Arbitrability of Disputes Arising from Public Procurement Contracts – Lithuanian Example

As it can be observed, this ruling of the SCL raises many questions, for example, are there sufficient grounds to state that the question of arbitrability should be answered though interpretation of the LPP[6]; or does the object of the dispute makes this dispute not arbitrable[7]; or whether involvement of a public body in the dispute makes it not arbitrable; or whether there should be a distinction made between the disputes arising from the public procurement procedure and the disputes arising from the commercial relationship regarding the execution of the public contract; or whether the tribunal has a right to apply provisions of the LPP[8] as there are many similar examples regarding the application of competition law provisions by arbitrators[9].

However, only three main questions will be discussed further, which form a basis of the ruling of the SCL: 1) is the LPP lex specialis and should it be applied first instead of the LCA, having due regard to the fact that the LCA is the main legislation which sets out the list of disputes that cannot be referred to arbitration, 2) whether the court has a right to interpret the provisions of law in such an expansive way that it would create new legislation, and 3) relationship between the public interest and the arbitrability.

a) Ratione personae

As it is provided by a number of authors, the issue of arbitrability must be discussed in two parts – parties’ capacity to refer their disputes to arbitration and the capacity of the subject matter of the dispute to be referred to arbitration[10]. As the SCL’s decision is mainly based on the second part – the ratione materae, the first one will only be discussed briefly.

As it was observed, parties to the dispute were private contractors and two public entities. Thus, the question that can be raised in this context is the capacity of state entities to arbitrate disputes. According to the SCL’s decision issued in 2008[11], if a public entity entered into an agreement for commercial purposes, then such an entity is regarded as a businessman in commercial relationship[12]. In addition, it is provided in Art. 11 of the LCA that disputes cannot be referred to arbitration where one of the parties is a public or municipality entity and there was no prior agreement of the establisher of such entity to refer disputes to arbitration. It is evident that the announcement of the tender by public entity and conclusion of the contract, which included the arbitration clause, should be sufficient to evidence the prior agreement of the establisher and must be regarded as an agreement by the public entity as required by the latter provision.

Therefore, it can be stated that the first part of the content of arbitrability, the ratione personae requirement is fully fulfilled, because there are no provisions in Lithuanian law which would prohibit public entities to enter into contracts which contain arbitration clauses.

b) Law on Arbitrability in Lithuania

First of all, a short review of the provisions of Lithuanian law regarding the objective arbitrability of disputes must be provided. Art. 23 of the Code of Civil procedure of the Republic of Lithuania (CCP) states that parties may agree to refer any dispute regarding the law, except disputes which, according to the law, cannot be referred to arbitration. As it was stated above, arbitration proceedings in Lithuania are governed by the LCA. Article 11 of the LCA clearly sets out the list of the disputes, which cannot be referred to arbitration (public procurement contracts are not included in the list)[13]. Article 37.5 of the LCA states that the Court of Appeal of the Republic of Lithuania would set-aside an award it if finds that the dispute could not be referred to arbitration under the provisions of Lithuanian law, or an award is in breach of the public policy[14] as stated in the provisions of Lithuanian law. In addition, Art. 40 of the LCA sets out the grounds for refusing to enforce an award which are similar to the provisions of Art. 5 of the New York Convention of 1958. Thus, these are the main provisions, which provide grounds for setting aside the award by the court in the context of arbitrability of disputes.

Another reference should be made to provisions of public procurement law. As it was mentioned above, public procurement procedures are governed by the LPP. Art. 120.2 of the LPP provides that in case of disagreement between the supplier and the purchasing entity, the supplier has a right to file a claim to the court. What could be noted in this part, it that none of the provisions of the LPP establish that disputes arising from public procurement law cannot be referred to arbitration.

Therefore, when faced with similar situation as analyzed in this article, the court has two options. First one is to consider the LPP as the lex specialis, because the dispute arose from public procurement contract, thus the court could find that disputes should be heard by the court, as provided in LPP. The second option is to consider the LCA as the lex specialis, because the answer of the arbitrability of certain disputes is provided in Art. 11 of LCA, and to refer the dispute to arbitration, since disputes arising from public procurement are not included in the list of the LCA. It can be argued that the latter option has more legitimate grounds which will be provided next.

c) Lex Specialis vs. Lex Generalis

It should be noted that provisions of the LCA were drafted in accordance with the UNCITRAL Model law on international commercial arbitration (Model law). As it is stated in Art. 7 of LCA, similar to Art. 5 of Model law – “In matters governed by this Law, no court shall intervene except where so provided in this Law”. Thus, it could be argued that the latter provision clearly sets out the lex specialis nature of the LCA[15]. As it can be observed from the provisions of the LCA,matters governed by the latter also include matters regarding the arbitrability of disputes – an imperative list of disputes which cannot be referred to arbitration is set in Art. 11 of the LCA. In addition, according to the Art. 7 of the LCA, the only basis for courts’ intervention must be set in this law (the LCA). Therefore, the LCA does not provide for a possibility for the courts to interpret other disputes as not arbitrable or to interpret the list provided in Art. 11 of LCA in an expansive way. Consequently, it can be argued that SCL’s argument that a list of disputes that are not arbitrable may be included in other legislation, contravenes the provisions of the LCA and its lex specialis nature.

In addition, the rationale of the basic doctrine of law – Lex specialis derogat legi generali means that a law governing a specific subject matter (lex specialis) overrides the law which governs general matters (lex generalis). It was stated in the ruling of the SCL that the object and subject matter of the respective dispute was concerned with a question of whether disputes arising from public procurement contracts are arbitrable under Lithuanian law. Therefore, it can be argued that the dispute was exceptionally concerned with the arbitrability issue. Accordingly, the law which specifically regulates which disputes may not be referred to arbitration should be the lex specialis and should lead the court while answering the question of arbitrability[16].

Furthermore, the object and purpose of the LCA should also referred to as the latter act should be the only act that regulates arbitration matters, including the procedure of arbitration, capacity of parties, as well as the issue of arbitrability,. It would be a very unusual practice to regulate matters exceptionally related to arbitration in other acts, especially, if the purpose of other acts (such as the LPP) clearly does not match with the purpose of the LCA. Similarly, the object and purpose of the LPP should also be analyzed.

As it was stated by SCL, the LPP is the lex specialis to disputes arising from public procurement procedures[17]. However, the procedure of public procurement should not be confused or equalized with matters which arise from commercial contracts related to public procurement. As it is stated in Art. 1 of the LPP, this act is purposed to regulate the procedure of public procurement, rights and obligations of subjects involved in the public procurement, control of the public procurement and dispute resolution. Therefore, it can be argued that the LPP is purposed to regulate the procedure of public procurement and the application of the latter act should not extent to matters arising after such procedures were concluded, i.e. when the contract is signed and the procedure of public procurement is over. Similar argumentation was also provided by the SCL itself in the ruling analyzed. The SCL had stated that the purpose of the LLP is to ensure the rational use of state’s budget, security of competition, transparency of public procurement procedures and etc. Thus, provisions of the LPP should not be applied when arguing a totally different issue of arbitrability[18] for a number of reasons.

Firstly, the LPP is not purposed to define disputes which may not be referred to arbitration. Secondly, legal relationship emerging after public procurement procedures and after the conclusion of contract should not be governed by the LPP. Instead, provisions which are generally applied to commercial conduct should govern parties’ relationship after the procedure of public procurement is finished. Provisions applicable to commercial relationship would clearly state that if there is a valid arbitration agreement, than the arbitral tribunal should be the one obliged to settle parties’ dispute instead of the court. Therefore, public entities may not take advantage of the restrictive provisions of their national law to question the validity of an arbitration agreement. This rule has been well established in international arbitration case law and in comparative law[19].

In addition, there are no other provisions in Lithuanian law, which would provide that certain dispute could not be referred to arbitration except the ones found in the LCA. The latter fact can be explained with reference to the principle of disposition, which is provided in Lithuania’s civil law. This principle can also be identified in Art. 23 of the CCP, which states that parties may agree to refer any dispute regarding the law, except disputes which, according to the law, cannot be referred to arbitration. Thus, the principle of disposition establishes that all disputes may be referred to arbitration, except the ones, which are clearly indicated by law, as not arbitrable (Art. 11 of the LCA).

It must be emphasized that arbitration is an alternative means of dispute resolution, which must be chosen by the parties. Thus, there is no need to include arbitration option in all legislation of the country. Generally, all state’s legislation provides courts’ jurisdiction as basic and general means of dispute resolution. As it was mentioned, the SCL stated that disputes arising from public procurement contracts cannot be referred to arbitration, because the LPP states that disputes regarding public procurement procedures should be dealt by court. Therefore, if one would agree with such rationale provided by the SCL, one could argue that any and every dispute is not arbitrable, because the basic jurisdiction of courts is provided in all legislation of the state. Clearly, such argumentation would not find support. Therefore, it is clear that such reasoning of the SCL is erroneous[20].

Finally, even if one would agree with the statement of the SCL, according to which, the LPP is the lex specialis in this case, this would not change an assessment of this situation. If one would apply the LPP first, instead of the LCA, it would find that there is no provision in the LPP which would state that disputes arising under this law are not arbitrable, and if one would next refer to the LCA, it would find that disputes arising from public procurement procedures are not included in the list provided in Art. 11 of the LCA.[21]

Consequently, a conclusion can be made that the LPP is not and should not be regarded as a lex specialis when questions of arbitrability of disputes are resolved. Arbitrability is an issue which should be exceptionally regulated by the provisions of the LCA. Furthermore, provisions of the LPP should be applied only to matters related to public procurement procedure and not to the commercial relationship, which evolves after conclusion of public procurement contracts. Therefore, it can be stated that the ruling of SCL is clearly subject to a lot of criticism.

d) The Expansive Interpretation of Law

Another question, which must be discussed next, is whether the court has a right to interpret the provisions of law in such an expansive way that it would create new provisions which would contravene with the existing legislation[22].

It was stated by the International court of justice (ICJ) that a court must seek to determine the ordinary meaning of the words[23] and to seek a reasonable approach[24]. However, the SCL took a rather expansive approach and stated that even if the list provided in Art. 11 of LCA is conclusive and may not be interpreted expansively, the SCL still found that there are also other disputes, which are not arbitrable under Lithuanian law. Thus, it can be legitimately stated that the court created a new provision, which states that disputes arising from public procurement contracts are not arbitrable[25]although the legislator chose not to include such provision in the LCA.

This raises an important question – is the court in Lithuania authorized to create provisions of law or should it adhere to the principles serving to this end, like primacy of literary construction and etc. This issue constantly raises substantial questions, as it was provided by some authors:

“How can we possibly plan our lives on the basis of the law of tomorrow when we can’t predict what that law will be? Are courts that are attracted to dynamic statutory interpretation teaching us that we can no longer know and rely on the rule of law in our daily lives because months or years later they can use policy considerations to make new law?”[26]

It can be argued that first – the doctrine of separation of powers should be followed. The latter doctrine (the trias politicaprinciple) states that the state is divided into branches, each with separate and independent powers and areas of responsibility so that no branch has more power than the other branches. This doctrine was also accepted in Lithuania. As it was stated by the Constitutional Court of the Republic of Lithuania:

“<…>Under the Constitution, the organization of state power and its activity are based on the principle of separation of powers. The Constitutional Court has held in its rulings for more than once that the constitutional principle of separation of powers, among other requirements, implies that the legislative, executive and judicial powers must be separated, sufficiently independent, however, there must be a balance between them, also, that every state institution is attributed the competence which corresponds to its purpose, and the particular content of which depends on the place of the power in question in the entire system of state powers as well as its relation with the other powers, also, that upon direct establishment in the Constitution the powers of a particular state institution, one state institution may not take over such powers from another state institution, transfer or waive them<…>”

Therefore, it can be argued that according to the principle of separation of state powers, courts may not create new provisions of law, as this is an exclusive prerogative of the legislator. Court’s interpretation of law should be limited only to dynamic statutory interpretation, which would not amount to unconstitutional ex post facto legislation[27]. Thus, this would mean that statement of the SCL, which provided that the list of disputes which cannot be referred to arbitration (provided in Art. 11 of the LCA) may be extended by interpretation of provisions of the LPP, is erroneous. It should be noted once again, that there were no provisions in the LPP, which would state that disputes arising from public procurement are not arbitrable neither there were such provisions in the LCA. So the court had no right create new provisions out of thin air or according to its own view of what the development of the arbitration law would require.

In addition, it should be remembered that one of the most approved methods [of interpretation] is to discover the intent of the legislator[28]. Therefore, the intent of the legislator was to explicitly establish in the LCA and not in the LPP which disputes may not be referred to arbitration. Further, the wording of the Art. 7 of LCA – “In matters governed by this Law, no court shall intervene except where so provided in this Law”, clearly suggests that the legislators’ intent was to prohibit the court to intervene in matters governed by the LCA, including also the arbitrability of disputes.

Finally, it can be stated that the main purpose of court’s ruling is to give detailed grounds and prove that the judgment necessarily results from applicable law. The applicable law on questions of arbitrability in Lithuania is the LCA and not the LPP. The LCA does not forbid arbitrating disputes arising from public procurement.

e) Analogy to Competition Law

As it was argued above, after making reference to the LCA and finding that disputes arising from public procurement contracts are not included in the list of the LCA, the SCL referred to the provisions of the LPP, because according to court’s view, it was the lex specialis in this case.

Another argument brought by the SCL was positioned as follows: “While ensuring the best possible protection of the public interest in disputes arising from public procurement contracts, the extensive power must be provided for an institution which would decide such disputes. Therefore, there is no doubt that such power may be provided only to courts”.

However, it can be argued that, firstly, the arbitral tribunal has a power vested on it by the parties themselves and by the law (the LCA)[29]. In addition, while stating that there is a public interest in disputes arising from public procurement, the SCL had ignored the fact that the public interest only existed before the contract was concluded. More specifically, as it was stated, the object and purpose of the LPP is to secure public interest. Therefore, the LPP is purposed to secure the procedure of public procurement and to ensure the transparent and competitive tender. The latter should be regarded as a public interest. Moreover, conditions of the tender are provided by the state, thus the only way to influence the public interest is vested on the state and not the bidders. Therefore, after the certain bidder accepts the conditions provided by the state and wins the tender and the contract is concluded ensuring transparency, then the public interest disappears, because pure commercial relationship evolves. So the cited statement of the SCL is ungrounded, because the public interest is not existent when the procedure of public procurement is completed.

Even if one would disagree with such argumentation and would argue that the public interest still exists after the completion of public procurement procedures, an analogy to competition law can be brought as a reference.

As it is generally accepted, competition law always includes public interest[30]. However, it does not mean that matters relating to competition law could not be subject to arbitration. For example, in Mitsubishi Motor Corp v Soler Chrysler Plymouth Inc[31], the US Supreme Court held by a majority that antitrust issues arising out of international contracts were arbitrable. The Court accepted that antitrust laws were extremely important and that such claims could be significant and complex. However, the Court also considered that it should respect arbitral tribunals and consider the need for predictability in commercial disputes.

Another example can be brought by the ECJ case in Eco-Swiss[32]. This case has been interpreted as meaning that an arbitral tribunal is enabled to apply EU competition law (even of its own accord) in cases where the award may be enforced in an EU state. In respect of the latter, the ECJ had provided:

“A national court to which application is made for annulment of an arbitration award must grant that application if it considers that the award in question is in fact contrary to Article 81 [EC Treaty]”

In addition, in the case of ET Plus SA v Welter[33] the High Court in England found that claims alleging a breach of Articles 81(101) and 82(101(2)) are arbitrable if they fall within the scope of a contractual arbitration clause.

Similarly, it was provided in ECJ case in Nordsee Deutsche Hochseefischerei[34] that the arbitral tribunal is obliged to apply mandatory provisions of EU law and it was confirmed numerously by the EJC that tribunals are enabled to apply also provisions which consider the public policy of EU law[35]. The main rationale of the EJC is that arbitrators must take into account mandatory rules eventually applicable to the case by reason of their connection to the case[36].

These decisions indicate that courts, at least in Europe and the United States, expect an arbitrator to have obligations to do more than just resolve a private dispute between parties, because statutory and regulatory claims are increasingly declared to be arbitrable[37].

Therefore, if one would argue that disputes arising from public procurement law also include public interest, then such disputes are similar to the disputes arising from competition law as the latter also includes protection of public interest. As it was observed, disputes arising in competition law area have no restrictions to be settled by arbitration. Even more, arbitrators have the power to apply competition law provisions. Therefore, an argument brought by the SCL that only the court has the power to rule on issues involving public interest cannot be regarded as grounded.