Paris Court of Appeal, No. No. 09/19535 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, First Pole, First Chamber, 18 November 2010, No. 09/19535

THE GOVERNMENT OF REGION A (RUSSIAN FEDERATION)
vs. THE REPUBLIC OF LITHUANIA

Region A of the Russian Federation took out a loan from a German bank in 1997. In the absence of repayment, the Cypriot company Duke Investment (Duke), assignee of the claim, submitted the dispute to the London Court of International Arbitration (LCIA) pursuant to the arbitration clause stipulated in the loan agreement. An award rendered by this Court, and dated 1 October 2004, was not contested in the UK courts, and ordered the borrower to pay the sum of $10 million plus interest.

The enforcement (in French Exequatur) of this award was pronounced in Lithuania by a first instance judgment of 3 November 2005, then it was confirmed on 7 March 2006 by a judgment of the Vilnius Court of Appeal, against which the appeal in cassation was rejected. In execution of these decisions, two properties located on the Lithuanian territory belonging to Region A, which had been subject to precautionary seizures, were sold by auction to the benefit of Duke on 18 December 2006 for a price of approximately EUR 685,000.

On 30 October 2006, the Government of Region A (the GRA) filed a request for arbitration with the International Chamber of Commerce based on the Treaty concluded on 29 June 1999, between the Russian Federation and the Republic of Lithuania, on the promotion and reciprocal protection of the investments (Bilateral Investment Treaty: BIT). The request was aimed at ordering the Republic of Lithuania (Lithuania) to pay compensation for the expropriation of its immovable property in execution of the Lithuanian court decisions.

By an award delivered in Paris on 28 January 2009, the tribunal, composed of Mr. B, Chairman, Mr. L and Mr. R, arbitrators:

declared it had no jurisdiction to decide the dispute before it;
declared that the application for intervention of the company managing the disputed properties (OGUP PKHO) was without object.

The GRA appealed against this award.

By submissions dated 23 June 2010, it seeks the annulment of both the award and the decision of 22 June 2009 by which the arbitral tribunal rejected its request for interpretation. It also requests that Lithuania be ordered to pay the sum of EUR 150,000 pursuant to Article 700 of the Code of Civil Procedure. It invokes the arbitrators' lack of knowledge of their mission (Article 1502-3 of the Code of Civil Procedure).

By submissions of 24 September 2010, Lithuania, alleging the need to combine, in the light of the Vienna Convention on the Law of Treaties, the provisions of the BIT with those of the New York Convention on the Recognition and Enforcement of Arbitral Awards, requests the Court to dismiss the action for annulment and to order the GRA to pay the sum of EUR 150,000 pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the sole ground of annulment based on the fact that the arbitrators did not comply with their mission (article 1502-3 of the code of civil procedure):

The GRA argues that the request for arbitration falls within the scope of Article 10 of the BIT, which sets out the procedure for the settlement of investment disputes between the Russian Federation and the Republic of Lithuania; it complains that the arbitrators took into consideration the New York Convention on the Recognition and Enforcement of Arbitral Awards and deduced from the combination of its provisions with those of the BIT that the latter could not have the effect of creating an appeal mechanism for a foreign arbitral award, in this case that of the LCIA; the GRA alleges that the New York Convention was irrelevant and that the arbitrators erroneously confused the LCIA dispute with the dispute before them whereas, on the one hand, the parties to the two arbitrations were different - the GOVERNMENT OF REGION A and the Region of A being two separate legal entities - that, on the other hand, the subject matter and basis of the two disputes were distinct, the first concerning the non-performance of a loan agreement and the second concerning the compensation of an expropriation, that finally, the action before the court did not seek to challenge the LCIA award, which could be executed on other property owned by the claimant, in particular on the territory of the Russian Federation;

Considering that the annulment court reviews the decision of the arbitral tribunal on its jurisdiction, whether it has declared it had jurisdiction or not, by seeking all elements of law or fact which make it possible to assess the scope of the arbitration agreement and to deduce the consequences on the respect of the mission entrusted to the arbitrators; that it is no different when, as in the present case, the arbitrators are seized on the basis of the provisions of a bilateral treaty;

Considering that on 30 October 2006, the GRA filed a request for arbitration under the supervision of the International Chamber of Commerce to obtain the condemnation Lithuania by making it compensate for the expropriation of immovable property located on the Lithuanian territory, sold on seizure by virtue of decisions of Lithuanian courts; that this request was made on the basis of the provisions of the BIT between the Russian Federation and the Republic of Lithuania, which entered into force on 24 May 2004;

Considering that Article 6 of that Treaty provides:

“Expropriation and compensation

l. The investments of the investors of one Contracting Party made in the territory of the other Contracting Party shall not be subject to expropriation, nationalisation or other measures equivalent to expropriation or nationalisation (hereinafter referred to as “expropriation”) unless these measures are carried out in the public interest and under due process of law, are carried out without discrimination and are accompanied by the payment of prompt, adequate and effective compensation.

2. The compensation shall be equivalent to the market value of the expropriated investments immediately before the expropriation in fact occurred or the impending expropriation became public knowledge. The compensation shall be paid without undue delay in a convertible
currency and shall be freely transferable from the territory of one Contracting Party to the territory of the other Contracting Party. The compensation shall include interest calculated until the date of payment of the compensation at the LIBOR rate.”.

That under the terms of Article 10 of the same Treaty:

“Settlement of Disputes between one Contracting Party and an Investor of the other Contracting Party

1. In a case of any dispute between one Contracting Party and the investor of the other Contracting Party concerning the investments, including the disputes regarding amount, conditions or procedure of payment of the compensation, and the procedure of transfers, referred to respectively in the Articles 6 and 8 of this Agreement, a written notification, which includes detailed explanation, is submitted by the investor to the Contracting Party, which is a party of the dispute. The parties of the dispute shall endeavour to settle such dispute, if possible, by the way of negotiations.

2. If such dispute can not be settled amicably within six months from the date of the written notification referred to in paragraph 1 of this Article, the dispute, at the request of either party and at the choice of an investor, shall be submitted to:

a) competent court or court of arbitration of the Contracting Party in which territory the investments are made;

b) the Arbitration Institute of the Stockholm Chamber of Commerce;

c) the Court of Arbitration of the International Chamber of Commerce;

d) an ad hoc arbitration in accordance with Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).”

Considering that in order to assess its jurisdiction, the Arbitral Tribunal verified that the claimant, a legal entity distinct from the Russian Federation, was an “investor of a Contracting Party” within the meaning of the BIT and that the disputed immovable property was to be qualified as an “investment” within the meaning of the same treaty; that the tribunal further stated that it was not excluded that an “expropriation” within the meaning of the BIT could result from decisions of the courts of a State Party to the contract if, in accordance with the principles of international law, the conduct of any organ of a State, whether it exercises legislative, executive or judicial functions, is considered an act of the State;

That, however, the arbitrators decided, without examining on the merits whether the facts of the case did indeed constitute expropriation, that they had no jurisdiction to settle the dispute submitted to them, since the BIT can neither create against international arbitral awards a means of appeal not provided for in the Convention for the Recognition and Enforcement of Foreign Arbitral Awards concluded in New York on 10 June 1958, nor violate the international rights that Great Britain, the seat of the LCIA, held under that same Convention;

Considering that the GRA complains that the Court made such a determination, even though the dispute before it was not between the same parties, did not have the same subject matter or the same basis as the dispute decided by the LCIA, did not constitute an appeal against the award made by the LCIA and therefore did not fall within the scope of the New York Convention in any way;

Considering that the expropriation alleged by the GRA does not result from an autonomous decision of the Lithuanian authorities but consists of a sale by seizure carried out by virtue of the enforcement (in French Exequatur) conferred by the Lithuanian courts on an arbitral award rendered by the LCIA for the benefit of a Cypriot company; that the jurisdiction of the Tribunal in such a dispute presupposes that the enforcement of an international award can be regarded as falling within the scope of the BIT; that since the issue is not expressly settled by the BIT, it is appropriate, contrary to the GRA’s contention, to examine the provisions of this treaty in consideration of their context and in the light of the principles of interpretation resulting from the relevant international conventions to which both the Russian Federation and the Republic of Lithuania are parties, in particular the Vienna Convention of 23 May 1969 on the Law of International Treaties and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958;

Whereas the Vienna Convention stipulates in its Article 31 on general rules of interpretation that: “A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”;

That under Article 41 of the same Convention: “1. Two or more of the parties to a multilateral treaty may conclude an agreement to modify the treaty as between themselves alone if:

(a) the possibility of such a modification is provided for by the treaty; or

(b) the modification in question is not prohibited by the treaty and:
(i) does not affect the enjoyment by the other parties of their rights under the treaty or the performance of their obligations;
(ii) does not relate to a provision, derogation from which is incompatible with the effective execution of the object and purpose of the treaty as a whole”;

Considering that the New York Convention is applicable, according to its Article I, “to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal”. Article III provides that “each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles.”; that Article V provides that:

“1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:

(a) The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

(b) The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or

(c) The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or

(d) The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or

(e) The award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:

(a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.”;

Considering that the purpose of the New York Convention is to promote the circulation of international awards by providing that each Contracting State shall, in principle, recognise their authority and grant enforcement, unless the parties against whom they are invoked justify one of the cases of refusal of enforcement exhaustively listed;

Considering that the BIT cannot be interpreted as including within its scope the pursuit of the responsibility of one of the contracting states merely because the latter has complied with its obligations arising from the New York Convention, without there being, within the meaning of the Vienna Convention, an incompatibility with the effective achievement of the object and purpose of the New York Convention taken as a whole;

Considering that it is therefore appropriate to note that the Arbitral Tribunal constituted under the supervision of the International Chamber of Commerce has no jurisdiction, no matter if the dispute before it did not have the same object or the same basis as the award rendered by the LCIA, and without it being necessary to ascertain in what respect the GRA is entitled to the rights of the Region of A;

Considering that it follows from the foregoing that the appeal against the award rendered on 28 January 2009 must be dismissed;

Considering that the request for annulment of the decision of the arbitrators dated 22 June 2009, which is not the subject of the present appeal, must also be rejected;

Considering that the GRA, who is unsuccessful, shall pay to Lithuania the sum of EUR 150,000 pursuant to Article 700 of the Code of Civil Procedure;

FOR THESE REASONS:

Dismissed the appeal against the award rendered between the parties on 28 January 2009.

Dismisses the application to set aside the decision of the arbitral tribunal of 22 June 2009.

Orders the GOVERNMENT OF REGION A to pay the REPUBLIC OF LITHUANIA the sum of EUR 150,000 pursuant to Article 700 of the Code of Civil Procedure.

Dismisses the claim of the GOVERNMENT OF REGION A based on Article 700 of the Code of Civil Procedure.

Orders the GOVERNMENT OF REGION A to pay the costs and admits the SCP DUBOSCQ and PELLERIN, appellate lawyesr, to the benefit of article 699 of the code of civil procedure.

THE CLERK, THE PRESIDENT