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Supreme Court of Lithuania denies the possibility of the punitive civil liability function in contractual relations2019-06-18

Solveiga Audrius svetaine eng

On June 13, the Supreme Court of Lithuania (SCL) adopted a milestone judgement and closed the rollercoaster of litigation between the Serbian Privatisation Agency and Lithuanian investors that had been going on for years.

The case involved the matter of recognition and enforcement of  a Serbian arbitration award in Lithuania. The subject of the dispute was the termination of an agreement between Lithuanian investors and Serbia, when the national privatisation body, having unilaterally terminated the agreement with the investors and reclaimed the object of privatisation without the repayment of the amount invested, sued for an award of the contractual penalty of 25% of the sale amount. In 2012, the Serbian arbitral tribunal adopted a decision to uphold the lawsuit of the Privatisation Agency, awarding an amount of EUR 3,275,000 to be paid by the investors.

When the Serbian Privatisation Agency approached the Lithuanian Court of Appeal for the recognition and enforcement of said arbitration award in Lithuania, the Lithuanian investors raised the objection for recognition of the contractual penalty awarded by the arbitration as contradictory to the public order in this case.

Even though in its decision dated 7 January 2019 the Lithuanian Court of Appeal recognised the award of the Serbian arbitration and permitted its enforcement in Lithuania, last week the SCL issued a final and non-appealable judgement, adopting a contrary decision and refusing to recognise the arbitration award and to permit its enforcement.

The Court noted that the amount awarded by the Serbian arbitration had to be measured in the context of the entirety of the sanctions applied towards the buyer as a party to the agreement. The Court ruled that the 25% contractual penalty awarded by the Serbian arbitration was punitive rather than compensatory in respect of losses predetermined or actually incurred. The Court also noted that the prohibition of this type of penalty falls within the contents of the public order of the Republic of Lithuania and international public order alike.

First of all, in its decision of 24 October 2012 the Constitutional Court clearly denied the possibility of the punitive function of civil liability in privatisation relations. The court ruled that a model of legal regulation when the state, in terminating a privatisation agreement, both reclaims the privatisation object and 100% of the amount paid for it and any amounts invested by the investor to improve the property, was contradictory to the Constitution.

Second, the interpretations by the Constitutional Court are fully aligned with the international trends of legal regulation of restitution, which recognise unilateral restitution within the context of unilateral agreement termination in exceptional cases only.

Third, the law doctrine stipulates that punitive penalties are only recognised and accessible only under the law of a highly limited number of states. With many states, punitive sanctions are inaccessible just as they are considered contradictory to the public order. Therefore, both the accessibility of punitive penalties and the enforcement of arbitration awards concerning them are strictly limited.

The Court ruled that the content of the Serbian arbitration award was vague on whether in this case the contractual penalty had been applied as a compensatory measure to reimburse the losses of the state resulting from tort under a privatisation agreement. The Court eventually decided that the recognition of, and permission to enforce, the Serbian arbitration award in the Republic of Lithuania would create a legal situation worse (in terms of the balance of the interests of the investor and of the state) than the one that the Constitutional Court recognised as contradictory to the Constitution in its decision dated 24 October 2012.

I am happy with the GLIMSTEDT team and pleased that we have managed to defend the rights and legitimate interests of our client, UAB Sanitex, in this matter. The litigation was challenging and cost us all a lot of time and money, but eventually we have succeeded in convincing the SCL that no such draconic punitive losses could be awarded,’ said Professor Dr Solveiga Palevičienė, Partner and head of the Dispute Resolution Practice with GLIMSTEDT, in commenting on the SCL judgement.

Notably, in 2009 Lithuanian investors UAB Sanitex and UAB Arvi ir ko launched an investment dispute procedure under the Lithuania–Serbia bilateral agreement on the protection of investments regarding the dispute with the Privatisation Agency at the International Centre for Settlement of Investment Disputes in Washington. After more than 5 years of judicial proceedings, the Investment Arbitration Tribunal recognised in that matter that the rights of the Lithuanian investors had been infringed, that the Serbian government and authorities had failed to provide adequate protection of the foreign investors, and consequently awarded a compensation amounting to EUR 1 million from Serbia.

In the words of GLIMSTEDT’s attorney-at-law Audrius Žvybas who represented the Lithuanian investors in the above investment dispute, as well as UAB Sanitex in the matter of recognition of the Serbian arbitration award, the decisions by the Investment Arbitration Tribunal and the Supreme Court of Lithuania show that Serbia had not adopted the generally recognised standards for the protection of investors and that its privatisation programme as well as the oversight and legal regulation thereof were flawed and required improving.

‘The sanctions that had been imposed unilaterally during the negotiations, the multi-tiered penalties, and the disproportionate allocation of liability were all slammed by the Supreme Court of Lithuania, which ruled that such stipulations were null and the Serbian arbitration awards adopted on their basis could not be recognised and enforced in the Republic of Lithuania,’ Audrius Žvybas, attorney-at-law with GLIMSTEDT, emphasised.

 

Professor Dr Solveiga Palevičienė, Partner, Head of the Dispute Resolution Practice

Audrius Žvybas, Senior Associate


Teisininkai: Professor Dr Solveiga Palevičienė , Audrius Žvybas



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