Data

Date:: 04-11-2005
Country:: United Kingdom
Number:: 2004 Folio 272
Court:: High Court of Justice (Queen's Bench Division)
Parties:: Svenska Petroleum Exploration AB, Government of the Republic of Lithuania, AB Geonafta

Keywords

STATE CONTRACTS - LONG-TERM CONTRACTS - JOINT-VENTURE AGREEMENT - BETWEEN A SWEDISH COMPANY AND A LITHUANIAN COMPANY - SIGNED ALSO BY THE LITHUANIAN GOVERNMENT - LITHUANIAN LAW APPLICABLE

INTERPRETATION OF THE AGREEMENT - LIBERAL INTERPRETATION IN ACCORDANCE WITH PARTIES’ COMMON INTENTION - RELEVANCE OF PRELIMINARY NEGOTIATIONS - REFERENCE TO ARTICLES 6.193 - 6.195 OF THE LITHUANIAN CIVIL CODE REPEATING ARTICLES 4.1 - 4.6 OF THE UNIDROIT PRINCIPLES

Abstract

A Swedish petroleum company (“the plaintiff”) and a previously state-owned Lithuanian petroleum company (“the defendant”) entered into a joint venture agreement (“the agreement”) for oil exploitation in Lithuania. The agreement contained an arbitration clause which indicated that the “founders,” i.e. incorporating shareholders, would submit their disputes to arbitration under the ICC Rules of Arbitration. Moreover it stated that "This Agreement shall be governed by the laws of Lithuania supplemented, where required, by rules of international business activities generally accepted in the petroleum industry if they do not contradict the laws of the Republic of Lithuania.” The Agreement also contained a separate provision stating that “The Government of the Republic of Lithuania hereby approves the above agreement and acknowledges itself to be legally and contractually bound as if the Government were a signatory to the Agreement.”

After a dispute arose as to the rights to exploit certain oil fields, the plaintiff commenced arbitration against both the defendant and the Government of Lithuania, claiming, with respect to the latter, breach of its obligation to grant a license to exploit certain oil reserves. The Government of Lithuania argued that sovereign immunity shielded it from liability, and even if sovereign immunity did not protect it, the arbitration clause only applied to the plaintiff and to the defendant because Lithuania was not a “founder.” In response, the plaintiff argued that in the agreement the Government of Lithuania had expressly waived sovereign immunity, and although the Government of Lithuania was not a founder, it was subject to the arbitration clause because it had signed the abovementioned separate clause in the agreement according to which it would be contractually bound as if it were a signatory to the agreement.

The Arbitral Tribunal found that because the Government of Lithuania had agreed it would be bound as if it were a signatory to the agreement, it was subject to the arbitration clause. As to the merits the Arbitral Tribunal held that the defendant and the Government of Lithuania were jointly and severally liable for payment of damages to the plaintiff.

The plaintiff then filed for enforcement and recognition of the award in England, which was granted. Against this decision, both the defendant and the Government of Lithuania appealed.

On appeal, the Court considered both the issue of whether the Government of Lithuania had waived sovereign immunity and whether it had agreed to arbitration. In dealing with this latter issue, the Court looked to the relevant rules of contract interpretation contained in Articles 6.193 to 6.195 of the Lithuanian Civil Code, and also extensively quoted the commentary by an eminent Lithuanian scholar pointing out that those articles “repeat Articles 4.1 - 4.6 of the UNIDROIT Principles.” The Court noted that contrary to English law, the above-mentioned rules of contract interpretation allow for a greater amount of factual material to assist in interpreting the meaning of a contract, particularly in allowing for evidence of pre-contractual negotiations, earlier drafts of the contract, and each parties subjective intent. Applying those rules, the Court looked to the parties’ pre-contractual negotiations in the case at hand, including previous drafts of the agreement, to determine whether the parties had intended Lithuania to waive sovereign immunity and to be bound by the arbitration clause. The Court found that because previous drafts of the agreement contained terms waiving sovereign immunity for Lithuania and subjecting it to arbitration, the drafters had inappropriately used the term “founder” in stating which parties would be subject to arbitration. Furthermore, the Court found that at no point during negotiations did any of the contracting parties suggest that that the waiver of sovereign immunity only applied to the respondent. Accordingly, the Court decided in favour of the claimant, finding that Lithuanian had waived its sovereign immunity and had agreed to settle disputes through arbitration.

Fulltext

SVENSKA PETROLEUM EXPLORATION AB v GOVERNMENT OF THE REPUBLIC OF LITHUANIA (NO 2) [2005] EWHC 2437 (Comm)

QUEEN'S BENCH DIVISION (COMMERCIAL COURT)

[2006] 1 Lloyd's Rep 181

HEARING-DATES: 4 November 2005

4 November 2005

Mrs Justice GLOSTER

The further facts are stated in the judgment of Mrs Justice Gloster.

Introduction

1. On 28 April 1993, the claimant, Svenska Petroleum Exploration AB ("Svenska"), the first defendant, the Government of the Republic of Lithuania ("Lithuania" or "the State"), and the second defendant, AB Geonafta ("Geonafta") (collectively "the defendants"), signed a Joint Venture Agreement (the "JVA") in relation to the planned exploitation of various oil fields in Lithuania.

2. Svenska, as its name suggests, is a Swedish company employed in the business of oil exploration and extraction. Geonafta, previously known as Gargzdai State Petroleum Geology Enterprise and sometimes referred to in the relevant documents as "EPG", was formerly a Lithuanian State enterprise. It was privatised on 16 June 2000 and has since then been privately owned.

3. In June 2000, a dispute arose between the parties as to who was entitled to exploit certain specific oil fields. Svenska brought a claim against both Geonafta and the State before an ICC arbitral panel sitting in Denmark ("the Tribunal"). The State took the preliminary objection that it was not a party to the arbitration agreement contained in article 9 of the JVA. On 16 and 17 October 2001 there was a two-day hearing before the three-member Tribunal in Copenhagen at which all parties were fully represented in relation to the issues of jurisdiction and arbitrability. In a 69-page interim award ("the Interim Award"), issued on 21 December 2001, the Tribunal, (having considered all the various arguments which have been deployed before me on this hearing) unanimously held that the State was a party to the arbitration agreement. The State made no challenge to that finding in the Danish courts, although it was common ground that it was open to it to have done so. It is relevant to quote the following passage from the Interim Award at page 68:

”It is undisputed that no provisions of any Lithuanian law prevented Government from signing an arbitration agreement at the time when the JVC was signed in 1993. The issue of arbitrability only arises due to subsequent Lithuanian laws, ie article 29 of the underground law from 1995 and article 11 in the Law of Commercial Arbitration from 1996.

The JVC is a commercial contract regarding the exploration and exploitation of oil fields within Lithuania. The dispute between Svenska and Government is a dispute which relates to an alleged breach of contract by Government. Such a dispute is clearly arbitrable. The claims of Svenska, ie the relief sought from this Tribunal are divided into three different claims, a request for a declaratory award sentence, a request for damages and a request for a specific performance award ordering Government to abrogate an existing licence and to issue a new licence. The alleged non-arbitrability can in the opinion of the Arbitral Tribunal at most be applicable to that part of Svenska's claim, which relates to the revocation and issuance of licences. It follows that Government is obliged to answer to the remainder of the claims in any event.

Under these circumstances, the Arbitral Tribunal has not found it appropriate - at this stage of the case - to make a final decision whether the claim for revocation and issuance of licences is arbitrable, or whether the relief sought would be an appropriate relief in this matter.

Accordingly, the parties are invited to elaborate further on this issue in the course of the dealing with the merits of the case.”

4. Following a substantial hearing, in which the State fully participated, the Tribunal issued a final Award on 30 October 2003 ("the Final Award"). By that Award (which ran to 280 pages), the Tribunal held that the State and Geonafta were jointly and severally liable to pay the claimant the sum of US$12,579,000 by way of damages plus costs. That Award also determined the question of arbitrability, in relation to which the Tribunal (by a majority) held as follows:

“Arbitrability

“In his dissenting opinion, Mr Gytis Kaminskas has addressed the issue of arbitrability, and has concluded that the dispute related to the Principal Claim is not arbitrable under Lithuanian law by virtue of article 29 of the Underground Law and Articles 2 and 11 of the Law on Commercial Arbitration of 1995.

We do not agree with Mr Kaminska's position, and we believe that this issue was already decided upon in our Interim Award, dated 21 December 2001, in which Award the unanimous finding of the Arbitral Tribunal was stated as follows. . . [Here the Tribunal set out the passage that I have already quoted above].

. . .

The claimant has after the Interim Award withdrawn its claim for a specific performance award ordering first respondent to abrogate an existing license and issue a new license. claimant's requested remedy is now limited to a claim for damages. This claim is in the view of the majority clearly arbitrable under Lithuanian law. The parties have not previously nor after the Interim Award argued that the claim for damages is not arbitrable or that the Arbitral Tribunal otherwise lacks jurisdiction with respect to this claim.

Article 29 of the Underground Law and article 11 of the Law on Commercial Arbitration governs the administrative legal relations, which disputes are decided by the Administrative court of Lithuania. These provisions are not applicable to disputes originating from a commercial contract, where relief sought is a claim for damages.

The claim for damages is a claim for breach of contract and does not depend on or relate to the validity of any administrative or Governmental act, including the grant or revocation of any rights in relation to the underground either to the claimant, the second respondent or the JV-Company.”

5. The State made no challenge to that Final Award in the Danish courts. On the contrary, by resolution dated 11 February 2004 it resolved that:

“1.. . . It 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.

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.”

Neither Geonafta nor the State has honoured the Final Award.

6. On 2 April 2004, Svenska issued an arbitration claim form seeking permission to enforce the Final Award in England pursuant to section 101 of the Arbitration Act 1996. On 7 April 2004 Morison J gave Svenska permission to enforce the Final Award in England. Since the application had, in the usual way, been made without notice, the defendants were given a period of time in which to apply to set aside the order. Geonafta's challenge to the recognition and enforcement of the Final Award was dismissed by Cooke J on 24 August 2004. The State acknowledged service of the claim form on 31 August 2004, indicating in that acknowledgement that it intended to contest the court's jurisdiction. On the same day, the State issued an Application Notice pursuant to Part 11 of the CPR disputing the jurisdiction of the English court, and applied for an order that the claim form, the order of Morison J and the service of the enforcement proceedings on it be set aside on the grounds that, as an independent sovereign state, the State is immune from the jurisdiction of the English court, by virtue of section 1 of the State Immunity Act 1978 ("the Act"). This 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.”

Summary of the parties' contentions

7. 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 (section 2); that the proceedings do not relate to a commercial agreement (section 3); and that the State has not agreed in writing to submit a dispute which has arisen to arbitration (section 9).

8. 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 section 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 section 3 of the Act;

(iii) it was a party to the arbitration agreement contained in article 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 section 9 of the Act.

Factual background

9. It is necessary to set out the factual background to the JVA and the arbitration proceedings in some greater detail than the brief summary which I have already given.

10. In 1989, Swedish and Lithuanian parties commenced discussions concerning the exploitation of certain of Lithuania's oil reserves. Discussions were initially conducted between Svenska, on the one hand, and the Soviet Corporation of Geological Works ("LG") on the other. On 31 January 1991, Svenska and LG signed a Letter of Intent, outlining a framework for the development and exploration of Lithuanian oilfields. The parties to the letter of intent were defined as Svenska and LG only. In March of 1990 the Republic of Lithuania declared its independence. After independence, LG had to be liquidated. The liquidation of Soviet style companies was a common occurrence in all newly independent States following the collapse of the Soviet Union and the gradual replacement of Socialist law with legal systems more consistent with market economies. Geonafta succeeded to LG as the State Enterprise having a right to explore and develop oilfields in Lithuania. All rights and obligations under the Letter of Intent were transferred to Geonafta. This was confirmed by agreement between Svenska and Geonafta dated 13 June 1991. The parties to this agreement were Svenska and Geonafta only. Negotiations continued as I describe in greater detail below in relation to the concluding of an agreement for the development and exploration of the oilfields. Geonafta held the legal licence to exploit the oil reserves which were the subject matter of negotiations. The project would require State approval. In addition, petroleum exploration and exploitation were a priority in view of the trade embargo imposed by the Soviet Union in response to Lithuania's declaration of independence. Lithuania had been the very first of the Soviet States to restore its independence. Accordingly, the State Geological Survey ("SGS") participated in discussions and reported to the State on progress. Various drafts of the JVA were prepared by Svenska between 1991 and 1993. Some early versions of the arbitration agreements mentioned the State and it was proposed that the State should agree to an ICSID arbitration clause. As I shall describe below in greater detail, the final version of the JVA did not include such a provision.

11. It was eventually decided to create a joint venture company as the vehicle for cooperation between Svenska and Geonafta. This was reflected in the text of the draft JVA dated March 1992. This draft also introduces the concept of the "Founders" of the joint venture company. The term "Founder" has a legal meaning under Lithuanian law corresponding to that of an incorporating shareholder. All drafts of the JVA subsequent to March 1992 define Svenska and Geonafta as the "Founders". They also provide that Svenska and Geonafta are to be the incorporating shareholders of the joint venture company, each holding 50 per cent of the shares.

12. References to both the State and ICSID arbitration were removed from subsequent drafts of the arbitration clause which on its face refers only to arbitration between the two "Founders" of the JVA, Svenska and Geonafta, pursuant to ICC Rules.

13. By Government Resolution dated 27 March 1993, the State approved the terms of the JVA and the issuing of licences in relation to the Gencai oilfield. This resolution also specifically authorised Dr Gediminas Motuza, Head of SGS, to approve the JVA. On 28 April 1993, Svenska and Geonafta signed the JVA. The JVA provided for signature by each founder. The State also signed the last page of the JVA, but separately from the signatures of the Founders and under the following rubric in the English version:

“The Government of the Republic of Lithuania hereby approves the above agreement and acknowledges itself to be legally and contractually bound as if the Government were a signatory to the Agreement.”

The Lithuanian text of the expression accompanying Lithuania's signature is slightly different. It states:

“The Government of the Republic of Lithuania approves this agreement and undertakes the obligations as a signatory thereto.”

As the JVA was executed in both Lithuanian and English, article 37 of the JVA accords equal weight to both versions of the text. However I do not attach any significance to the slightly different wording for the purpose of the issues which I have to determine.

14. Pursuant to the terms of the JVA, a joint venture company was established by Svenska and Geonafta, called UAB Genciu Nafta ("the JV Company"). In the preamble to the JVA, Svenska and Geonafta were defined as "Founders". Svenska and Geonafta, as "Founders", each held 50 per cent of the share capital of the JV Company. The State was not defined as a "Founder" under the JVA and did not hold any shares in the JV Company.

15. Article 41 of the JVA provided that the parties would develop either or both of the Kretinga and Nausodis oilfields by a separate agreement. Disputes arose principally in respect of the development and exploration of the Kretinga and Nausodis oilfields. Article 41 of the JVA provided:

”Fields within the Agreement Area

As soon as practical after the Effective Date, Svenska shall carry out a technical economic feasibility study in respect of the Kretinga and Nausodis fields within the Agreement Area and the Parties shall, where the study, in the opinion of the Parties proves this to be economically feasible, develop either or both fields by a separate agreement.”

16. Svenska and Geonafta failed to agree terms for the development of the Kretinga and Nausodis oilfields as envisaged at article 41 of the JVA. Geonafta, which held the licence to develop these oilfields prior to the JVA, continued to develop them independently of Svenska. Svenska claimed that the JVA entitled Svenska to exclusive rights to develop the Kretinga and Nausodis oilfields. As a result, Svenska filed a Request for Arbitration with the ICC Secretariat on 12 June 2000. On 19 and 29 August 2000, the State wrote to Svenska and the ICC Secretariat stating an objection to jurisdiction on the alleged grounds that the State had not consented to arbitrate differences with Svenska. A three-member tribunal was appointed comprising Messrs Mogens Skipper-Pedersen, Edward Greeno and Gytis Kaminskas. Terms of Reference were agreed with the arbitral tribunal on 8 August 2001. These were signed with an express reservation in respect of jurisdiction on the State's part, in the following terms:

“[The State] declares that its signature of these Terms of Reference does not constitute an acceptance of the jurisdiction of the ICC Court of Arbitration and/or the Arbitral Tribunal.”

17. On 16 and 17 October 2001, a hearing took place in Copenhagen on the issue of the arbitrators' jurisdiction over the State. As I have already stated, the Tribunal issued the Interim Award on jurisdiction on 21 December 2001 in which it held that it had jurisdiction over the State. The Tribunal held that the State was a party to the JVA. It relied, in part, on the words of the JVA which express the State's consent to be contractually bound by the JVA. At page 63 of the Interim Award the Arbitrators held:

“The Arbitral Tribunal holds that by signing the [JVA] and by acknowledging itself to be legally and contractually bound "as if the Government were a signatory to the agreement," Government became a party to the Joint Venture Agreement with Svenska and [Geonafta]. . . By this signature, the agreement became effective in accordance with article 11.1 of the [JVA]. This interpretation is supported by Government Resolution No 205 of 27 March 1993, in which the Government authorises the Minster of Energy and Mr Motuza to approve the founding agreement of the Genciu Nafta enterprise "on behalf of the Government." The Arbitral Tribunal cannot accept Government's allegation that this signature is merely an approval by Government in its administrative capacity. As pointed out by Svenska, the [JVA] vests a number of rights and obligations on the part of Government, and it needs a strong support, which is not available in this case, to consider that Government's signature is of no significance to such rights and obligations . . .”

In the absence of any indication in the wording of the JVA or any other indication of intentions in relation to the arbitration agreement, the Tribunal also relied on a presumption of Lithuania's intent. At pages 63 and 65 the arbitrators said:

“The Arbitral Tribunal also holds that by signing the [JVA], Government is bound by the arbitration clause in article 9. Although Government signed the [JVA] in a different capacity than a "Founder", we have found that Government is as a party to the [JVA] signed "as if it was a "signatory" and therefore became bound by the provisions of the [JVA], as if Government had been a "Founder". Government is therefore also bound by the arbitration provision in article 9 unless there is support for an allegation that Government intended a different dispute resolution mechanism. [. . .] Such support does not exist”. . . .

“The [JVA] was an agreement between three parties, each having its rights and obligations. . . In such a contract there is an implicit assumption that the parties have agreed to the same dispute resolution mechanism.”

Does the State fall within the exception contained in section 2 of the Act?

23. The first issue for my determination is whether the State falls within the exception contained in section 2 of the Act. Section 2 provides (so far as is material) 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.”

24. One of the terms of the JVA was article 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 business activities generally accepted in the petroleum industry if they do not contradict the laws of the Republic of Lithuania.”

25. However, the State contends that, on its true construction (as allegedly demonstrated by evidence as to the purpose of article 35, given by a Professor Katuoka and corroborated by a Mr Zukovskis), article 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.

26. The JVA contains no express submission to the jurisdiction of the English court. Article 9 of the JVA does contain an arbitration agreement referring disputes between the two "Founders" (which is the collective definition set out 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-para (b) of this paragraph.”

27. 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 section 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 article 35, that waiver under article 35 did not per se amount to a submission to the English court's jurisdiction for the purposes of section 2; accordingly, article 35 cannot assist Svenska unless the State is also found to have agreed that it would be a party to arbitration proceedings under article 9 of the JVA.

28. Therefore the questions which, as I see it, I have to decide under this head are as follows:

(i) on the true construction of article 35, did the State waive its own sovereign immunity thereunder, or did article 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 clause 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 article 9 of the JVA.

If the answer to sub-issue (ii) is that the waiver of the State's immunity contained in clause 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 article 9 of the JVA, because only in that event would the court have jurisdiction to enforce the Award, then there is no separate or free-standing issue under section 2 of the Act, since in reality the issue falls to be decided under section 9.

29. 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 articles 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 article 6.193 represents a complete statement. In addition, the State relied on "international law and practice", which Mr Shackleton 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 edn) at paras 19-019 and 32-188-9; the Fourth Supplement thereto (2004) at page 26 and authorities 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 article 35 were not legitimate aids to my determination.

30. Articles 6.193-5 of the Lithuanian Civil Code and the relevant commentary (excluding footnotes) are as follows:

“Article 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.

2. All terms and conditions of the contract must be interpreted taking into account their interrelation, the essence of the contract as well as its purpose and the circumstances of its conclusion. When interpreting a contract, it is necessary to have due regard to usual terms and conditions, although they are not provided for in the contract.

3. In the event of doubt concerning terms which may have several meanings, the meaning, which is most suitable according to the nature, essence and subject-matter of the contract, shall be attributed to these terms.

4. In the event of doubt concerning contractual conditions, these shall be interpreted against the contracting party that proposed such conditions, and in favour of the party that accepted them. In all cases, the conditions of a contract must be interpreted in favour of consumers or a party who concludes a contract by way of adherence.

5. When interpreting the contract, pre- contractual negotiations, an established course of conduct between the parties, post-contractual conduct and existing usages shall be taken into consideration as well.

Article 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.

Article 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.

. . .

The Commentary:

1. The article commented on repeats articles 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.

In accordance with article 45 of the Law on Approval, Entry into Force, and Implementation of the Civil Code of the Republic of Lithuania, articles 6.193-6.195 of the Civil Code are applied to the interpretation of contracts irrespective of the time of their conclusion. This rule is set out because the rules on the interpretation of contracts provided in the article commented on are not new - they were known and recognised by both legal doctrine and judicial practice before the entry into force of the Civil Code.

Paragraph 1 of the article establishes two significant principles of interpretation of contracts. First, contracts must be interpreted in good faith. This principle requires that consideration be given to the intentions of both parties, analysis of the contract as a whole, and not certain part[s] of it, and in case of doubt as to the validity of a contract, to give priority to an interpretation that confirms the validity of the contract, etc. In addition to good faith, the principles of justice and reasonableness must be applied when interpreting contracts. For instance, both good faith and justice require that a contract be interpreted in favour of a party which is economically weaker, eg for the benefit of the consumer or an employee or a party which concluded the contract by way of adherence.Second, the article commented on embodies the principle of subjective interpretation of contracts which requires the determination of the true intentions of the parties and not only the written text of the contract. This principle means that in case of any discrepancy between the textual meaning of provisions of the contract and the true intentions of the parties, priority must be given to the parties' true intentions which they had in mind when concluding the contract. However, this principle should not be overestimated. In case the parties' true intentions vary, attention should be focused on the textual analysis of the contract, since it might be helpful in determining which party's intentions correspond to the textual meaning of the contract. Therefore, the article commented on also establishes that when the parties' true intentions cannot be determined, the contract must be interpreted in the way a reasonable person, being a party under identical circumstances, eg having the same profession, experience or qualification, would understand its text.

2. Paragraph 2 of the 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 (eg 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 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 (article 6.196 of the Civil Code). Therefore, when inter- preting 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.

Another principle of contractual interpretation is the determination of its objectives. The purposes of a contract may help to reveal the parties' true intentions, the meaning of one or another condition, etc. The purposes of the contract may help to determine the type, nature of the contract and the extent of mutual rights and duties of the parties.

3. Paragraph 3 of the article commented on sets out the rule of interpretation when polysemic 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 preferentem 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, ie 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 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 (para 1 of the article being commented on).Frequently, after lengthy negotiations parties include in the contract a special condition indicating that this is to be the sole agreement and the whole previous correspondence of the parties or the signed documents become invalid (the reservation of integration or consolidation). However, such a contractual condition does not have any impact on the interpretation of the contract - the whole pre-contractual documentation between the parties may be used for the interpretation of the contract and for the determination of the common intentions of the parties.”

31. In my judgment, and applying the rules and principles set out in article 6, as amplified by the Commentary, on the true interpretation of article 35 of the JVA, the State clearly waived its own sovereign immunity thereunder, and it is impossible sensibly to construe article 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.

The applicable principles of Lithuanian Law

80. 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; see Professor Katuoka's Report, §§62-64.

(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; see the First Report of Dr Foigt, page 7; and Professor Katuoka's Report, §64.

(iii) The principle of the separability of arbitration agreements is well-recognized under Lithuanian law; ie arbitration agreements/ clauses are separable from the contracts in which they might be contained; see Professor Katuoka's Report, §§83-89 and Second Report of Dr Foigt, §§27-28.

(iv) A valid arbitration agreement required the parties to express their common will to submit disputes between themselves to arbitration in writing; see Professor Katuoka's Report §§71-73.

(v) Although the JVA was concluded in 1993, when construing it and, in particular, article 9, the Civil Code 2000 (which entered into force on 1 July 2001) must be applied; article 45 of the Law on Approval, Coming into Force and Enforcement of the Civil Code of the Republic of Lithuania, dated 18 July 2000; see Professor Katuoka's Report, §§76-77 pp 16-17 and Second Report of Dr Foigt, §16.

81. Article 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.

82. I accept Mr Bools' 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".

83. 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 article 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.

Conclusion

139. In my judgment, the evidence of the parties' pre-contractual negotiations demonstrates the 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 article 9 of the Final JVA should apply to disputes between the State and Svenska, notwithstanding the inappropriate use of the words "Founders" and other words in that clause. In reaching this conclusion I have given due weight to the wording in clause 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 article 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 article 9 of the JVA and therefore it is not entitled to State immunity in the present proceedings by virtue of section 9 of the Act.}}

Source

}}