Gazprom v Lithuania: SCC Tribunal Rules on Arbitration Clause and Parallel Litigation

Lithuanian leading natural gas company Lietuvos Dujos is in the centre of a number of litigations and arbitrations between Gazprom and Lithuania, which are both shareholders in the company.

Gazprom is challenging Lithuania’s recent regulations requiring Lietuvos Dujos to divest its gas transit assets as a breach of the bilateral investment treaty between the Russian Federation and Lithuania. The Lithuanian Ministry of Energy meanwhile asked the Lithuanian courts to investigate whether the conduct of Lietuvos Dujos and members of its Board appointed by Gazprom was consistent with the interests of the company.

The Lithuanian litigation became the subject of a separate arbitration, with its final award being published this week. The award was rendered on 31 July 2012 by an SCC tribunal. The Russian gas giant argued that Lithuania’s attempt to litigate certain matters relating to the management of Lietuvos Dujos before the Lithuanian courts was a breach of the shareholders’ agreement to which Gazprom and the Ministry of Energy of Lithuania are parties.

Both sides claimed that the SCC tribunal award supported their position.
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We are now able to report on the actual decision of the tribunal.

Facts of the case

Lietuvos Dujos has three major shareholders, which in addition to Gazprom (37.1%) and the Ministry of Energy of Lithuania (17.7%) includes E.ON Ruhrgas (38.91%). In 2004 these shareholders entered into a shareholders’ agreement (the “SHA”). The agreement requires all disputes arising out of or in connection with it to be resolved by arbitration under the SCC Rules. According to the SHA any transactions between the parties and Lietuvos Dujos should be entered into on an arm’s length basis. The agreement also requires the parties to ensure the long-term supply of gas to Lietuvos Dujos and long-term transit of gas to the Kaliningrad Region (Russia) on terms which are beneficial to both the company and the supplier (Gazprom).

At the end of 2010 and at the beginning of 2011 the Board of Lietuvos Dujos approved the terms of supply of natural gas by Gazprom and the terms of transit of gas to the Kaliningrad Region for 2011.  A representative of the government of Lithuania voted against approval of the supply terms, but for approval of the transit terms.

In March 2011 the Ministry of Energy of Lithuania commenced “investigation proceedings” before the Lithuanian courts arguing that the actions of Lietuvos Dujos, the members of its Board appointed by Gazprom and its CEO in relation to the new terms of gas supply and gas transit were against the interests of the company.

So far the Lithuanian courts have not rendered their decision. However, Gazprom commenced SCC arbitration arguing that the Lithuanian Ministry of Energy’s conduct was in breach of the arbitration clause in the SHA.

Findings of the Tribunal

Lithuania argued that the investigation proceedings were not contrary to the arbitration clause. It argued that Gazprom was not party to those proceedings and the directors and the company (Lietuvos Dujos) which were parties to those proceedings were not parties to the SHA.
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Hence it was not a dispute arising out of the SHA. This argument was dismissed by the Tribunal. Firstly, the Tribunal found that the arbitration clause in the SHA was broad as it covered disputes “in connection with [the SHA]”. Secondly, it found that the parties were under an obligation to act in good faith and using a parallel statutory remedy to sidestep the arbitration clause could be a breach of this obligation.

However, according to the Tribunal two conditions had to be cumulatively satisfied for a finding of lack of good faith. These were: (i) parallel litigation would affect the rights of the other shareholder under the SHA; and (ii) the remedy sought by the shareholder in the parallel litigation could be granted by the arbitral tribunal.

The Tribunal then went on to analyse the claims before the Lithuanian courts in light of these conditions. It concluded that the Lithuanian courts may neither be asked to order Lietuvos Dujos to renegotiate its gas supply and gas transit contract with Gazprom nor transfer the right to vote held by a shareholder of Lietuvos Dujos to a different party, as all these claims would be covered by the SHA.
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However, it concluded that commencement of litigation questioning the performance of a fiduciary duty by an officer of Lietuvos Dujos and seeking invalidation of a decision adopted by its managing body as a result of such breach would be consistent with the SHA.  The Tribunal found that these claims are not covered by the agreement and a tribunal acting under the SHA arbitration clause would not be in the position to invalidate a decision of Lietuvos Dujos’s management body. It also confirmed that Lithuania may commence litigation seeking the invalidation of a provision of the constitutive documents of Lietuvos Dujos, because this remedy may not be granted by an arbitral tribunal.  The Tribunal went on to hold that the liquidation of Lietuvos Dujos may also be sought before the Lithuanian courts because a tribunal would not be in the position to order such a measure.

On the basis of these findings the Tribunal concluded that certain aspects of the Ministry of Energy’s claims before the Lithuanian courts were in breach of the SHA. Since neither party contested the Tribunal’s right to order specific performance, it ordered the Ministry of Energy to withdraw such claims so as to remove any inconsistency with the SHA.

Gazprom also sought reimbursement of costs it allegedly incurred for the purposes of funding Lietuvos Dujos’ and members of its Board’s defence of claims brought before the Lithuanian courts. However, the Tribunal held that since the commencement of investigation proceedings was not in itself contrary to the SHA and it was impossible to allocate the costs incurred between various claims, this relief should be denied.

The award is available here.

Sergey Usoskin