Lithuania’s public policy problem

Daujotas, R. Lithuania’s public policy problem. CDR 05 April, 2013

“An expansive construction of this defense would violate the Convention’s basic effort to remove pre-existing obstacles to enforcement. Additionally, considerations of reciprocity – considerations given express recognition in the Convention itself – counsel courts to invoke the public policy defense with caution. We conclude, therefore, that the Convention’s public policy defense should be construed narrowly. Enforcement of foreign arbitral awards may be denied on this basis only where enforcement would violate the forum state’s most basic notions of morality and justice.” This is an excerpt of Justice Smith’s judgment in the case of United States Court of Appeals, Parsons & Whittemore Overseas Inc. (2d Cir.) decided in 1974.

To this date, a similar position and interpretation of the public policy ground indicated in the New York Convention of 1958, according to which courts may refuse recognition of arbitral awards, is followed by the majority of contracting states to this international convention which ensures the facilitation and development of international arbitration practice among its members. But, most importantly, the New York Convention and its proper interpretation ensures that member states will trust each other, hoping that all the parties to the Convention had agreed to interpret its terms similarly and in a bona fide manner.

However, the recent practice of Lithuanian courts regarding interpretation of the notion of public policy, as indicated in the New York Convention, has caused the member states to question the trust of their international partners. It has also brought doubts regarding Lithuania’s approach to the public policy ground in international commercial arbitration.

Gazprom versus Lithuania disputes

On December 17 2012, the Court of Appeals of Lithuania refused to recognise an SCC award in favour of Russian energy giant Gazprom. The court refused to enforce the award in Lithuania, reasoning that it would be contrary to the public policy of the Lithuanian legal system. The award ended one of the many disputes between Gazprom and the Republic of Lithuania that had built up during recent years after energy sector reform in Lithuania.

The SCC award rendered by an arbitral tribunal in Stockholm ruled that Lithuania was not entitled to file its claims regarding gas prices before Lithuanian courts, but should instead be heard by an arbitral tribunal.
Another dispute is pending under the auspices of the PCA regarding Gazprom’s claim for compensation of damages in connection with the planned reform of the gas market in Lithuania. In addition, another major dispute regarding Lithuania’s claim for payment by the Russian party of nearly USD 1.5 billion is pending, to be heard under the auspices of the SCC.
The public policy issue
The first arbitration began in August 2011, when Gazprom filed a claim against the Lithuanian state at the SCC, claiming that the Energy Ministry’s lawsuit in a local court had breached an agreement among the company’s shareholders – the State Assets Fund, Gazprom and Ruhrgas – to refer all their disputes to arbitration.
Gazprom requested that the arbitral tribunal order the Energy Ministry to discontinue the examination of the case at Vilnius Regional Court, and to decide all disputes in arbitration, as was initially agreed by the shareholders.
In July 2012, an SCC tribunal ordered the Lithuanian Energy Ministry to withdraw from the court any
claims related to the redrafting of gas supply contracts regarding Gazprom. However, investigation proceedings initiated in the Vilnius court were permitted to remain before the Lithuanian courts. Gazprom subsequently applied to the Lithuanian Court of Appeal for recognition of the SCC award.
The Court of Appeal has refused recognition of the award, stating that recognising the award would limit the legal capacity of the legal entities participating in the proceedings – and even the jurisdiction of the Lithuanian national courts.
The court ruled that the latter circumstance would violate a number of Lithuania’s constitutional principles, and also the sovereignty of the state which would be contrary to public policy.

A breach of the trust?

A proper interpretation of the New York Convention, including the notion of public policy, ensures the
facilitation of trust between the member states of the Convention.
However, it can be argued that the court’s decision raised doubts as to Lithuania’s readiness to meet its international commitments, and showed a failure in protecting foreign investors’ rights in the country.
The effect of the ruling of the Court of Appeal is unclear since Gazprom has appealed this ruling to the Supreme Court of Lithuania, and the final decision is still pending. It could yet be interpreted as refusing to recognise an agreement to arbitrate which was concluded by the state’s own bodies. It could also open the public policy ground for all disputes that, in the eyes of the court, limit its jurisdiction. After all, it is the court, not the parties, that decides whether to examine a commercial dispute.
Yet such a position clearly contradicts one of the most important principles in international arbitration: the principle of party autonomy to decide where they want to bring their future disputes, and especially parties’ right to refer their dispute to an independent tribunal instead of national courts.
Legal doctrine appears to provide a very simple solution regarding the issue of public policy. That is, that public policy should only include and be regarded as international public policy, i.e. international standards of due procedure and justice when dealing with enforcement of international arbitral awards.
We can only hope that an excessively broad interpretation of the public policy ground will not be applied, as this could have the adverse effect on facilitation of arbitration practice in Lithuania, breaching a trust of all the member states to the New York Convention. This could lead to a diminishing of foreign direct investment in Lithuania due to its unpredictable interpretation of international agreements.