Lithuania prevails in investor-state BIT claim over enforcement of ICC award in case brought by Russian regional Gov’t

An IAReporter investigation reveals that an arbitral tribunal has dismissed a treaty-based claim brought by the Russian region of Kaliningrad against the Republic of Lithuania.

Kaliningrad, a Russian territory located between Poland and Lithuania, initiated arbitration under the Russia-Lithuania bilateral investment treaty after a Lithuania-based building owned by the Kaliningrad regional government was seized by order of the Lithuanian courts.

The building, located in the town of Vilnius, was targeted by a Cyprus-based entity, Duke Investments Limited, which was seeking to enforce a 2004 commercial arbitration award rendered against Kaliningrad.

(The earlier commercial arbitration proceedings related to a $10 Million (US) loan issued by Dresdner Bank to the Kaliningrad regional government. When Kaliningrad failed to repay the loans, they were sold to Duke Investments Limited, and the Cyprus-based entity turned to the London Court of International Arbitration (LCIA) in order to obtain an arbitral award against Kaliningrad).

When Kalinigrad proved unsuccessful in its efforts to challenge the freezing of its property in Lithuania, the regional government alleged that Lithuania was liable for expropriating the property in question.

The Kaliningrad government initiated arbitration in 2006, under the rules of the International Chamber of Commerce (ICC), and asked a tribunal to consider whether Lithuania had breached the terms of the Russia-Lithuania treaty.

Arbitrators in the case were Karl-Heinz Boeckstiegel, Sergei Lebedev and Jose Rosell.*

Government entity permitted to file an investor-state claim

Unusually, the arbitral claim was filed under the investor-state arbitration mechanism provided in the Russia-Lithuania bilateral investment treaty.

Lithuania is understood to have questioned whether the proceeding should have been handled under the state-to-state mechanism under the treaty. However, the tribunal determined that the Kaliningrad regional government qualified as an investor according to the definition contained in the treaty; for its part, the treaty refers to Russian law for guidance as to which persons and entities can be considered “investors”.

The import and persuasiveness of this approach is sure to be debated in other future investment treaty arbitrations, particularly given the large volumes of foreign investments made in recent years by states or para-statal entities.

Court enforcement of arbitral award under NY Convention framed as BIT breach

Kaliningrad had sought to characterize the actions of the Lithuanian courts as leading to an expropriation of its assets in Lithuania.

In its February, 2009 award on jurisdiction, the ICC tribunal acknowledged that court decisions can give rise to an expropriation as defined in a BIT. However, it remained to be seen whether court decisions enforcing an arbitral award under the New York Convention* could be deemed an expropriation.

(IAReporter believes that the Kaliningrad-Lithuania case marked the first instance where arbitrators were asked to grapple with such a question.)

Arbitrators in the ICC case were obliged to consider the relationship of two treaties, the NY Convention and the Russia-Lithuania BIT (which was concluded some years later).

As part of this effort, the arbitrators referred to relevant provisions of the Vienna Convention on the Law of Treaties (VCLT), in an effort to ascertain whether the Russia-Lithuania BIT was intended to modify the earlier New York Convention.

Indeed, the arbitrators saw no evidence that Russia and Lithuania had sought – by means of the BIT – to modify the specialized (lex specialis) multilateral framework for enforcement and recognition of foreign arbitral awards.

Accordingly, the tribunal noted that a holding of expropriation in cases such as the present dispute – where national court decisions pursuant to the New York Convention were at issue – would, in essence, mean that the BIT would be viewed as obliging the Contracting States to breach their obligations under the New York Convention

Rather, on this view, the tribunal held that it that it lacked jurisdiction to review rulings of domestic courts on questions of enforcement and recognition of foreign arbitral awards pursuant to the New York Convention.

Ultimately, the arbitrators held that they lacked jurisdiction to hear Kaliningrad’s claim for expropriation arising out of the Lithuanian courts’ handling of the enforcement of the 2004 LCIA award.

* [UPDATE, March 16, 2017: we’ve updated this article to add the names of the tribunal members.]