Title
Svenska Petroleum Exploration AB (Schweden) vs. Government of the Republic of Lithuania & AB Geonafta (Lithuania), in: Yearbook Comm. Arb'n XXXI (2006), at 906 et seq.
Content
906

Svenska Petroleum Exploration AB (Schweden) vs. Government of the Republic of Lithuania & AB Geonafta (Lithuania)

Facts

The facts of this case are also reported in Yearbook XXX (2005) at pp. 701-703 (UK no. 68). On 28 April 1993, Svenska Petroleum Exploration AB (Svenska) entered into a Joint Venture Agreement (JVA) with AB Geonafta (Geonafta) and, allegedly, with the Government of the Republic of Lithuania (the State) for the purpose of exploiting certain oilfields in Lithuania. The JVA was governed by the law of Lithuania. Art. 35 of the JVA contained a waiver of sovereign 907 immunity; Art. 9 provided for ICC arbitration of disputes in Copenhagen, Denmark.

In June 2000, a dispute arose between the parties that was referred to ICC arbitration in Copenhagen pursuant to the clause in the JVA. In the arbitration, the State objected to the jurisdiction of the arbitral tribunal, alleging that it was not a party to the JVA or to the arbitration clause therein. On 21 December 2001, the arbitral tribunal issued an interim award on jurisdiction (the Interim Award), holding that the State was a party to the JVA and was bound by the arbitration clause. The State did not challenge the Interim Award before the Danish courts and continued to participate in the arbitration. On 30 October 2003, the arbitral tribunal issued a final award on the merits (the Final Award), directing the State and Geonafta to pay Svenska US$ 12,579,000 plus interest and costs. The State did not challenge the Final Award; on the contrary, it passed a Resolution dated 11 February 2004, stating that "(1) [i]t is not expedient to apply to a court for annulment of the award of the Arbitration Tribunal of the International Chamber of Commerce in the case considered in Copenhagen on 30 October 2003" and resolving "(2) to commission the state enterprise State Property Fund to notify [Svenska] or its representatives of the position of the [State] or its representatives of the position of the [State] on the award referred to in Clause 1".

On 2 April 2004, Svenska sought enforcement of the Final Award in the Commercial Court at the Queen's Bench Division of the High Court in London against the State and Geonafta (collectively, the defendants),. On 7 April 2004, the High Court, per Morison, J, granted enforcement. On 31 August 2004, the State applied to set aside the enforcement order, arguing that it enjoyed sovereign immunity. On 11 January 2005, the High Court, per Nigel Teare, QC, denied Svenska's application to have the State's application dismissed (this decision is reported in Yearbook XXX (2005) at pp. 701-722. (UK no. 68)).

By the present decision, the High Court, per Gloster, DBE, rejected Svenska's argument that the State waived immunity under the State Immunity Act of 1978, which provides for certain exceptions to the general principle of sovereign immunity. First, the court held that the State did not waive its immunity under Sect. 2 of the 1978 Act by submitting to the jurisdiction of the English courts. Although it found that the waiver of immunity in Art. 35 of the JVA also applied to the State and not, as alleged, to Geonafta only, the court held that it was purely a waiver of the State's immunity" and did not amount to a submission to the English courts.

Second, the court found that the State did not waive sovereign immunity under Sect. 3 of the 1978 Act - which provides that a state waives immunity by 908 participating in a commercial transaction - because Sect. 3 did not apply here. While the JVA was indeed a commercial transaction to which the State was a party, as required by Sect. 3, the present proceedings related to the Danish award and its enforcement rather than to the commercial transaction itself, as also required by Sect. 3. Hence, Svenska could not rely on the exception to immunity in Sect. 3 of the Act.

Third, the court dealt with Svenska's argument under Sect. 9 of the 1978 Act, which provides that a state waives immunity by entering into a written arbitration agreement. The court considered at the outset whether the decision rendered by the arbitrators in the Interim Award that the State was a party to the arbitration clause in the JVA could estop the State from arguing that it was not a signatory to the arbitration clause in the enforcement proceedings. The court concluded that it could, dismissing the State's argument that the Interim Award could not give rise to an issue estoppel because it was not final. Based on the evidence on Danish law before it, the court held that the Danish courts would likely find the Interim Award to be final, as they would deem that the State had forfeited its right to challenge it by not bringing an action within "reasonable time" as required by Danish law. The court then dismissed the State's argument that Sect. 9 does not apply in proceedings for the enforcement of a foreign award, as "there is no linguistic or other basis for construing the language used in Sect. 9 of the Act...as excluding enforcement proceedings". Hence, the exception in Sect. 9 of the 1978 Act applied to rule out the State's sovereign immunity.

The court reasoned that it should reach an independent conclusion on the issue whether the State was a party to the arbitration clause in the JVA. Although the State was estopped from raising it in the present enforcement proceedings, this issue would still be relevant if the court were wrong in finding that the State was estopped by the determination in the Interim Award. The court considered that Lithuanian law applied, as in the absence of exceptional circumstances the law applicable to an arbitration agreement "is the same as the law governing the contract of which it forms a part". The arbitration clause in the JVA provided for arbitration of disputes "between the founders", "the founders" being the collective definition set out in the preamble to the JVA of Geonafta and Svenska. The court noted that Lithuanian law requires that the court take into account "a far wider range of factual material then would be permissible under English law" - in casu, the parties' pre-contractual negotiations and the JVA drafts - in order to establish the parties' subjective intentions. The court conducted an extensive examination of this evidence and concluded that there was a "common intention of the State, Geonafta and Svenska that their disputes (including those involving 909 the State) should be settled by arbitration and that the dispute resolution provisions of Art. 9 of the [final version of the] JVA should apply to disputes between the State and Svenska, notwithstanding the inappropriate use of the words 'Founders' and other words in that Article". The court also dismissed the State's contention that the dispute was not arbitrable because it concerned "oil works" that were allegedly not arbitrable under the 1996 Lithuanian Law on Commercial Arbitration and the 1995 Lithuanian Law on Sub-Soil Exploitation. The court agreed with Svenska's expert on Lithuanian law that neither Act was retroactive and that the Provisional Rules of Oil Prospecting, Exploration, and Production in the Republic of Lithuania of 16 March 1992 made clear "that disputes involving 'Oil works' might be arbitrated".

Excerpt

(....)

1" "[Sect. 1 of the State Immunity Act 1978 (the Act)] provides:

'A State is immune from the jurisdiction of the courts of the United Kingdom except as provided in the following provisions of this Part of this Act.'

Shortly stated, the State's argument is that none of the various exceptions contained in Part I of the Act apply. In particular, the State contends that it has not submitted to the jurisdiction of the English Court (Sect. 2); that the proceedings do not relate to a commercial agreement (Sect. 3); and that the State has not agreed in writing to submit a dispute which has arisen to arbitration (Sect. 9).

2" "On the other hand, Svenska contends that: (i) the State has expressly waived any entitlement to rely on State Immunity and has agreed to submit to the Court's jurisdiction; accordingly it falls within the exception contained in Sect. 2 of the Act; (ii) it was party to a commercial transaction and the present proceedings relate to that transaction; accordingly it falls within the exception contained in Sect. 3 of the Act; (iii) it was a party to the arbitration agreement contained in Art. 9 of the JVA, alternatively is estopped from denying that fact by virtue of the Interim Award; accordingly it falls within the exception contained in Sect. 9 of the Act."

(....)

910

I. WAIVER OF IMMUNITY BY SUBMITTING TO JURISDICTION OF ENGLISH COURTS (SECT. 2 OF THE STATE IMMUNITY ACT 1978)

3" "The first issue for my determination is whether the State falls within the exception contained in Sect. 2 of the [State Immunity Act 1978]...'1

4" "One of the terms of the JVA was Art. 35, which provided as follows:

'Governing Law and Sovereign Immunity. 35.1 GOVERNMENT and EPG hereby irrevocably waives [sic] all rights to sovereign immunity. 35.2 This Agreement shall be governed by the laws of Lithuania supplemented, where required, by rules of international usiness activities generally accepted in the petroleum industry if they do not contradict the laws of the Republic of Lithuania.'

5" "However, the State contends that, on its true construction (as allegedly demonstrated by evidence as to the purpose of Art. 35, given by a Professor Katuoka and corroborated by a Mr. Zukovskis), Art. 35 amounted to a waiver of Sovereign Immunity in respect of Geonafta only (Geonafta being at the time of entry into the JVA a state enterprise), and that all that the State was doing under the terms of the clause was to give its consent to Geonafta's own waiver.

6" "The JVA contains no express submission to the jurisdiction of the English Court. Art. 9 of the JVA does contain an arbitration agreement referring disputes between the two 'Founders' (which is the collective definition set out 911 in the preamble to the JVA of Geonafta and Svenska) to inter alia ICC arbitration and is in the following terms:

'9.1 Disputes between the Founders concerning the performance or interpretation of this Agreement are settled through negotiations between the Founders. 9.2 In the event that disputes cannot be settled within 90 days of the receipt of the written notice by either Founder about the existence of such disagreement, the disputable matter shall be submitted upon agreement of the Founders for consideration to: (a) the Court of the Republic of Lithuania; or (b) independent arbitration in Denmark, Copenhagen, to be conducted in accordance with International Chamber of Commerce Rules of Arbitration in the English language. In case the Founders do not reach agreement on the institution where the dispute is to be settled, the disputable matter shall be submitted for consideration to an independent arbitration provided in sub-paragraph (b) of this paragraph.'

7" "The State contends - and it is a critical plank of its case - that, because it is not a 'Founder', it is not a party to the agreement to arbitrate. This is an issue to which I will have to turn later in this judgment in the context of the submissions on Sect. 9 of the Act. It submits that even if, contrary to its primary contention, the State itself agreed to waive its own, as opposed to Geonafta's, sovereign immunity under Art. 35, that waiver under Art. 35 did not per se amount to a submission to the English Court's jurisdiction for the purposes of Sect. 2; accordingly, Art. 35 cannot assist Svenska unless the State is also found to have agreed that it would be a party to arbitration proceedings under Art. 9 of the JVA.

8" "Therefore the questions which, as I see it, I have to decide under this head are as follows: (i) on the true construction of Art. 35, did the State waive its own sovereign immunity thereunder, or did Art. 35 amount to a waiver of Sovereign Immunity in respect of Geonafta only; (ii) if the former, did the waiver of the State's immunity in Art. 35.1 amount to a submission to the jurisdiction of the English court, irrespective of whether the State was a party to the arbitration agreement contained in Art. 9 of the JVA.

9" "If the answer to sub-issue (ii) is that the waiver of the State's immunity contained in Art. 35.1 amounts to a submission to the jurisdiction of the English court only if the State was in fact a party to the arbitration agreement under Art. 9 of the JVA, because only in that event would the Court have jurisdiction to 912 enforce the Award, then there is no separate or free-standing issue under Sect. 2 of the Act, since in reality the issue falls to be decided under Sect. 9.

10" "Subject to the points referred to below, it was common ground that the JVA had to be construed in accordance with its governing law, namely Lithuanian law, and that the relevant principles of construction were contained in Arts. 6.193-5 of the Lithuanian Civil Code as elaborated in a commentary by a Professor Mikelenas (the Commentary). However, the parties were not in agreement as to the relevance and importance of the principal text of the contract or whether Art. 6.193 represents a complete statement. In addition, the State relied on 'international law and practice', which Mr. Shackleton [counsel for the defendants] identified as 'the interpretations of similar situations by other arbitral tribunals and by the courts of the United States, France and Switzerland where these issues have arisen'. It was also common ground that, although the expert as to foreign law has to provide the English Court with the relevant foreign principles and rules of construction, in relation to a contract it was for the English Court, in the light of those principles and rules to determine the meaning of the document; see Dicey and Morris, The Conflict of Laws (2000) (13th Edition) at paras. 19-019 and 32-188-9; the Fourth Supplement thereto (2004) at p. 26 and audiorities there cited; and Rouyer Guillet & Cie v. Rouyer Guillet & Co Ltd. [1949] 1 All ER 244 (CA). Accordingly, both parties correctly accepted that the views, given by their respective experts as to the true interpretation of the contract, were not admissible evidence. Likewise, the subjective views of Mr. Zukovskis as to the interpretation of Art. 35 were not legitimate aids to my determination.

11" "Arts. 6.19 3 - 5 of the Lithuanian Civil Code and the relevant comment (excluding footnotes) are as follows:

'Art. 6.193: Rules on Interpretation of Contracts.

1. A contract must be interpreted in accordance with good faith. In interpreting a contract, it is necessary primarily to determine the parties good intentions and not rely only on a literal interpretation of the text of the contract. In the event the real intentions of the parties cannot be established, the contract must be interpreted in accordance with the meaning that reasonable persons analogous to the parties would have attributed to it in the same circumstances.

Art. 6.194: Language Discrepancies.

Where a contract is drawn up in two or more languages and all texts of the contract have equal legal force, in the case of discrepancy between the versions, preference shall be given to the text which was drawn up first.

Art. 6.195: Filling in Gaps of a Contract.

Where parties leave certain matters unagreed, which are necessary for the performance of the contract, the court, at the request of a party, may fill in such gaps in the contract by establishing appropriate conditions, taking into account non-mandatory legal norms, the intentions of the parties, the purpose and essence of the contract, standards of good faith, reasonableness and justice.'

12" "The Commentary:

1.

The Article commented on repeats Arts. 4.1-4.6 of the UNIDROIT Principles. The contract has to be interpreted when a dispute arises between the parties concerning its validity, type, nature, amendment, termination, true meaning of one or another condition, etc.

2.

Paragraph 2 of me Article being commented on sets out several other principles of contractual interpretation. First, this Article establishes the principle of systemic interpretation of the contract which requires any contractual condition to be interpreted with regard to the entire context of the contract. Furthermore, no part of the contract, annex or any other constituent part should be left without consideration or evaluation (e.g. it is necessary to have regard to the preamble of the contract, its annexes, subsequent amendments, etc). In this case, the presumption that each word or phrase has a certain meaning and significance is valid, as usually parties do not use them without a reason. Therefore, it is necessary to 915 determine the meaning of each word or phrase, and not on the contrary, to state that one or another word or phrase is meaningless or insignificant. Also, it is necessary to bear in mind that terms and conditions of a contract are of two types: explicitly expressed and implicit (Art. 6.196 of the Civil Code). Therefore, when interpreting a contract, due regard must be paid not only to explicitly expressed terms and conditions, but also to implicit terms and conditions, for instance, those which are usually found in contracts of a similar nature. When interpreting contracts, it is necessary to take into account traditions of the trade, mutual relations between the parties, the circumstances of the conclusion of the contract, etc.

3.

Paragraph 3 of the Article commented on sets out the rule of interpretation when polysémie words and definitions are encountered. Frequently, the same words may have several meanings. Sometimes parties indicate in the contract interpretations of definitions used in the contract. Definitions must be interpreted in the way they were defined in the contract by the parties. Words or definitions the meaning of which is not set out in the contract must be assigned the meaning which is most acceptable in terms of the type, nature, essence, subject-matter, parties of the contract and other important circumstances.

4.

Paragraph 4 of the Article being commented on embodies the so-called contra proferentem rule. This means that terms and conditions that are unclear and ambiguous in the contract are to be interpreted against the benefit of the party which proposed or drafted them. For instance, unclear and ambiguous terms and conditions of a contract are to be interpreted against the benefit of the party which drafted them and in favour of the party who concluded the contract by way of adherence. As most consumer contracts are contracts of adherence, the Article being commented on sets a general rule that in case of doubt, it is necessary to interpret contracts for the benefits of users and the party which has concluded the contract by way of adherence, i.e., the party who is economically weaker.

5.

Paragraph 5 of the Article being commented on sets out the general rule that not only the text of the contract, but also the actual circumstances surrounding the conclusion and fulfilment of the contract as well as other 916 action of the parties are important for the interpretation of the contract. Therefore, when interpreting a contract, it is necessary to take into account the parties' pre-contractual negotiations, signed documents of negotiations, verbal and written statements by the parties, exchanges of correspondence, established relations between the parties, traditions of the trade and other customs, actual acts of the parties when concluding, fulfilling or making any amendments, etc to the contract. Actual acts of the parties must also be interpreted in order to determine the true intentions of the parties (paragraph 1 of the Article being commented on).

13" "In my judgment, and applying the rules and principles set out in Art. 6, as amplified by the Commentary, on the true interpretation of Art. 35 of the JVA, the State clearly waived its own Sovereign Immunity thereunder, and it is impossible sensibly to construe Art. 35 as amounting to a waiver of Sovereign Immunity in respect of Geonafta only. Every draft of the JVA, except the first draft, and the final version of the JVA, contained a clause by which both Geonafta and the State waived state immunity and submitted to arbitration under the auspices of ICSID (International Centre for the Settlement of Investment Disputes). At no point did either party ever suggest that the waiver of immunity was restricted to Geonafta and that was all to which the State was agreeing. Accordingly on this issue I construe the JVA against the State's contentions."

14" "I now turn to consider the question whether the waiver of the State's immunity in clause 35.1 amounts to a submission to the jurisdiction of the English court, for the purposes of Sect. 2 of the Act, irrespective of whether the State was a party to the arbitration agreement contained in Art. 9 of the JVA. For the purposes of deciding this issue as a free standing one, I assume that the State did not agree to arbitrate issues between itself and Svenska under Art. 9.

15" "The issue whether such a waiver of immunity amounts to a submission to the jurisdiction of the court is discussed by Dickinson, et al, State Immunity, Selected Materials and The Commentary at pp. pp.349-50: 917

'Some difficulty may arise... in the event that an agreement contains, not a provision submitting disputes to the English courts (or other courts in the United Kingdom), but a provision merely setting out the State's agreement to waive any immunity that it may possess in any jurisdiction in which the counterparty should choose to bring proceedings. Such an agreement does not sit comfortably within the framework of Sect. 2. The English courts may have jurisdiction in respect of the subject-matter of proceedings brought against a State in these circumstances, but that would not be because the State had submitted to the jurisdiction in the normal sense. To fall within Sect. 2(1), the waiver of immunity provision would have to be characterized as a submission by the State to the jurisdiction of the English courts to the extent that such courts may have jurisdiction under their own rules in the absence of consent. It is submitted, that such characterization, whilst not free from artifice, would accord with the spirit of the section'

16" "Mr. Bools [counsel for the claimant] submitted that Art. 35.1 of the JVA should be characterized in the way suggested: he contended that Svenska was understandably wary about entering into a commercial contract with the nascent Republic of Lithuania and only agreed to do so because the State agreed to contract on the same basis as a private party; he submitted that an agreement irrevocably to waive all rights to immunity only makes sense if interpreted as an agreement to be treated as a private party. He submitted that, by agreeing to be treated as a private party the State, as Dickinson suggests, agreed to submit to the Courts of foreign states to the extent that they would have jurisdiction over private parties (i.e. to the extent that they would have jurisdiction absent consent); and that, as is demonstrated by the English Court's jurisdiction over Geonafta in the present case, the Court would have jurisdiction over the State under its ordinary jurisdictional rules for private parties. In support of his submission that Art. 35.1 should be interpreted as an agreement by the State to be treated as if it were a private party, counsel for the claimant relied upon the judgment of Saville J., as he then was, in A Company Ltd v. Republic of X [1990] 2 Lloyd's Rep. 520. In that case clause 6 of the relevant agreement provided that

'The Ministry of Finance hereby waives whatever defence it may have of sovereign immunity for itself or its property (present or subsequently acquired).'

Saville J. held that 918

'It seems to me that, read in the context of what was undoubtedly a commercial bargain between the parties, the intent and purpose of the clause is quite clear, namely, to put the State on the same footing as a private individual so that neither in respect of the State nor its property would any question of sovereign immunity arise in connection with the State's obligations to the plaintiffs under the agreement, [at p. 523, col 1.]'

The counsel for the claimant submitted that, in the present case, the purpose of Art. 35 is similarly clear.

17" "I do not accept the counsel for the claimant's submissions. I cannot sensibly construe clause 35, which is purely a waiver of the State's immunity, as a written submission to the jurisdiction of the English Court within Sect. 2(1) and (2) of the Act.

18" "Moreover, in the absence of an agreement on the part of the State under Art. 9 to submit to arbitration (and, on this hypothesis, there was no such agreement), the characterisation of the waiver of immunity provision 'as a submission by the State to the jurisdiction of the English courts to the extent that such courts may have jurisdiction under their own rules in the absence of consent' leads nowhere, as the English courts would not have jurisdiction to enforce an arbitration award against a non-party to the arbitration.

19" "Moreover, there is either a submission to the jurisdiction or there is not. There is an inherent difficulty in characterising a clause such as Art. 35 as a submission to the jurisdiction of the English Court, for immunity purposes, but not for other purposes. But to interpret the waiver as a submission to the jurisdiction of the English Court for all purposes would clearly be impermissible, as it would be imposing obligations upon the State, to which it never agreed.

20" "I accept counsel for the defendants' submission that the Act lays down a presumption of immunity, which applies subject to the exceptions set out in the Act. There is no authority to support a freestanding concept of waiver, outside the scope of the Act. If there were such audiority, I was not referred to it. A State will enjoy immunity pursuant to Sect. 1 of the Act, unless one of the exceptions can be proven. Thus any waiver alleged must conform with the requirements of the sections of the Act which provide exceptions to immunity, for example an express submission to the English Courts or an express submission to arbitration.

21" "Accordingly I reject Svenska's submissions on Sect. 2."

919

II. WAIVER OF IMMUNITY BY ENTERING INTO COMMERCIALTRANSACTION (SECT. 3 OF THE STATE IMMUNITY ACT 1978)

22" "The second issue which arises is whether the State falls within the exemption afforded by Sect. 3 of the Act...."2

1. JVA Is Commercial Transaction

23" "The first question under this head is whether the JVA was a commercial transaction entered into by the State or whether it was a signatory to the JVA merely in an administrative capacity or in the exercise of its sovereign audiority."

a. Commercial transaction in respect of State

24" "Counsel for the defendants, on behalf of the State, submitted that, as a matter of fact, the JVA is not a commercial transaction as far as it concerns the State; that the State was never a commercial party to the JVA, nor indeed defined as a 'party' to the JVA at all; that there was evidence from Dr. Gediminas Motuza, (who was involved in the negotiations for the JVA in his capacity as Director of the Geological Survey, which supervised and regulated Geonafta) and Professor Katuoka (the expert in Lithuanian law on behalf of the State), that Lithuania’s role in this project was not commercial but public, relating as it did to the regulation and licensing of the country's natural resources; and that the provisions relied on by Svenska as examples of commercial obligations of the State are not commercial matters, but areas generally relating to the public interest and the administrative and regulatory spheres; and that there was no evidence that the State was getting into the oil business itself.

25" "Although the JVA is arguably somewhat of a hybrid agreement, on this point I prefer the submissions of the counsel for the claimant, as to the correct 920 characterisation of the JVA. I did not find the evidence of either Dr. Motuza or Professor Katuoka of any assistance on this point.

26" "I conclude that the JVA is a commercial transaction as defined in [Sect.] 3(3)(a) and (c). This can be seen from certain of the relevant terms of the JVA."

27""The court referred, inter alia, to the State's right under the JVA to purchase all of the oil produced under the agreement at market price, the State’s granting the joint venture "the right to use certain assets and infrastructures, with the right to the State and Geonafta to remove and use assets purchased by Svenska or Geonafta, which had become the property of the joint venture, but had become surplus to its requirements". The court also mentioned the State's granting the joint venture the proprietary use of the areas required for operations and a release to Svenska in respect of environmental damage liabilities. The court also noted that "under [the JVA] the State was given wide contractual rights of cancellation of the entire JVA as against Svenska, with a corresponding obligation upon the State to pay the fair market value of Svenska's share of the field facilities left behind in Lithuania."

(....)

28" The court continued: "As the Tribunal stated at p. 66 of the Interim Award, the dispute between Svenska and the State was one which related to an alleged breach by the State of its express or implied contractual obligations under ... the JVA. Moreover, as the Tribunal stated at p. 68 of that Award.... the JVA 'is a commercial contract regarding the exploration and exploitation of oil fields within Lithuania'. Whilst I am not in any way bound by the views of the Tribunal, I share its views as to the correct characterisation of the contract."

b. State is party to JVA

29" "As to the question whether the State was a party to a commercial transaction, not only did the State expressly assume a raft of obligations under the final JVA, but it also signed it and agreed that it was 'legally and contractually' bound by it. (....)

30" "Accordingly, whatever may be the position in relation to the agreement to arbitrate, (which is an issue that I consider below), it is clear in my judgment that, by signing its acknowledgement that it was 'legally and contractually bound' and by accepting obligations and rights under various of the clauses of the JVA, the State was clearly a party thereto. In my judgment, therefore, the JVA was a 'commercial transaction, entered into by the State'."

921

2. Present Proceedings Do Not Relate to the Commercial Transaction

31" "The second question, which arises under this head, is whether, for the purposes of Sect. 3 of the Act, Svenska's enforcement proceedings under Sect. 101 of the 1996 [Arbitration] Act3 are proceedings 'which relate to a commercial transaction'.

32" "For the State, counsel for the defendants submitted that, even if the JVA was a commercial transaction as far as the State is concerned, these proceedings do not relate to the underlying commercial transactions of the JVA, but rather to the Final Award and its enforcement. He argued that, in this respect, a clear distinction is drawn between adjudicative and enforcement proceedings and that these proceedings clearly fall into the latter category. He submitted that the distinction is laid down in the provisions of the Act itself and relied upon the decision of Stanley Burnton J in AIC Ltd v. The Federal Government of Nigeria [2003] EWHC 1357, where it was held that proceedings for the registration of a foreign judgment under the Administration of Justice Act, 1920 were not proceedings relating to a commercial transaction. (....)

33" "Counsel for Svenska, on the other hand, submits that I should not follow the decision of Stanley Burnton J in AIC Ltd v. The Federal Government of Nigeria, because the decision is not binding upon me and, it is said, the judge's reasoning was unsatisfactory. (...)

34" "In my judgment, I should follow the decision of Stanley Burnton J in AIC Ltd v. The Federal Government of Nigeria largely for the reasons which he gives. Although the view expressed by Lord Millett in the House of Lords in Holland v. Lampen-Wolfe [2000] 1 WLR 1573, at 1588, that: 922

'In my opinion the words "proceedings relating to" a transaction refer to claims arising out of the transaction, usually contractual claims, and not tortious claims arising independently of the transaction but in the course of its performance'

was strictly obiter, it shows that the phrase 'proceedings relating to the transaction', in the context of Sect. 3 of the 1978 Act, should indeed be given a narrow construction; that is to say, they should be limited to claims that arise out of the contract or transaction itself, and not extended to those arising out of some subsequent act, albeit that act itself might loosely 'relate to' the contract or transaction. A claim to enforce an arbitration award necessarily 'arises out of the award. As counsel for Svenska realistically accepted, there is a clear analogy between proceedings to register judgments and proceedings to enforce arbitration awards.

35" "The decision in AIC Ltd v. The Federal Government of Nigeria has been cited with some approval by Dame Hazel Fox QC in the introduction to her work The Law of State Immunity, Oxford University Press (2002) at p. xxvii, although she questioned the judge's reasoning by reference to the utility of Sect. 9 of the Act, stating ibid, that his reading 'may neglect the prime purpose of Sect. 9 which was to construe consent to arbitration as submission to the English Court's jurisdiction'. Be that as it may, and even accepting, as counsel for Svenska submits, that there well may be situations where there is no overlap between a Sect. 3 case and a Sect. 9 case, I conclude that these enforcement proceedings under Sect. 101 of the 1996 Act do not relate to the underlying commercial transactions of the JVA, but rather to the arbitration and the Final Award.

36" "Accordingly Svenska's case under Sect. 3 of the Act fails."

III. WAIVER OF IMMUNITY BY ENTERING INTO ARBITRATION AGREEMENT (SECT. 9 STATE IMMUNITY ACT 1978)

1. Estoppel

37" "The issue that arises under this head is whether, given that the arbitrators decided in the Interim Award that the State was a party to the arbitration agreement in Art. 9 of the JVA, the State is estopped from contending that it was not so bound [I]n his judgment of 11 January 2005 on Svenska's Part 24 application, Mr. Teare QC held that Svenska had established all the necessary elements of an issue estoppel, save for establishing that the Interim Award was, 923 as a matter of Danish law, final and conclusive. He held that, for these purposes, an arbitrators' award on jurisdiction was only final and conclusive if it could no longer be challenged under the law of the courts with supervisory jurisdiction over the arbitration."

a. Svenska may rely on estoppel (impact of 11 January 2005 decision)

38" "The State's threshold submission on this point is that Mr. Teare QC has already decided the issue of issue estoppel relating to the Interim Award adversely to Svenska on the Part 24 application and it is therefore not open to Svenska to re-argue the point before me. The State contends that the issue has been determined on the merits by Mr. Teare in a final and conclusive judgment, Svenska having sought permission to appeal the decision of Nigel Teare QC, (which was granted) but then electing not to appeal. In other words, counsel for the defendants submitted that Svenska itself was estopped from raising the point again and that it would be an abuse to do so. Counsel for the defendants further submitted that, even if it were technically open to Svenska to do so, the decision was a fully reasoned finding on the merits and Mr. Teare's judgment should be regarded as finally determinative of the matter.

39" "I reject counsel for the defendant's threshold submission. I accept counsel for Svenska's submission that Mr. Teare's decision was only given in the context of the CPR Part 24 application. Although the Deputy Judge did not expressly say so, it is clear that all he was deciding was whether the State's claim to immunity should be struck out or dismissed pursuant to Part 24 as being hopeless on the grounds of issue estoppel; he was not determining the actual issue himself. This is clear from the terms of the order made by him on 11 January 2005 which merely dismissed the Claimant's Part 24 application. A course that would have been open to him, had he thought it appropriate to have done so, would have been to have given a final judgment on the issue in the State's favour; see CPR Part 24.2 and the notes at 24.6.2. He did not do so.

40" "Moreover, it is clear from paragraph 37 of his judgment, that he was not, on the application before him, considering the argument presented before me by counsel for Svenska (but not before the Deputy Judge) that, although the Interim Award did not, as at the date of the Interim Award, finally and conclusively determine the question whether the State was party to the arbitration agreement, yet it now did because of the State's delay in exercising, or waiver of, the right of review. Counsel for Svenska told me that the reason why such an argument was not advanced at the stage of the Part 24 application was that it could not be said that the contrary argument - that the right of challenge had not been lost - was unarguable, such that it had no real (as opposed to fanciful) prospect of 924 success for the purposes of the Part 24 application. In contrast, such an argument was run before me.

41" "Accordingly, this court is not precluded from adjudicating on the issue, as it is well-established that an interim, or interlocutory, decision of this type does not give rise to res judicata or issue estoppel."

b. Finality of Interim Award

42" "I therefore have to decide whether, on the evidence before me, as at the present date, and on the balance of probabilities, the Interim Award was final and conclusive, so as to give rise to an issue estoppel. In practice this means that I have to decide whether it is more likely than not that the [State] has, as a matter of Danish law, now lost the right to challenge the arbitrators' Interim Award, it being common ground that, if it could no longer be challenged under the law of the courts with supervisory jurisdiction over the arbitration (i.e. the Danish Courts), the decision would indeed be final and conclusive.

43" "At the hearing before Mr. Teare QC both parties filed expert evidence of Danish arbitration law: these reports were also relied upon in evidence before me. Svenska relied on the Report of Joren Gronborg and Peter Fogh and the State relied on the Report of Kim Hakonsson and Kim Frost. Both experts' reports agreed that not only could the Final and Interim Awards theoretically be the subject of challenge or appeal in the Danish courts on any of the grounds set out in Sects. 7(1) and 7(3) of the Danish Arbitration Act (Act no. 81 of 24 May 1982 [rectius, 1972]),4 but also that the same defences could be relied upon in any enforcement proceedings brought in the Danish Courts by the successful party under Sect. 9 of the Danish Arbitration Act.5

925

44" "Both reports expressly addressed the question of whether the right to challenge the Interim Award had been lost and both agreed as to the applicable test as a matter of Danish law. Gronborg and Fogh stated that if a party had left 'an unreasonably long time to pass' before challenging an award, that fact (taking into account all of the circumstances of the case) will be interpreted as an expression that the party has, in reality, accepted the award Hakonsson and Frost put the test in much the same way: '... if a party does not appeal an award within a reasonable time, the courts may find that the party due to unreasonable delay in asserting a right has forfeited his right to appeal the award'....

45" "Has the State's delay in challenging the Interim Award become 'unreasonable' such as to preclude it from challenging it? On that Svenska's experts expressed the following views:

'If an extended period of time has lapsed after the arbitration award was executed, the courts may, however, find that the lack of action has constituted an implied acceptance of the arbitration award and consequently a waiver of the right to challenge.... It is in our opinion not possible to state when an "unreasonably long time" has passed. When exercising a "test of reasonableness" Danish courts will take all circumstances into consideration and the circumstances will rarely be the same from case to case. It is, however, our opinion that a party, who are [sic] dissatisfied with an Arbitration Award, but does not commence legal proceedings or raises a challenge as a defence until almost three years later will be seen by the Danish courts as having waived the right to challenge. ' [Gronborg and Fogh Report...]

46"[46] "Messrs, Hakonsson and Frost, the State's experts, were more equivocal:

'However, if a party does not appeal an award within a reasonable time, the courts may find that the party due to unreasonable delay in asserting a right has forfeited his right to appeal the award [W]hat constitutes "reasonable time" is not clear. If the Lithuanian government decides to appeal the interim award before the Danish courts, 926 the relevant court would review the matter and make a decision on the question. In our opinion the fact that more than three years has passed since the final award was announced implies a right that a Danish court would not consider an appeal at this point of time as an action within "reasonable time". It is, however, difficult to estimate that risk.'

(....)

47" "I reject [the] submissions by the State [that the award was not yet final]. It is clear from reading the expert reports submitted by both sides, that, although whether the State was a party to the arbitration agreement at Art. 9 of the JVA might have been an issue that was prima facie renewable by the Danish courts, either in a challenge to the Award itself (Interim or Final) brought by the State by way of appeal, or as a defence under Sect. 9 of the Danish Arbitration Act to any Danish enforcement proceedings brought by Svenska, the question could nonetheless arise in either such proceedings whether the State was precluded from raising such an argument as a result of the passage of time, its failure to challenge the Interim or the Final Awards, waiver or any other relevant circumstance. In other words, the possibility exists under Danish law that the Interim Award had indeed become final and conclusive, gave rise to an issue estoppel and therefore precluded the State either from challenging the Interim Award by way of appeal, or by way of a defence to any Danish enforcement proceedings brought by Svenska.

48" "I do not find such a position surprising, since it equates to the position in relation to English arbitration proceedings under Sects. 31 and 73 of the English Arbitration Act 1996.6

927

49" "Second, with the assistance of the Danish expert evidence as to the relevant principles which a Danish supervisory Court would apply to determine the matter, this Court is in as good a position as a Danish court to consider whether the State's delay in seeking to challenge the Interim Award is reasonable, such that the supervisory court would permit the State now to challenge that Award. Moreover the fact that it may not be possible as a matter of law to state with certainty or definitively when an 'unreasonably long time' has passed, does not mean that a Danish Court could not, or would not, decide whether, in all the circumstances, a party has indeed lost the right to challenge an arbitral award, nor does it preclude me from doing so.

50" "Moreover, the function of the Danish law evidence is not 'to prove an issue estoppel' or to disprove it either. Its function, in the circumstances, where Danish law does not identify a specific date when, or event upon the happening of which, the State would be precluded from challenging the Interim Award, is to 928 articulate the relevant legal principles by which the Danish Court would be guided in determining if such a time had arrived.

51" "The views of the respective Danish law experts were clearly set out in their reports and, in the event, did not differ greatly. There was no need for that evidence to 'be fully argued and tested in cross examination' as counsel for the defendants submitted. Moreover no application was made by the State either to cross-examine Svenska's experts or for an adjournment of the application. The State had every opportunity to deal with Svenska's case on this point, which cannot be regarded as involving the raising of fresh allegations.

52" "In my judgment, on the balance of probabilities, were the Danish Court now to address itself to the issue whether the Interim Award was binding, or whether the State was still free to challenge that Award before the Danish Court, as the supervisory court of the arbitration proceedings, the Danish Court would conclude that it was no longer open to the State to do so. The Interim Award was rendered on 21 December 2001, now nearly four years ago. The State had every opportunity to challenge the Interim Award, had it chosen to do so. But it deliberately did not take advantage of that opportunity; instead it chose fully to participate in the arbitral hearing on the merits, which led to the Final Award.

53" "Moreover, as the passage at p. 238 of the Final Award ... shows, after the Interim Award had been given, the State did not 'argue ... that [Svenska's] ... claim for damages is not arbitrable or that the Arbitral Tribunal otherwise lacks jurisdiction with respect to this claim'. No doubt the State fully participated in the substantive hearing hoping for success before the Tribunal. Had it been successful, it would then have been entitled to have relied upon the Award, for example in resisting any proceedings which might have been brought by Svenska against it in Lithuania. It passed the Governmental Resolution on 11 February 2004 ... deciding effectively not to challenge the Final Award, and further resolving that the resolution be specifically communicated to Svenska. No doubt Svenska relied upon that decision in informing its strategy as to what further steps it would take to enforce the Final Award.

54" "In all those circumstances it seems to me unlikely in the extreme that a Danish supervisory court would now permit the State to challenge the Interim Award in the Danish Courts. I consider that, on the balance of probabilities, a Danish Court would decide that any appeal at this point of time to the Danish Courts to challenge the Interim Award would not be an action within 'reasonable time' and that they would regard the State, for the purposes of those proceedings and any enforcement proceedings, as effectively having waived its right to do so.

55" "I therefore agree with counsel for Svenska's submission that, in all the circumstances, the Interim Award gives rise to an issue estoppel and debars the 929 State from arguing before the English court that it was not a party to the arbitration agreement in Art. 9 of the JVA. Accordingly, in my judgment, because of the issue estoppel, the State is not entitled to rely on the fact that it alleges that it was not a party to the arbitration agreement in the context of its claim to state immunity."

2. Applicability of Sect. 9 to Enforcement Proceedings

56" "The next issue that arises is whether Sect. 9 applies to proceedings which are for the enforcement of an award delivered in foreign arbitration proceedings and therefore whether Svenska can rely on the exception.7

57" "Svenska contends that proceedings for the recognition and enforcement of an Award are proceedings 'which relate to the arbitration' within Sect. 9 and that the meaning of those words is plain. Accordingly, on the basis that the State is indeed estopped from denying that it was a party to the arbitration agreement in Art. 9 of the JVA, it contends that the exception in Sect. 9 applies and therefore the State cannot claim immunity.

58" "The State, on the other hand, submits that Sect. 9 does not apply, first, to enforcement proceedings and, secondly, to proceedings which relate to the enforcement of a foreign arbitral award. It contends for a limited interpretation of the scope of Sect. 9. It contends that these enforcement proceedings do not 'relate to an arbitration', for the purposes of Sect. 9 of the Act, but rather solely to the arbitration award. The proceedings, it is said, are not supportive of the arbitral process, but relate to the enforcing jurisdiction's treatment of the arbitration award.

59" "Counsel for the defendants' submissions on this point may be summarised as follows:There is no connecting factor between the arbitration clause or the dispute and the United Kingdom or the courts of the United Kingdom. Support for the view that in such circumstances Sect. 9 is not engaged is to be found in Dicey & Morris (2000) The Conflict of Laws 13th edition, London, Sweet & Maxwell at p. 251:930

'This exception applies to proceedings relating to the arbitration, including proceedings to enforce the arbitration agreement or for review of an award. The Bill which resulted in the 1978 Act expressly provided that this Exception did not apply to proceedings for the enforcement of the award. Although the question is not free from doubt, it is suggested that the exception does not apply to enforcement of an award.'

(ii) Further support is to be found in Dame Hazel Fox's article (1988) 'States and the Undertaking to Arbitrate', 37 International and Comparative Law Quarterly, p. 1 at p. 13, and also in The Law of State Immunity, Oxford, Oxford University Press at pp. 166-167. At the former passage Dame Hazel Fox explains some of the reasons why enforcement proceedings do not come with the scope of the Sect. 9 exception:

'First the section contains no express limitation to proceedings relating to arbitration of commercial matters. Had Sect. 9 followed Art. 12 of the [European Convention on State Immunity of 1972] ... - and one of its purposes was to ratify that Convention - it would have restricted the proceedings to "commercial or civil matters". By omitting to do so, it theoretically covers all arbitration, domestic and international, relating to non-commercial matters. For States the distinction has great importance; many disputes with private parties arise by reason of the exercise of governmental power, or involve mixed issues of commercial law or public law. It is in this sensitive area that a State may consent to settlement by arbitration where it would adamantly oppose reference to a local court. To impute automatically submission to the local court by reason of the consent to the agreement to arbitrate is to endanger States' willingness to consent to any third party process of settlement. The [1958 New York Convention] recognises the significance of the distinction between commercial and non-commercial matters by allowing States to limit the obligation of their courts to give effect to foreign awards ... "which are considered as commercial under the national law of the State making the declaration".'

(iii) These considerations, submits counsel for the defendants, are particularly relevant in the circumstances of this arbitration given the non-arbitrable (and non-commercial) nature of many of the disputes that arise under Lithuanian law.

60" "(iv) Counsel for the defendants also relies upon Dame Hazel Fox's rationale for a limited interpretation of the scope of Sect. 9 (ibid, at p. 14): 931

'The second omission appears to be any limitation of the section to English arbitration. Is an undertaking by a State to refer a future dispute to arbitration outside the United Kingdom, and for which the proper law is foreign law, within the section so as to constitute consent to proceedings in the English court? ... Although as far as I know, the point has not appeared in any English reported case, this disregards the additional requirement that the English court will require a jurisdictional connection between itself and the arbitration agreement, such as England being the place of arbitration, which would rule out such extreme situations. Certainly in the United States ... the case law after some hesitation has emphasised the need for territorial links with the US courts and refused to construe a waiver of immunity in respect of one jurisdiction as waiver to all jurisdictions. On this analogy consent to arbitration in England may constitute consent to proceedings in English courts, but consent to arbitration elsewhere will not ... Had Sect. 9 once again followed the wording of Art. 12 of the European Convention there would have been no ambiguity. Art. 12 expressly limits the local court proceedings to those relating to the validity or interpretation of the arbitration agreement, arbitration procedure and setting aside the award - Such a limitation would seem to have been in conformity with the general approach which was to separate off enforcement measures and to require a separate express consent by the State to their application.'

61" "(v) Further he submits that Sect. 9 does not apply in relation to disputes of a public nature relating to a state's Iicensing of the natural resources on its own territory, particularly when the resources presented a valuable energy source in a time of political and economic transition.

62" "(vi) Further he submits that the wide construction considered by Svenska conflicts with the approach of the European Convention on State Immunity 1972. One of the purposes of the State Immunity Act 1978 was to ratify the Convention. Art. 12 of the Convention provides:

'Where a Contracting State has agreed in writing to submit to arbitration a dispute which has arisen or may arise out of a civil or commercial matter, that State may not claim immunity from the jurisdiction of a court of another Contracting State on the territory or according to the law of which the arbitration has taken or will take place in respect of any proceedings relating to:

(a) the validity or interpretation of the arbitration agreement; (b) the arbitration procedure; (c) the setting aside of the award, unless the arbitration agreement otherwise provides.'

63" "(vii) He then submits that this is not a case where it is legitimate to place any reliance upon Hansard [House of Commons Daily Debates]. The words of Sect. 9 of the Act are not ambiguous or obscure as required under the first limb of the test in Pepper v. Hart as outlined by Lord Browne-Wilkinson at [1993] AC 634. Nor can it fairly be said that either suggested construction leads to an 'absurdity' as is required by that case, whatever the merits of either construction.

64" "(viii) Even if regard is to be paid to the passages in Hansard relied upon by Svenska, these short statements cannot be regarded as determinative of the issue of the proper construction of Sect. 9. In particular, no evidence has been put forward that Sect. 9 was intended to apply to disputes arising out of a foreign State's regulation of its underground natural resources.

65" "(ix) Counsel for the defendants also placed reliance upon certain United States authorities. He submitted that, despite the broad language of the American Foreign Sovereign Immunity Act, in the United States, a number of decided cases have declined to infer waiver from the existence of an arbitration agreement in a contract, particularly where there was no link with the United States. It appears that some form of territorial connection, or a willingness to submit to the jurisdiction of any State, will be required before American courts will allow a waiver of sovereign immunity.8(....)

66" "I do not accept these submissions. In my judgment, there is no linguistic or other basis for construing the language used in Sect. 9 of the Act (particularly when viewed in the context of the execution provisions of Sect. 13) as excluding enforcement proceedings, or as excluding proceedings which relate to the enforcement of a foreign arbitral award. Nor is there any justification for excluding arbitrations which 'may relate to disputes of a public nature relating to a state's licensing of the natural resources on its own territory'.

67" "If, however, there is any doubt, or any ambiguity in the language, such that it is legitimate to place reliance upon Hansard, then the Parliamentary proceedings leading to the enactment of the Act resolve that ambiguity. As Dame Hazel Fox has observed - see State Immunity ibid, at p. 167:933 'During the passage of the bill through Parliament a clause excluding a provision for the enforcement of an arbitral award was deleted from this section. This and the reference in Sect. 13(4)(b) to an arbitral award would seem to indicate that proceedings may be brought for registration to turn an award into an order of the court, provided leave to serve proceedings abroad can be obtained under CPR 6.20-12.... Sect. 13, relating to measures of enforcement, would govern how any such court order could be executed.'

68" "The debate in the House of Lords to which Dame Hazel Fox referred is reported in Hansard, 16 March 1978, Cols 1516-17.

'The Lord Chancellor moved Amendment No. 15 Page 5, line 13, leave out subsection (2). This Amendment is intended to remove the immunity currently enjoyed by States from proceedings to enforce arbitration awards against them. Clause 10(1) [as Sect. 9 then was] removes immunity from proceedings relating to arbitration where the State had submitted to the arbitration in the United Kingdom, or according to United Kingdom law, but by subsection (2) enforcement proceedings are excepted; that exception is now to be removed. If the Government Amendments to Clause 14 are accepted, the property of a State which is for the time being in use or intended for commercial purposes will become amenable to execution to satisfy and [sic] award. However, it would not be possible to proceed to such execution without first bringing enforcement proceedings to turn the award into an order of the court on which the execution could be levied, and unless the State had waived its immunity to enforcement, Clause 10(2) would prevent the necessary steps being taken. This Amendment will delete the subsection.'

The Amendment was agreed. It is clear therefore that Sect. 9, as enacted, was indeed intended to apply to proceedings for the recognition and enforcement of awards.

69" "As I have set out above, the State also argues that there is a requirement of link with the United Kingdom and that, accordingly, Sect. 9 only applies when there is a 'connecting factor between the arbitration clause or the dispute and the United Kingdom'.

70" "I accept counsel for Svenska's submission that the passage from Dame Hazel Fox's 'States and the Undertaking to Arbitrate' 37 ICLQ 1 relied upon by 934 counsel for the defendants does not support the submission that Sect. 9 requires a connecting factor between the arbitration and the United Kingdom; that passage merely notes the apparent omission of 'any limitation of the section to English arbitration'. Moreover, the Parliamentary proceedings as reported in Hansard for 28 June 1978, Col 316 make it clear that the omission was deliberate:

'The Lord Chancellor: My Lords, I beg to move that the House doth agree with the Commons in Amendment No 2. Clause 9 of the Bill provides that where a State has agreed in writing to submit a dispute to arbitration in, or according to, the law of the United Kingdom, the State is not immune as respects proceedings which relate to the arbitration. The Amendment removes the links with the United Kingdom, and by deleting the reference to the United Kingdom or its law, it will ensure that a State has no immunity in respect of enforcement proceedings for any foreign arbitral award.'

The Amendment was passed.

71" "In my judgment, it is therefore clear that Sect. 9 was intended to apply to 'any foreign arbitral award' and there is no justification to be found in the language used in Sect. 9 (in particular when contrasted with that used in Sect. 3) for limiting the exception to awards relating to purely commercial disputes....

72" "Accordingly, I hold that the present proceedings for the enforcement of a foreign arbitration award are indeed within the scope of Sect. 9. It follows that, in my judgment, on the basis that the State is indeed estopped by the Interim Award of the Tribunal that it was a party to the arbitration agreement, the State cannot rely on sovereign immunity for the purposes of these proceedings."

IV. INDEPENDENT CONCLUSION AS TO WHETHER STATE IS PARTY TO ARBITRATION AGREEMENT

73" "It is only if I were to be wrong in my finding that the State is estopped by the Interim Award of the Tribunal that the issue as to whether the State was indeed a party to the arbitration clause at Art. 9 of the JVA arises for my determination. However, in case this matter goes further, and since I have heard a substantial amount of evidence and argument on the matter, it is right that I should express my conclusion on this issue. The point may also be relevant to 935 enforcement proceedings in Lithuania and Germany. As counsel for the defendants submitted, it is clear that, in doing so, I have to come to an independent conclusion on the matter, rather than merely reviewing the decision of the Tribunal for the purpose of seeing whether the Arbitrators were entitled to reach the decision which they did.

74" "Two further points should be stated at the outset, since counsel for the defendants devoted a considerable time in submission to addressing them. First, I accept that the issue is whether the State agreed, whether expressly or impliedly, to arbitrate its disputes with Svenska by the procedure laid down in Art. 9; in other words, it is not sufficient that Svenska establishes merely that the State was party to the JVA; it must also establish that the arbitration clause was intended to cover disputes between the State and Svenska and the State agreed to be bound thereby. The separability of an arbitration clause, a concept well-known to English law, is also well-established under Lithuanian law, as the experts agreed. That proposition is well-established by the audiorities to which counsel for the defendants referred.... Second, I accept that, for the purposes of deciding this issue, the State cannot be equated with Geonafta, which at all material times was a separate corporate entity, albeit that at the time of the conclusion of the JVA it was a state enterprise, only being privatised in June 2000. I thus accept that the mere fact that a state enterprise agrees to arbitrate does not itself imply consent by a state itself to arbitrate. There must be a manifestation of the State's own intention so to do. That proposition is well-established by the authorities to which counsel for the defendants referred...."

1. Applicable Law to Arbitration Agreement

75""In order to answer the question what law governs the question whether or not a state has agreed in writing to submit a dispute to arbitration, the English court must apply English conflicts rules. Rule 57(1) of Dicey and Morris, The Conflict of Laws (2000) (13th Edition) provides that the validity, effect and interpretation of an arbitration agreement are governed by its applicable law. In the absence of exceptional circumstances, the applicable law of an arbitration agreement is the same as the law governing the contract of which it forms a part; see ibid. para. 16-012.

76" "I have already set out above the relevant express choice of law clause contained in Art. 35.2 of the JVA. From that clause it is clear that the applicable law of the arbitration agreement contained within the JVA is therefore Lithuanian law, supplemented, where required, by 'rules of international936 business activities generally accepted in the petroleum industry if they do not contradict the laws of the Republic of Lithuania'.

77" "The question for the Court is therefore whether, as a matter of Lithuanian law, the State and Svenska agreed that disputes between them should be submitted to arbitration. I accept counsel for Svenska's submission that there is no basis, in answering that question, for having recourse to any other law than Lithuanian....

78" "Nor does Art. 35.2 justify any invocation of principles of 'international law' as counsel for the defendants suggested. The clause gives primacy to Lithuanian law and only permits other laws to be referred to where they are 'required' to supplement Lithuanian law, which they are not in the present case. Moreover, even if it were necessary to so [sic], recourse may only be to the 'rules of international business activities generally accepted in the petroleum industry'. There is no basis for simply asserting that these rules are the same as the rules of international arbitration. Furthermore, recourse is to be had to such rules only insofar as they do not contradict the laws of Lithuania. Lithuanian law provides rules for determining whether the arbitration clause is a valid agreement to arbitrate. Insofar as the rules of international arbitration are the same as Lithuanian law they add nothing; insofar as they differ, they are inapplicable because they contradict Lithuanian law. They can, therefore, be disregarded in any event. The State did not, in any event, adduce any evidence of what were the 'rules of international business activities generally accepted in the petroleum industry'."

2. Applicable Principles of Lithuanian Law

79" "I heard lengthy expert evidence, both written and oral, relating to Lithuanian law. However there was, in the main, agreement between the parties on the essential requirements under Lithuanian law for a valid arbitration agreement. The principal features may be summarised as follows:

(i)

At the time that the JVA was concluded there was no requirement that an arbitration agreement had to be in any particular form...;

(ii)

At the time that the JVA was concluded there was no legal impediment to the State's agreeing to arbitrate disputes that might arise under that contract...;

(iii)

The principle of the separability of arbitration agreements is well-recognized under Lithuanian law; i.e. arbitration agreements/clauses are separable from the contracts in which they might be contained... ;937

(iv)

A valid arbitration agreement required the parties to express their common will to submit disputes between themselves to arbitration in writing... ;

(v)

Although the JVA was concluded in 1993, when construing it and, in particular, Art. 9, the Civil Code 2000 (which entered into force on 1 July 2001) must be applied; Art. 45 of the Law on Approval, Coming into Force and Enforcement of the Civil Code of the Republic of Lithuania, dated 18 July 2000....

80" "Art. 6.193 of the Civil Code, 'Rules of the Interpretation of Contracts', and the Commentary thereon, (which I have already set out in full above) make it clear that the process of interpretation of a contract under Lithuanian law is significantly different from the approach that is applied under English law. In particular, under Lithuanian law it is legitimate to have regard to a far wider range of factual material, than would be permissible under English law.

81" "I accept counsel for Svenska's submissions that the following important principles of Lithuanian law relating to the interpretation of contracts can be derived from the expert evidence and the materials which they produced:

(i)

The overriding principle is that a contract should be interpreted in good faith

(ii)

Thereafter, the Court's search is for 'the real intentions of the parties without being limited by the literal meaning of the words'. In other words, unlike under English law, the primary objective is to ascertain what the parties subjectively actually intended, regardless of the words they used. In the present case, therefore, the enquiry becomes one into whether Lithuania and Svenska intended that disputes between them would be resolved by arbitration, regardless of the literal meaning of the words they used.

(iii)

In seeking to ascertain the parties' actual intention, regard must be had to 'the preliminary negotiations between the parties, practices which the parties have established between themselves, the conduct of the parties subsequent to the conclusion of the contract, and the existing usages'. Consequently, and again contrary to the position in English law, the court must look at the negotiations which led to the conclusion of the contract, take into account earlier drafts of the contract and consider each party's subjective intention.

(iv)

If, despite these sources, what the parties really intended cannot be ascertained then the court will apply an objective interpretation and give the contract 'the meaning that could be attributed in the same circumstances by reasonable persons in the corresponding position as the parties'.

938

82" "The issue before the Court in reality is whether the pre-contractual dealings between the parties demonstrate that they intended disputes between Lithuania and Svenska to be submitted to ICC arbitration. I should say that both experts gave their opinions as to whether or not, applying Lithuanian law to the facts, the State was a party to the arbitration agreement in Art. 9 of the JVA. Professor Katuoka concluded that it was not; Dr. Foigt concluded that it was. However, as I have already said above, both parties agreed that, although the expert as to foreign law has to provide the English Court with the relevant foreign principles and rules of construction, it was for the English Court, in the light of those principles and rules, and any relevant factual material, to determine the meaning of the JVA. Accordingly it is not necessary for me to analyse, accept or reject the respective opinions of the experts as to the true construction of the JVA.

83" "The onus is on Svenska to establish that the State was indeed party to an agreement to arbitrate. However it is convenient to set out the five principal arguments upon which counsel for the defendants relied to support the State's contentions that it was not a party to the arbitration agreement."

3. The State's Arguments

a. State not a party to JVA

84" "The first contention was that the State was not a party to the JVA at all. I have already rejected this argument, in the context of my decision on Sect. 3 of the Act. In this context I merely add that it is clear from the evidence before me that the State was involved with the negotiations with Svenska from the outset."

b. State not a party to arbitration agreement

85" "Secondly the State argues that it is not a party to the arbitration agreement in Art. 9. It relies in particular on the actual wording of Art. 9 of the JVA and its drafting history. It submits that these are the most important elements in the construction of Art. 9, and that the importance of the text itself and contractually agreed definitions is clearly set out in the Lithuanian law on the interpretation of contracts. Counsel for the defendants submitted that there is no room for reasonable doubt as to the meaning of Art. 9: it is expressed in plain terms (with clearly defined legal meaning) and expressed so as not to include the State. He also submitted that support is also to be derived from Lithuania's role in the JVA, which was, on any reading, profoundly different in character from that of Svenska or Geonafta.

939

86" "Counsel for the defendant submits that the only parties to the arbitration agreement are the two Founders which are clearly defined in the JVA as Svenska and Geonafta ; that not only is the meaning of the defined term, ' Founder', clear in the JVA itself, but the word has an established legal meaning in Lithuanian law, as defined in the Law on Joint Stock Companies and the Law on Foreign Investments, both of which are referred to in the preamble to the JVA; that that meaning corresponds to an incorporating shareholder; that the incorporating shareholders of the JV Company were Svenska and Geonafta; that the State is defined separately from the parties to the agreement, at Art. 13.12 of the JVA, as the State or effectively any other Department 'having the right to control the activity of the joint venture within the limits of its competence'; and that the language of the arbitration provision which refers to 'disputes between the Founders', 'negotiations between the Founders' and notice by 'either Founder', is clearly inconsistent with Svenska's position that tripartite arbitration was agreed, but is consistent with an arbitration agreement between two parties only

87" "Many of these points (but not the conclusion which counsel for the defendants seeks to draw) are accepted by counsel for Svenska.... What Svenska submits is that it was not the parties' intention that the use of the word 'Founder' in Art. 9 was intended to exclude the State from the scope of the arbitration agreement. It is irrelevant to that issue whether the State was, or could have been, a founder of the JV Company and it is irrelevant whether it was included in the preamble as one of the 'Founders'. Counsel for Svenska submits that the simple point is that it was Svenska's and the State's common intention that, irrespective of the language used, they be covered by the agreement in Art. 9 to submit disputes between themselves to ICC arbitration.

88" "If I had been approaching the interpretation of the JVA in accordance with English law principles of construction (and in the absence of a claim for rectification), I would reject counsel for Svenska's submissions, as the language of Art. 9, when construed in the context of the entire JVA and against what would be the permissible factual matrix under English law, does not support the conclusion that the State has agreed to arbitrate its disputes.

89" "However, the approach which is required under Lithuanian law means that, in order to establish the parties' subjective intentions, I have to consider the evidence relating to the parties' pre-contractual negotiations, and the various drafts of the JVA, as an aid to the interpretation of the words used, and therefore I do not accept counsel for the defendants' submissions that I should approach the matter merely by reference to the language used in the JVA and in isolation from the factual evidence relating to the pre-contractual negotiations. Obviously, 940 when I come to consider the question whether the evidence relating to the parties' pre-contractual negotiations shows that the parties' intentions were that the State should be party to the arbitration clause, I must, under the relevant Lithuanian principles of construction, give appropriate weight to the actual words used in Arts. 9 and 35."

c. Bilateral investment treaty

90" "Third, the State argues that, as a bilateral investment treaty between Sweden and Lithuania had been concluded on 17 March 1992 (the BIT), the parties' intention must have been that disputes between them would be settled under the procedure laid down in Art. 7 of that Treaty and that it was for that reason that the reference to the State submitting to arbitration was removed from the JVA. Further Counsel for the defendants submits that support for the clear language of the text of Art. 9 is found in the removal of any mention of Lithuania and the subsequent removal of ICSID clauses from drafts of the JVA and the simultaneous coming into force of a BIT between Lithuania and Sweden.

91" "I address this argument below, in my analysis of the pre-contractual negotiations."

d. Arbitrability

92" "In his oral evidence, but not in his Report, Professor Katuoka sought to argue that provisions of the 1996 Lithuanian Law on Commercial Arbitration and the 199S Lithuanian Law on Sub-Soil Exploitation were both retroactive and made the disputes between Svenska and the State non-arbitral. This was relied upon by the State generally in its arguments, and also to support its contention that in such circumstances it was unlikely that the State would have agreed to have become party to the arbitration clause in Art. 9 of the JVA.

93" "I do not accept Professor Katuoka's views in this respect. Although referring to both pieces of legislation in his Report, Professor Katuoka did not there assert that they were retroactive. When asked direct in cross-examination

'"... why in paragraph 131 you do not say that these two Acts have retroactive effect?" Professor Katuoka simply replied: "I do not have anything more to say.'"

94" "On this issue, I prefer Dr. Foigt's evidence, namely that neither of the acts had retroactive effect, which may be why Professor Katuoka did not assert the contrary in his written Report and instead went on to consider the law as it applied in 1993. In this regard Professor Katuoka relied upon Art. 28 of the Civil 941 Code of 1964. I accept counsel for Svenska's submissions that his reliance was, however, misplaced. First, Art. 28 of the 1964 Code, as the Professor read it, was permissive and not prohibitory : it permitted disputes arising out of civil legal relationships to be referred to arbitration, maritime arbitration or foreign trade arbitration; it did not go further and prohibit arbitration of other disputes. Secondly, the Provisional Rules of Oil Prospecting, Exploration, and Production in the Republic of Lithuania 16 March 1992, made clear (in Art. 61) that disputes involving 'Oil works' might be arbitrated. The dispute in the present case fell within the definition of 'Oil works' within Arts. 6-10 of the Rules and was therefore arbitrable.

95" "It follows that, as Dr. Foigt stated, there was no prohibition in Lithuanian law on the underlying dispute being submitted to arbitration."

e. Pre-contractual negotiations

96" "In summary, the State's principal argument was that the evidence relating to pre-contractual negotiations, and indeed how Svenska, Geonafta and the State conducted themselves after the JVA was concluded, supports its position that the State did not consent to become a party to Art. 9 of the JVA. Counsel for the defendants submitted that the mere fact that the State may have been a party to the JVA does not imply its consent to arbitration, where actual consent was lacking. One cannot assume consent to arbitration simply because one party (a fortiori a State) does not object or because there is no evidence of intent to consent to any alternate dispute resolution mechanism. To proceed on an assumption that a State must arbitrate unless otherwise agreed is especially inappropriate in a context where the arbitration clause clearly excluded the State by its terms.

97" "Counsel for the defendants further submitted that the State ' s position was supported by the evidence of Dr. Motuza, who confirmed that one of the purposes of the language of the JVA referring only to Svenska and Geonafta, was clearly to dissociate Lithuania from the JVA itself and from the arbitration clause. Counsel for the defendants further submitted that the fact that Sweden and Lithuania signed a bilateral investment treaty must be taken into account when seeking to ascertain the parties' common intention and that that intention was that disputes between them would be settled under the procedure laid down in Art. 7 of that Treaty." (....)

98" The court then considered in detail the evidence relating to the pre-contractual negotiations among the parties and their post-contractual behaviour. The court examined in particular the successive drafts of the 942 jurisdiction clause in the JVA, also in the light of the signing and entry into force of the BIT between Lithuania and Sweden. The court concluded that there was a "common intention of the State, Geonafta and Svenska that their disputes (including those involving the State) should be settled by arbitration and that the dispute resolution provisions of Art. 9 of the [final version of the JVA should apply to disputes between the State and Svenska, notwithstanding the inappropriate use of the words 'Founders' and other words in that Article."

99" The court added that "[i]n reaching this conclusion I have given due weight to the wording in Art. 9. However, despite the fact that it does not prima facie reflect the actual intentions of the parties as I have held them to be, the relevant principles of Art. 6.193 of the Lithuanian Civil Code require the Court to search for the parties' real common intention notwithstanding the literal meaning of the words used. Accordingly, it follows that, in my judgment, the State was indeed a party to the arbitration agreement in Art. 9 of the JVA and therefore it is not entitled to State immunity in the present proceedings by virtue of Sect. 9 of the Act." (...)

11. The court quoted Sect. 2 of the State Immunity Act 1978 as follows: "(1) A State is not immune as respects proceedings in respect of which it has submitted to the jurisdiction of the courts of the United Kingdom. (2) A State may submit after the dispute giving rise to the proceedings has arisen or by a prior written agreement; but a provision in any agreement that is governed by the law of the United Kingdom is not to be regarded as a submission. (3) A State is deemed to have submitted - (a) if it has instituted the proceedings; or (b) subject to subsections (4) and (5) below, if it has intervened or taken any step in the proceedings. (4) Subsection (3)(b) above does not apply to intervention or any step taken for the purpose only of - (a) claiming immunity; or (b) asserting an interest in property in circumstances such that the State would have been entitled to immunity if the proceedings had been brought against it."
2"The court quoted Sect. 3 [of the State Immunity Act] 1978 as follows: "(1) A State is not immune as respects proceedings relating to - (a) a commercial transaction entered into by the State....(3) In this section "commercial transaction" means - (a) any contract for the supply of goods or services... (c) any other transaction or activity (whether of a commercial, industrial, financial, professional or other similar character) into which State enters or in which it engages otherwise than in the exercise of sovereign authority."
3Sect. 101 of the English Arbitration Act of 1996 reads: "Recognition and enforcement of awards. (1) A New York Convention award shall be recognised as binding on the persons as between whom it was made, and may accordingly be relied on by those persons by way of defence, set-off or otherwise in any legal proceedings in England and Wales or Northern Ireland. (2) A New York Convention award may, by leave of the court, be enforced in the same manner as a judgment or order of the court to the same effect. As to the meaning of 'the court' see Sect. 105. (3) Where leave is so given, judgment may be entered in terms of the award."
4Sect. 7(1) and (3) of the Danish Arbitration Act, 1972 reads: "An arbitral award is void, wholly or in part, when 1. the arbitration agreement is void... 3. the arbitration tribunal has acted outside its jurisdiction...."
5Sect. 9 of the Danish Arbitration Act, 1972 reads: "1. The awards of Danish arbitration tribunals may be enforced under the rules of the Administration of Justice Act on the enforcement of judgments. The days of grace before the expiry of which execution cannot be levied run from the service of the award. 2. A request for enforcement shall be submitted to the bailiff. The request shall be in writing and a copy of the award as well as of the agreement to arbitrate, should it be in writing, shall be attached. 3. Objections to the validity of an award made in connection with the enforcement, shall be ruled upon by the bailiff. The bailiff may, however, refer the claimant to ordinary proceedings, should he find that the objection cannot be ruled upon as the case stands. 4. Where an award has been submitted to another arbitration tribunal or to a court to obtain a ruling on the validity of the award - cf. Section 7 - the bailiff shall decide whether enforcement shall be proceeded with or postponed and, in this connection, whether enforcement or postponement shall be conditioned upon the giving of security."
6Sect. 31 of the English Arbitration Act 1996 reads: "(1) An objection that the arbitral tribunal lacks substantive jurisdiction at the outset of the proceedings must be raised by a party not later than the time he takes the first step in the proceedings to contest the merits of any matter in relation to which he challenges the tribunal's jurisdiction. A party is not precluded from raising such an objection by the fact that he has appointed or participated in the appointment of an arbitrator. (2) Any objection during the course of the arbitral proceedings that the arbitral tribunal is exceeding its substantive jurisdiction must be made as soon as possible after the matter alleged to be beyond its jurisdiction is raised. (3) The arbitral tribunal may admit an objection later than the time specified in subsection (1 ) or (2) if it considers the delay justified. (4) Where an objection is duly taken to the tribunal's substantive jurisdiction and the tribunal has power to rule on its own jurisdiction, it may - (a) rule on the matter in an award as to jurisdiction, or (b) deal with the objection in its award on the merits. If the parties agree which of these courses the tribunal should take, the tribunal shall proceed accordingly. (5) The tribunal may in any case, and shall if the parties so agree, stay proceedings "whilst an application is made to the court under section 32 (determination of preliminary point of jurisdiction)." Sect. 73 reads: "(1) If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection - (a) that the tribunal lacks substantive jurisdiction, (b) that the proceedings have been improperly conducted, (c) that there has been a failure to comply with the arbitration agreement or with any provision of this Part, or (d) that there has been any other irregularity affecting the tribunal or the proceedings, he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection. (2) Where the arbitral tribunal rules that it has substantive jurisdiction and a party to arbitral proceedings who could have questioned that ruling- (a) by any available arbitral process of appeal or review, or (b) by challenging the award, does not do so, or does not do so within the time allowed by the arbitration agreement or any provision of this Part, he may not object later to the tribunal's substantive jurisdiction on any ground which was the subject of that ruling."
7"Sect. 9 of the Act provides as follows: '(1) Where a State has agreed in writing to submit a dispute which has arisen, or may arise, to arbitration, the State is not immune as respects proceedings in the courts of the United Kingdom which relate to the arbitration. (2) This section has effect subject to any contrary provision in the arbitration agreement and does not apply to any arbitration agreement between States.'"
8Counsel for the defendants relied in particular on Verlinden B.V. v. Central Bank of Nigeria, 488 F. Supp. 1284 (S.D.N.Y 1980), Obntrup v. Firearms Center, Inc. (1981) 516 F.Supp. 1281 D.C.C. and Zernicek v. Petroleos Mexicanos, 614 F.Supp. 407 (S.D. Tex.) 1985.

Referring Principles
Trans-Lex Principle: IV.5.1 - Intentions of the parties
Trans-Lex Principle: IV.5.3 - Interpretation in favour of effectiveness of contract
Trans-Lex Principle: IV.5.4 - Interpretation against the party that supplied the term
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