Supreme Court decision
A recent decision by the Supreme Court is the first in Lithuanian case law on the issue of the arbitrability of public procurement disputes. The position adopted by the court has already sparked a debate among experts. Is it a Pandora's box, opening up the possibility of more disputes being deemed non-arbitrable, or is it a necessary weapon against bad-faith actions arising from public procurement relationships?
The dispute related to a construction agreement that was concluded following public procurement procedures. The claimants were the construction contractors under the contract. They brought an action against the procuring entity and the customer under the contract, seeking an increase in the contract price. A dispute resolution committee, organised in accordance with the contract, partly satisfied this request. Nevertheless, the defendants refused to pay the extra amount.
Since the contract contained an arbitration clause, the claimants applied to the Vilnius Court of Commercial Arbitration, asking it to require the defendants to comply with the committee's decision and pay the additional part of the contract price. The arbitral tribunal agreed with the plaintiffs and resolved the dispute in their favour.
One of the defendants, the customer under the contract, applied to the Lithuanian courts. It argued that the arbitral tribunal's decision should be annulled on various grounds. Among other things, it argued that the dispute was not arbitrable under Lithuanian law.
Article 11 of the Law on Commercial Arbitration sets out a list of non-arbitrable disputes. However, this list does not include disputes related to public procurement. Nonetheless, the claimants argued that since the dispute put matters of public interest at stake, it should be deemed to fall within Article 11.
The Supreme Court upheld the appeal.(1) It stated that Article 11 provides a closed list of non-arbitral disputes which cannot be interpreted broadly. However, in the very next sentence of its decision, the court noted that this interpretation of Article 11 does not mean that only the Law on Commercial Arbitration determines whether a dispute is non-arbitrable.
The court emphasised that the case concerned a specific issue (ie, a change in price under a contract concluded according to public procurement procedures). Considering the imperative nature of public procurement rules as established in the Public Procurement Law, and the applicability of such rules where a concluded public procurement contract is to be modified, the court noted that the law's provisions on a possible dispute resolution forum should be followed, as they had the status of a special law.
Therefore, since the Public Procurement Law provides that the national courts have exclusive competence over public procurement disputes, and does not prescribe arbitration as a potentially applicable form of dispute resolution in this area, the Supreme Court declared that the dispute fell to be resolved by a court, not an arbitral tribunal. In support of this position, it referred to the EU Remedies Directive (89/665/EEC), which states that public procurement procedures must be fully reviewed by a court or corresponding body. Since arbitral awards in Lithuania can be appealed only on limited grounds, the court emphasised that arbitral tribunals cannot hear disputes related to public procurement as regulated by the provisions of the Public Procurement Law.
Until this decision, the list of non-arbitrable disputes was held to be established in the Law on Commercial Arbitration. Although the Supreme Court confirmed that the list is closed and must be interpreted narrowly, it also found that disputes which are not included in the list may still be found to be non-arbitrable.
The effect of the court's stance is still unclear. It could yet be interpreted as opening the non-arbitrability argument for all disputes that, in law, are stated to fall within the jurisdiction of the national courts. However, it might also be interpreted narrowly, as it appears that the court intended it to be. On this analysis, only very particular issues, such as a change in the price payable under a contract concluded by public procurement procedures (where such a difference in price might have affected the outcome of the public procurement), fall under the exclusive jurisdiction of the court and cannot be arbitrated.
Legal doctrine appears to provide a sensible solution: the non-arbitrability of public procurement-related matters should not include a contract as finally signed; rather, it should apply only to actions that involve potential interference in a specific public procurement process.(2) It is hoped that an over-broad interpretation is not applied, as this could have the adverse effect of removing all public procurement-related disputes from the jurisdiction of arbitration forums.
For further information on this topic please contact Jurgita Petkute or Rasa Grambaitė at Lideika, Petrauskas Valiunas ir partneriai LAWIN by telephone (+370 5 268 1888), fax (+370 5 212 5591) or email ([email protected] or [email protected]).
(1) UAB Kauno vandenys v WTE Wassertechnik GmbH (3K-7-304/2011).
(2) See Abdulhay, "Corruption in International Trade and Commercial Arbitration", Kluwer Law International, The Hague, 2004.