Pathological Arbitration Clauses in Lithuanian Case Law

The Lithuanian courts have lately shown very positive trends of becoming an arbitration-friendly destination. Over the last couple of years, the Supreme Court has produced a spectrum of judgments infused with a western pro-arbitration attitude. These judgments make ubiquitous references to the UNCITRAL Model Law, as well as the writings of Gary B. Born and other authors.

Not surprisingly, the pro-arbitration sentiment has become prevalent in the Lithuanian courts’ approach towards pathological arbitration clauses. Two Supreme Court cases clearly resonate the aforesaid.

Reference to a non-existing institution

In the case of UAB AK „Aviabaltika“ v Flight Test Aerospace Inc., the Supreme Court dealt with the following arbitration clause:

If the parties fail to reach an agreement, all disputes and disagreements that may arise out of this Agreement or in connection with it, shall be settled by Arbitration in the Arbitration Court of the Chamber of Commerce of the Republic of Lithuania in accordance with the applicable arbitral procedure. Arbitral Awards shall be final and binding on both parties.

As it turned out in the course of the proceedings, no such arbitral institution existed. The claimant brought an action in the national court, claiming the arbitration clause was void ab initio and consequently all the disputes must be submitted to the domestic courts. The respondent relied on the arbitration clause above and moved to dismiss.

The Supreme Court upheld the pathological clause. It reasoned that in cases where the Court decides on the validity of a “pathological” arbitration agreement, the Court is obliged to find out the meaning of such arbitration agreement, and any doubts as to the existence or validity of the arbitration agreement must be interpreted in favour of the validity of the arbitration agreement, ie the Court relied on the in favor contractus principle.

The Supreme Court also explained that if the parties have expressed their intention to settle their disputes in arbitration, the Court should respect such intention of the parties, even if some aspects of the arbitration agreement are inaccurate. Importantly, the Court emphasised its duty to give due consideration not only to the wording of the arbitration clause, but also to all other evidence gathered. In the Court’s reasoning, failure to correctly specify the arbitral institution does not render the arbitration clause null and void so long as the casefile presents sufficient evidence to single out the institution which the parties intended to designate.

In the case at hand, the wording of the arbitration clause, in the Court’s opinion, clearly nominated the predecessor of the Vilnius Court of Commercial Arbitration, namely the Arbitration Court at the Association International Chamber of Commerce Lithuania. Therefore, the Supreme Court had given effect to the pathological clause designating the Vilnius Court of Commercial Arbitration as the institution of the parties’ choice.

Failure to designate any Arbitral institution

In another case, UAB „Kistela“ shareholders v UAB „Kistela“, the Supreme Court even went beyond the conclusions discussed above. In a nutshell, the Court reasoned that as long as the parties clearly and unambiguously showed intent to arbitrate, the arbitration agreement is valid even if its text does not determine the institution, composition of the tribunal, place or arbitral procedure. The arbitration clause read:

All disputes arising between the company and the shareholders or between the shareholders based on the membership in the company, as well as disputes arising out of the Articles of Incorporation or validity its respective provisions shall be resolved by a mediator, without the recourse to the courts. If no agreement is reached, the dispute shall be referred to the Court of Arbitration on jurisdiction, composition and procedure of which the companies agreed in a separate document.

No separate document, as specified in the clause, existed. Thus, essentially the parties expressed their will to arbitrate without ever agreeing on any institution.

The Supreme Court upheld the pathological clause, noting that where the parties have expressed their intention to settle disputes in arbitration, the court must give effect to their arbitration agreement, even vague, unless it gives “a clear advantage” to any of the parties.

The Court explained that the parties had effectively waived their right to litigate their dispute in court in writing, and thus are bound by such clause. According to the Supreme Court, the defects of the clause could have been cured under the principles enshrined in lex arbitri, including competence-competence.

Conclusion

The case law of the Lithuanian Supreme Court has repeatedly demonstrated a liberal attitude towards arbitration. National courts consistently rely on in favor contractus and effective interpretation principles (see also the UAB „Marijampolės pieno konservai“ v „Interfood B. V.“ case) to give effect to interpretation of arbitration clauses which will ensure the validity of the arbitration agreement.

Although international practice shows that upholding vague or dubious clauses may lead to certain controversies, the approach of the Lithuanian Supreme Court must be viewed as an extremely positive development, solidifying Lithuania’s position as a place of arbitration.

Denis Parchajev

Motieka & Audzevicius Law Firm