17.4.2. CONTINGENT LIABILITIES

Information concerning significant proceedings in front of court, body appropriate for arbitration proceedings or in front of administration bodies in which the companies of the ORLEN Group act as the defendant:

I.P.-95 s.r.o. compensation claim against Unipetrol RPA s.r.o.
On 23 May 2012, Unipetrol RPA s.r.o. received from the District Court in Ostrava a claim brought by I.P.-95 s.r.o. for compensation related to the filing by Unipetrol RPA s.r.o. a motion for bankruptcy of I.P.-95 s.r.o. in November 2009. The total amount of the claim is approximately PLN 314 million, translated using the exchange rate as at 31 December 2020 (representing CZK 1,789 million). Unipetrol RPA s.r.o. is one of eight defendants which were jointly and severally claimed. At the request of the I.P.-95 s.r.o proceeding was pending concerning the accession to the claim as plaintiff NESTARMO TRADING LIMITED. The court refused the Company permission to enter to the case. In February 2018, the court dismissed in entirety claim ruling in favour of Unipetrol RPA s.r.o. On 3 April 2018, I.P.-95 s.r.o. appealed against the decision of the court of first instance. On 22 May 2018, the District Court in Ostrava obliged I.P. - 95 s.r.o. to pay the appeal fee. On 11 December 2018, the court of second instance dismissed the appeal of I.P.-95 s.r.o. from the judgment of the District Court in Ostrava. The judgment is binding. On 20 March 2019 I.P. - 95 s.r.o. filed a cassation appeal against the judgment of the court of second instance. According to Unipetrol RPA s.r.o. the claim is without merit.

Claim of Warter Fuels S.A. (before: OBR S.A.) against PKN ORLEN for compensation
On 5 September 2014, OBR S.A. (currently: Warter Fuels S.A.) filled an action against PKN ORLEN with the District Court in Łódź for a claim for payment in respect of an alleged breach by PKN ORLEN of patent rights. The amount of the claim in the lawsuit was estimated by Warter Fuels S.A. in the amount of approximately PLN 84 million. The claim covers the adjudged sum of money from PKN ORLEN for Warter Fuels S.A. in the amount corresponding to the value of the license fee for the use of the solution under the above patent and adjudge the obligation to repay the benefits derived from the use of this solution. On 16 October 2014 PKN ORLEN responded to the lawsuit. By the procedural document from 11 December 2014 the value of the dispute was referred to by the plaintiff in the amount of approximately PLN 247 million. So far, several hearings have been held (last on 28 September 2018), during which witnesses submitted by the parties were heard by the court. On 19 December 2018, a hearing took place, during which the Court heard the parties' position in the scope of the grounds for any repeal of the freezing order. By a decision of 2 January 2019 the Regional Court set aside the order granting security for claims. Warter Fuels S.A. submitted a complaint against this decision on 5 February 2019. PKN ORLEN submitted a response to the complaint. The matter of complaint consideration is at the stage of secondary proceedings, i.e. before the Court of Appeal in Łódź. The freezing order has been legally repealed.
The PKN ORLEN attorney submitted a request to suspend the proceedings due to parallel proceedings for determining the right to the disputed patent, the outcome of which will have significance for the resolution in the case of breach. The request has not been considered yet. The court is currently looking for an expert or institute to issue an opinion also among foreign entities, hence the translation of part of the case documentation into German was commissioned. A full assessment of the risk of an unsuccessful decision may be made at a later stage of the proceedings, taking into account the arguments of PKN ORLEN. In the opinion of PKN ORLEN the claims of Warter Fuels S.A. are without merit.

UAB Baltpool claim against ORLEN Lietuva
In May 2019, UAB Baltpool (an entity administering the funds and responsible for collecting fees for so-called Public Service Obligation in Lithuania) filed a claim against ORLEN Lietuva for payment of system fees (so–called PSO fees) related to electricity consumption for the period from February 2013 to March 2019 (excluding May 2017). The claim relates to unpaid by ORLEN Lietuva system fees on the amount of electricity generated and consumed by ORLEN Lietuva for own needs. ORLEN Lietuva believes, that such system fees (self-producer fees) are not due. The case is connected with 8 administrative cases brought by ORLEN Lietuva (since 2013), in which ORLEN Lietuva challenges the legality of charging PSO on electricity generated and consumed for own needs. All these administrative cases are suspended in connection with proceedings pending before the Court of Justice of the EU. The outcome of the case brought by UAB Baltpool depends on a large extent on the outcome of these administrative proceedings and proceedings before the Court of Justice of the EU. The Court of Justice of the EU decided, that the Lithuanian PSO program constitutes the nature of state aid. In order to participate in the PSO fee reimbursement plan, which starts on 1 July 2020, the Supervisory Board of ORLEN Lietuva decided to settle the arrears. A reduction of overdue interest was negotiated. On 25 June 2020, ORLEN Lietuva settled the arrears in the amount of PLN 63 million, translated at the exchange rate as at 31 December 2020 (i.e EUR 13.7 million), which is equivalent to the total dispute value as at 31 December 2020. UAB Baltpool withdrew the lawsuit which was confirmed by the court decision of 3 November 2020. Therefore ORLEN Lietuva will participate in the PSO reimbursement plan, as one of the conditions of participation is lack of debt to UAB Baltpool. The case that concerns PSO for 2017 is in the appeal instance. The date of the appeal hearing is not yet determined. If ORLEN Lietuva wins the case, the PSO paid to date will be returned to ORLEN Lietuva by the State Treasury. In the opinion of the ORLEN Lietuva the claims are without merit.

POLWAX S.A. - ORLEN Projekt S.A. dispute
On 19 April 2019 ORLEN Projekt filed a claim against POLWAX with the District Court in Rzeszów for payment of the amount of PLN 6.7 million together with due statutory interest for delay in commercial transactions in respect of remuneration for performed and received by POLWAX construction works in connection with the Agreement concluded on 7 April 2017 for "Construction and start-up of the paraffin wax solvent deoiling installation together with auxiliary installations for POLWAX .S.A.". On 23 May 2019 the Court issued a warrant for payment to ORLEN Projekt in a writ of payment proceedings covering the entire amount claimed, thanks to which ORLEN Projekt obtained subsequently a bailiff's security for this amount on the POLWAX bank account. The motion submitted by POLWAX for overturning the warrant of payment was dismissed by the decision of the Court of First Instance. POLWAX appealed against the decision of the Court of First Instance, however on 16 March 2020 the Court of Appeal in Rzeszów issued a decision rejecting POLWAX's complaint. The lawsuit's files were transferred back to the District Court in order to carry on evidence proceeding. On 27 November 2020, the District Court issued a judgment in the case, according to which (i) upheld the payment order of 23 May 2019 for the most part, i.e. in full for the main claim in the amount of PLN 6.7 million and with regard to overdue interest for delay in commercial transactions from 1 October 2019 to the date of payment; (ii) revoked the order for payment issued dated on 23 May 2019 for the payment of overdue interest, i.e. in the amount of PLN 2.9 million from 11 January 2019 to 1 October 2019 and in the amount of PLN 3.7 million from 25 January 2019 to 1 October 2019; (iii) ordered POLWAX to pay to ORLEN Projekt additional litigation costs. On 22 February 2021 ORLEN Projekt filed an appeal against the judgment, objecting to it in the part in which the Court revoked the payment order as regards the payment of statutory interest for delay in commercial transactions from the amounts: (i) PLN 2.9 million from 11 January 2019 to 1 October 2019 and (ii) PLN 3.7 million from 25 January 2019 to 1 October 2019.

On 31 May 2019 ORLEN Projekt filed another claim against POLWAX with the District Court in Rzeszów for payment of further PLN 6.5 million together with due statutory interest for delay in commercial transactions in respect of further part of remuneration for performed and received by POLWAX construction works. This claim was then extended three times 1) the extension of the claim as at 20 September 2019 by the amount of PLN 13.9 million for groundless reimbursement of a performance guarantee and covering the costs of its execution, and 2) the extension of the claim as at 6 November 2019 by the amount of PLN 25 million for other claims related to withdrawal from the Agreement by ORLEN Projekt due to POLWAX's fault and (3) the extension of the claim as at 19 February 2021 for the amount of PLN 22.5 million for further claims related to termination of the Agreement by ORLEN Projekt due to fault of POLWAX, up to the total amount of PLN 67.9 million. Further hearings are scheduled for May and June 2021.

On 2 March 2020, POLWAX filed a lawsuit against ORLEN Projekt with the District Court in Rzeszów for payment of PLN 132 million plus accrued interest for delay. The total amount investigated by the defendant includes PLN 84 million for damage in the form of actual loss to be incurred by POLWAX and PLN 48 million for lost benefits resulting from improper performance and failure to perform the Agreement by ORLEN Projekt. In the opinion of ORLEN Projekt, the POLWAX claims pursued by the lawsuit are unfounded, therefore in response to the lawsuit dated 3 September 2020 ORLEN Projekt requested to dismiss the claim in its entirety. According to the information held by ORLEN Projekt, before filing the lawsuit, POLWAX filed a request to the District Court in Rzeszów for securing the claims it intended to pursue from ORLEN Projekt, however, the Court entirely dismissed the request by the order as at 6 February 2020. The Court dismissed the request in its entirely. Following POLWAX's filing of a letter entitled extension of claim together with a reply to the statement of defence, ORLEN Projekt requested that the extension of claim is declared inadmissible. On 25 February 2021 the District Court in Rzeszów supported ORLEN Projekt's motion and issued a decision declaring the extension of POLWAX's claim by PLN 2 million as inadmissible. The date of the preparatory hearing in the case was set for 19 May 2021.

On 11 March 2020, POLWAX filed a lawsuit against ORLEN Projekt with the District Court in Rzeszów for payment of PLN 9.7 million plus accrued interest for late payment: (i) reimbursement of costs of removal and disposal of waste in the form of contaminated land from the Project area, and (ii) non-contractual storage of land from the Project area on plot no. 3762/70 belonging to POLWAX. In the opinion of ORLEN Projekt, the POLWAX claims pursued by the above lawsuit are unfounded, hence in response to the lawsuit of 19 June 2020 ORLEN Projekt requested to dismiss the claim in its entirety. The case was suspended at the joint request of the parties. By letter dated 1 March 2021 POLWAX requested that the suspended proceedings be resumed. On 17 March 2021, the Court issued a decision to resume the suspended proceedings, setting the date of the preparatory hearing in the case for 14 June 2021.

On 22 June 2020 a copy of another suit filed by POLWAX with the District Court in Tychy was delivered to ORLEN Projekt. Within the framework of the filed lawsuit POLWAX demanded that the Court obliges ORLEN Projekt to restore the legal status by emptying warehouses transferred to ORLEN Projekt in order to store equipment and materials for the purposes of the conducted investment. On 3 July 2020 the Court extended the deadline for ORLEN Projekt to submit a response to the lawsuit to 24 July 2020. On 24 July 2020 ORLEN Projekt submitted a response to the statement of claim in this case, requesting that the claim be dismissed as unfounded in its entirety. By order of 16 August 2020 the court directed the case to mediation, which both parties agreed to. On 9 April 2021, the mediator prepared a protocol on the conclusion of the mediation, returning the files to the District Court in Tychy for further proceedings in the case.

Technip Italy S.p.A. v UNIPETROL RPA, s.r.o.
In connection with the delay in execution of the Agreement concluded between Technip Italy S.p.A. ("Technip") and UNIPETROL for the construction of the Polyethylene Plant in Litvinov, Technip was obliged to pay contractual penalties for the delay in the amount of PLN 106 million, translated using the exchange rate as at 31 December 2020 (representing EUR 23 million). Technip did not pay the above mentioned contractual penalties to UNIPETROL, therefore UNIPETROL activated the bank guarantee in the amount of PLN 97 million, translated using the exchange rate as at 31 December 2020 (representing EUR 21 million).

On 17 August 2020, Technip called for arbitration. In November 2020, UNIPETROL claimed an offset of the remaining contractual interest from the invoice issued by Technip for the remaining part of the contractual remuneration: the outstanding amount of contractual interest for delay is PLN 8 million translated using the exchange rate as at 31 December 2020 (corresponding to EUR 1.8 million).

On 30 November 2020, UNIPETROL submitted a reply to the statement of claim and filed a counterclaim for the outstanding contractual interest for delay in the amount of PLN 8 million translated using the exchange rate as at 31 December 2020 (corresponding to EUR 1.8 million).
On 5 January 2021, Technip submitted an amendment to the demand for arbitration increasing the total amount of the claim to PLN 148 million translated using the exchange rate of 31 December 2020 (corresponding to EUR 32 million).

Technip, by filing for arbitration taking into account the submitted amendment, intends to obtain:

a) payment of the amount of PLN 98 million, translated using the exchange rate as at 31 December 2020 (corresponding to EUR 21.3 million), representing the amount of unjustified payment under the bank guarantee by UNIPETROL;

b) payment of the amount of PLN 48 million, translated using the exchange rate as at 31 December 2020 (corresponding to EUR 10.5 million) representing additional claims of Technip based on various circumstances and legal grounds mainly concerning works, additional services provided by Technip in connection with the Polyethylene Plant construction project;

c) payment of the amount of PLN 0.9 million, translated using the exchange rate as at 31 December 2020 (corresponding to EUR 0.2 million) from the invoice issued by Technip, representing the remaining part of the contractual remuneration (which was offset by UNIPETROL in November 2020);

d) payment of the amount of statutory interest for the entire due payment;

e) dismissal of UNIPETROL's counterclaim.

The arbitration proceedings are pending before the Court of Arbitration at the International Chamber of Commerce in Vienna. In the opinion of UNIPETROL RPA s.r.o., Technip's claim is without merit.

Contingent liabilities related to the ENERGA Group
As at 31 December 2020, the ENERGA Group identifies contingent liabilities in the amount of PLN 309 million, including mainly the contingent liabilities relating to legal claims filed against ENERGA Group companies likely to be effectively dismissed by the companies or for which no cash outflow can be reliably estimated and no provision has been recognised for those claims.

The largest item of contingent liabilities of the ENERGA Group consists of legal claims relating to the power infrastructure of Energa-Operator SA located on private land. The Group recognises provisions for filed legal claims. If there is uncertainty as to the validity of the amount of the claim or legal title to land, the Group recognises contingent liabilities. As at 31 December 2020, the estimated value of those claims recognised as contingent liabilities amounts to PLN 248 million. Considering the legal opinions, the estimated amounts represent a risk of liability of less than 50%.

Another issue is the contract for co-finance the project entitled “Construction of a biomass-fired power unit by Energa Kogeneracja Sp. z o.o. in Elbląg” which sets out the performance ratios relating to the volume of electricity and heat produced in the years 2014-2018. In order to secure the performance of obligations under the co-financing agreement Energa Kogeneracja Sp. z o.o. issued a blank bill for up to PLN 40 million including interest.

As part of the settlement of the acquisition of ENERGA shares, in relation to the above contingent liabilities, the ORLEN Group in accordance to the specific requirements of IFRS 3 Business Combinations has recognised in the statement of financial position as at the acquisition date additional provisions reflecting their estimated fair value in the amount of PLN 74 million, including those related to the power infrastructure of Energa-Operator SA located on private land, the fair value of which has been determined on the basis of the probability of meeting the clients' claims based on the estimation of law firms.

Arbitration procedure brought by Elektrobudowa S.A. against PKN ORLEN
Elektrobudowa S.A. filed an action against PKN ORLEN with the Arbitration Tribunal of the Polish Consulting Engineers and Experts Association (SIDiR) of Warsaw (case No. P/SA/5/2019), seeking payment of a total of PLN 103,997,758.85 and EUR 11,481,955.37. The case concerns performance of the EPC contract between PKN ORLEN S.A. and Elektrobudowa S.A. for the construction of a metathesis unit.

The amount in dispute includes:

1) consideration of PLN 20,570,866.83 and EUR 7,585,851.61 plus statutory default interest, alleged to be payable under the EPC Contract to Elektrobudowa S.A. or, alternatively, to Citibank if the consideration is found to be payable to Citibank following assignment;

2) a fee of PLN 7,832,245.97 and EUR 1,261,191.54 plus statutory default interest accrued since 23 October 2018 for additional and substitute works, alleged to be payable to Elektrobudowa S.A. or Citibank (see above);

3) a claim of PLN 62,355,170.15 plus statutory default interest accrued since 27 December 2019, alleged to be payable to Elektrobudowa S.A. or Citibank (see above) on top of the lump-sum consideration payable thereto;

4) compensation of PLN 13,239,475.90 and EUR 2,634,912.22 plus statutory default interest accrued since 25 October 2019, alleged to be payable to Elektrobudowa S.A. for the harm it suffered as a result of wrongful drawdown of funds by PKN ORLEN under bank guarantees.

On 17 April 2020, PKN ORLEN submitted its defence. The Arbitration Tribunal has issued two rulings:

(I) The interim award of 7 January 2021, which concerns Electrobudowa S.A.’s claims for recovery of PLN 250,000 for the development of the ‘Post-overhaul Unit Commissioning and Start-up Manual’ (the “Manual”) and for recovery of a PLN 128,795.36 surcharge for delivery of a stainless steel FA-2202 Nitrogen Treater adsorption unit in place of a carbon steel one (the “Adsorption Unit”).
In the award, the Arbitration Panel found both these claims to be justified in principle. The award is not dispositive as to whether PKN ORLEN is liable to pay the plaintiff PLN 250,000 in consideration for the development of the Manual and/or the PLN 128,795.36 surcharge for delivery of the Adsorption Unit but establishes, in view of the Panel’s findings, that Elektrobudowa S.A. may reasonably expect to be paid by PKN ORLEN for rendering the aforesaid additional and/or substitute performance.
The exact amounts of the payments due to Elektrobudowa S.A. from PKN ORLEN for that performance are to be determined at the next stage of the ongoing proceedings. Accordingly, on 18 January 2021 the Arbitration Panel decided to admit expert evidence in order to determine the value of the Manual as developed by Elektrobudowa S.A. and the amount of the surcharge due for delivery of the stainless steel Adsorption Unit in place of a carbon steel one.

(II) The partial award of 8 January 2021, which concerns PKN ORLEN’s counterclaim for reduction of the consideration due to Elektrobudowa S.A. by a total of PLN 11,612.94 and EUR 4,602,235.65 on account of defects found in the K-2302A and K-2302B compressors and in the drinking and utility water pipelines. The Arbitration Tribunal dismissed the PKN ORLEN’s counterclaim, made under the implied warranty statute, for reduction by a total of PLN 11,612.94 and EUR 4,602,235.65 of the lump-sum consideration due to the plaintiff for delivery of the K-2302A and K-2302B compressors with a shaft power of 11.4 kW and for the construction of the PEHD drinking and utility water pipelines under the ‘Engineering, Procurement and Construction (Turnkey) Contract for a Metathesis Unit at Polski Koncern Naftowy ORLEN’s Production Plant in Płock’ of August 1st 2016, having found the counterclaim to be without merit. The partial award is not equivalent to an actual award of PLN 11,612.94 and EUR 4,602,235.65 to the plaintiff against PKN ORLEN as the Arbitration Tribunal did not rule on whether the plaintiff had standing to claim payment of those amounts as part of the consideration due under the Contract, nor is to equivalent to a ruling that PKN ORLEN’s notice of reduction under the implied warranty statute of the contractual consideration by the same amounts on account of defects in contract deliverables should be deemed ineffective.

(III) The partial award (No. 2) of 3 February 2021, the Court awarded PKN ORLEN for Elektrobudowa the amount of PLN 4,346,223.35 (17 invoices) and the amount of PLN 6,961,630.26 (equivalent to EUR 1,622,983.45 - 5 invoices) for VAT (in total: PLN 11,307,853.61), together with statutory interest for delay, and determined that the deductions made by the defendant were unjustified for the amount of EUR 667,271.12 and the amount of PLN 3,502,187.47. As regards part of the invoices, the Court stated that they had not been paid without explaining the reasons for their payment. Moreover, the Court stated that the EPC Agreement allowed only deductions to be made to the net value. Therefore, it concluded that VAT, as a public law debt, cannot be set off against a civil law debt and such amounts cannot be retained.

(IV) The partial award (No. 3) of 3 February 2021 ordering PKN ORLEN to pay the bankruptcy trustee the total amount of PLN 1,180,846.40 net for partial payment of contractual remuneration (6 invoices), including statutory interest for delay until the date of payment. The court ruled on 6 invoices which were already examined in the partial judgment (no. 2). The court stated that PKN ORLEN did not indicate why the amounts were not paid. It also stated that the lawsuit was limited and that it does not include the amounts retained as a substitute deposit related to the failure to submit the Performance Guarantee during the guarantee period. However, the Court awarded the trustee the amount of PLN 1,180,807.40

(V) The partial award (No. 4) of 3 February 2021 ordering the defendant to pay the plaintiff in the total amount of PLN 2,090,738.20 and the amount of EUR 1,379,395.95 for partial payment of contractual remuneration, together with statutory interest for delay until the date of payment and establishing the unjustified deductions made by the defendant for contractual penalties in the amount of EUR 1,865,930.95. The judgment concerns the amounts deducted by PKN ORLEN in connection with the imposition of contractual penalties for the late performance of the EPC agreement with regard to intermediate deadlines. The court found that:

• contractual penalty for delay in providing the documentation was partially incorrectly charged, and therefore awarded the plaintiff the amounts deducted in connection with the incorrectly calculated penalty;
• contractual penalty for delay in delivery of the OCU reactor is justified and dismissed the claim for payment of remuneration to the extent that it was deducted to cover this contractual penalty;
• contractual penalty for delay in delivery of the Cold Station was calculated incorrectly and awarded Elektrobudowa claims for the remuneration deducted to satisfy this contractual penalty.
  
  PKN ORLEN is not entitled to any appeal against the abovementioned awards in the proceedings before the Court of Arbitration. At the time of publication of these consolidated financial statements, on the basis of the abovementioned awards PKN ORLEN is obliged to pay to the bankruptcy trustee of Elektrobudowa S.A. approximately PLN 45 million with interest, provided that PLN 22 million of the above amount is not yet covered by the awards.
  
  Except of described above proceedings, the Group has not identified any other significant contingent liabilities.