opponent’s cards to make sure that rules are obeyed or to signal that overplaying one’s hand might be a costly strategy.
By Wojciech Kozlowski, Partner, and Radoslaw Goral, Counsel, Dentons Poland
This Article was originally published in Issue 5.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
