Bulgarian Supreme Court rules on the scope of the arbitration clause in a power purchase agreement
11 September 2019
Recently the Bulgarian Supreme Court of Cassation (SCC) has issued an important ruling on the issue whether a general arbitration clause in a contract covers rights and obligations of the parties which stem directly from the law.
At first sight, the matter seems quite clear – the arbitration clause applies only to disputes arising out of the agreement and does not cover disputes regarding any other legal relations between the parties.
In some situations, however, there is a thin line between legal relations stemming from the contract itself and legal relations stemming directly from the law. Sometimes entering into a particular type of contract could be just a precondition for arising of entirely different legal relations between the parties based on the applicable substantive law. This is the case referred to the Bulgarian SCC.
Background of the dispute and the relations between the parties
According to a repealed provision of the Electricity Market Rules, the Renewable Energy Source (RES) producers who have concluded a long-term PPA with NEK (the Bulgarian electricity public supplier) and have not chosen another coordinator of a balancing group, were automatically included in NEK’s special balancing group. As members of the balancing group, the producers were obliged to pay balancing costs to NEK determined in accordance with NEK’s methodology for allocation of imbalances.
Based on that, NEK filed a claim against a RES producer (member of NEK’s balancing group) for payment of balancing costs. The claim was filed before Sofia City Court. The respondent objected that the state courts had no jurisdiction to hear the dispute, because there was an arbitration clause in the PPA between the parties. The arbitration clause stated that all disputes arising out of or connected to the PPA were to be referred to ad hoc arbitration in accordance with the ICC Rules.
Sofia City Court sustained the objection of the respondent and discontinued the proceedings. This ruling was upheld by Sofia Court of Appeal. The ruling of Sofia Court of Appeal was appealed by NEK before the Supreme Court of Cassation.
The ruling of the Supreme Court of Cassation
Тhe Supreme Court of Cassation found that the general arbitration clause in the PPA does not apply to disputes concerning balancing costs.
The main argument of the supreme judges was that the obligations of the RES producers who are members of NEK’s balancing group to pay balancing costs stemmed directly from the legislative provisions of the Electricity Market Rules issued by the Energy and Water Regulatory Commission. The conclusion of a PPA with NEK was just a precondition for the respective RES producer to be included in NEK’s balancing group. However, the PPA itself did not contain any rights and obligations of the parties with regard to the balancing costs and therefore the arbitration clause in the PPA did not cover these rights and obligations.
As a result, the supreme judges found that the general arbitration clause in the PPA should not apply to the claim of NEK for payment of balancing costs. Hence, the state courts had jurisdiction to hear the case.
With this reasoning the Supreme Court of Cassation ruled that Sofia City Court should hear the dispute on the merits.
Why is this important?
The ruling of SCC should bring clarity to the scope of the arbitration clause included in a PPA. Most of the PPAs concluded by NEK contain arbitration clauses. Now it should be clear that these arbitration clauses should apply only to disputes regarding the rights and obligations of the parties under the PPA, but not to any other relations between the parties.
The same arguments should apply also in other situations where entering into a particular type of contract is only a precondition for creation of entirely new legal relation between the parties based on the applicable law.
The SCC ruling appears to confirm what seems like a general tendency in Bulgarian case-law to interpret arbitration clauses narrowly.
 Ruling No. 388 of 14 August 2019 under commercial case No. 1157/2019 of the Supreme Court of Cassation. Link (in Bulgarian language)
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