- Arbitral Award
- ICC International Court of Arbitration 10021
LONG-TERM CONTRACTS - SHAREHOLDERS AGREEMENT - SUBJECT TO A PARTICULAR DOMESTIC LAW (LITHUANIAN LAW) - CONCURRENT APPLICATION OF "RELEVANT TRADE USAGES" ACCORDING TO ARTICLE 17 ICC ARBITRATION RULES - REFERENCE TO THE UNIDROIT PRINCIPLES AS "CODIFIED TRADE USAGES"
SHAREHOLDERS' AGREEMENT FOR AN INDEFINITE PERIOD OF TIME - CAN BE ENDED BY EITHER PARTIES ONLY BY GIVING NOTICE A REASONABLE TIME IN ADVANCE (ARTICLE 5.8 [ART. 5.1.8 OF THE 2004 EDITION] OF THE UNIDROIT PRINCIPLES)
DESTRUCTION OF MUTUAL TRUST BETWEEN PARTIES TO SHAREHOLDERS' AGREEMENT - NOT NECESSARILY CASE OF HARDSHIP ACCORDING TO ARTICLE 6.2.2 OF THE UNIDROIT PRINCIPLES
TERMINATION OF SHAREHOLDERS' AGREEMENT BECAUSE OF CASE OF HARDSHIP - ONLY IF NEGOTIATIONS FOR ADAPTATION OF TERMS OF AGREEMENT FAIL (ARTICLE 6.2.3 OF THE UNIDROIT PRINCIPLES)
Claimant and Defendant had entered into a Shareholders’ Agreement aimed at ensuring cooperation between the parties with a view to improving the production and export of cement by the company registered in Lithuania.
The dispute arose after Defendant declared the Shareholders’ Agreement terminated and began negotiating with a competitor. Claimant asked the Arbitral Tribunal to order Defendant to respect the Agreement. Defendant insisted on termination, invoking, among others, its right to unilaterally put an end to the Agreement and the disruption of the relationship between the parties which in its view amounted to a case of hardship.
The Agreement was governed by the law of Lithuania. However, the Arbitral Tribunal based its decision not only on the relevant provisions of the Lithuanian Civil Code, but also in accordance with Article 17 of the ICC Rules of Arbitration on the relevant trade usages and in this context expressly referred to the UNIDROIT Principles as “codified trade usages” though declaring that such a reference “is rather of persuasive than binding nature”.
As to the merits, the Arbitral Tribunal pointed out that neither the Agreement nor the Lithuanian Civil Code contained a provision permitting a party unilaterally to terminate an agreement with immediate effect. Also Article 5.8 [Art. 5.1.8 of the 2004 edition] of the UNIDROIT Principles provides that contracts for an indefinite period of time may be terminated by either party only by giving notice a reasonable time in advance. With respect to the alleged hardship due to the disruption of the relationship between the parties, the Arbitral Tribunal first of all denied that disruption of the relationship between the parties constituted hardship which by its very nature implied an advantaged and a disadvantaged party. In any case, according to both Article 177 of the Lithuanian Civil Code and Article 6.2.3 of the UNIDROIT Principles in case of hardship the disadvantaged party is not entitled to declare termination of its own accord but has to request the Court or Arbitral Tribunal to do so, and according to Article 6.2.3 of the UNIDROIT Principles, only after that party has requested renegotiation and renegotiation has failed.
VALIDITY OF THE SHAREHOLDERS’ AGREEMENT
(26) Respondents have presented two groups of arguments with respect to the validity of the Shareholders’ Agreement. The first group of arguments concentrates on the validity of the Shareholders’ Agreement and is invoked with respect to Article 3.2 [of the Shareholders’ Agreement]. It will be discussed together with the second aspect of the Respondents’ case with respect to the validity of the Shareholders’ Agreement, namely the alleged termination of the agreement.
(27) Respondents argue that the Shareholders’ Agreement is not valid, since it has not been set up according to the mandatory requirements of Article X, section Y, subsection Z of the Lithuanian Company Law. This provision, as argued by Respondents, defines the minimum content requirement for a shareholders’ agreement. The Shareholders’ Agreement does not prescribe its duration and, in Respondents’ opinion, Article […] [of the Agreement] restricts shareholders’ rights, which, according to Article X, section Y, subsection Z of the Company Law [of Eastern Europe Country A] cannot be restricted.
(32) The second cause of termination given by Respondents in the above mentioned letter was the disruption of the relationship between the parties. The Arbitral Tribunal is aware of the strains in the relationship between the parties and finds that the Shareholders’ Agreement does not expressly provide for ways in which the agreement can be terminated at the instance of only one party. Articles 244 to 252 of the Lithuanian Civil Code (Article 244: End of Obligation by Discharge; 245: End of Obligation bye Mutual Settlement; 246: Prohibition of Mutual Settlement, 247. Mutual Settlement in Case of transfer of claim; 248: End of Obligation by Agreement of Parties; 251: End of Obligation Due to Impossibility of Performance; 252: End of Obligation upon Death of Natural Person or Liquidation of Legal Person) are general provisions dealing with termination of contractual obligations, and do not offer any solution to this question. If the disruption of relationship of the parties is characterized as hardship, Article 177 of the Lithuanian Civil Code provides that:
“It shall be prohibited to unilaterally refuse to discharge an obligation and to unilaterally modify the terms of a contract, except for the case provided by a contract or laws.
In the event by virtue of any extraordinary change in circumstances the discharge on an obligation involves great difficulties or either party is likely to suffer great expenses that are obviously not adequate, which expenses could not have been foreseen by the party when executing the contract, then the court may, upon assessment of the interest of the parties, based on the demand of the party concerned, determine the amount of payment to be discharged or it may terminate the contract. When termination the contract, the court shall make a decision concerning the set-off to be effected by either party with respect to the other party, taking account of the contract executed by the parties, the extent to which the contract has been discharged and the change in the circumstances.”
It is accordingly up to the court (or, where the relevant obligation is covered by an arbitration agreement, as in the present case, the arbitrators) to decide whether to sanction the termination of the Agreement on grounds of hardship. Respondents have not asked the Tribunal to terminate the Agreement and (correctly in the Tribunal’s view) have not sought to argue that they are entitled to apply to the Lithuanian courts to rule on this question.
(33) As authorized by Article 17 of the [ICC Arbitration] Rules, the Arbitrators refer to the relevant trade usages in order to establish whether the purported termination might have been valid. In this respect the reference to the UNIDROIT Principles, as codified trade usages, is rather of persuasive than binding nature, and is in support of the Tribunal’s view that the purported termination of the Shareholders’ Agreement is invalid and without effect.
Article 5.8. of the UNIDROIT Principles provides that
“A contract for an indefinite period of time may be ended by either party by giving notice a reasonable time in advance”
Reasonable time can be interpreted differently under different circumstances, but termination with immediate effect, as was purportedly done by Respondents […] cannot, under the circumstances of this case, qualify as “reasonable time”.
Even if the disruption of the relationship between the parties were to be qualified as hardship according to Article 6.2.3 of the UNIDROIT Principles which states:
“(1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based.
(2) The request for renegotiation does not in itself entitle the disadvantaged parties to withhold performance.
(3) Upon failure to reach agreement within a reasonable time either party may resort to the court.
(4) If the court finds hardship it may, if reasonable,
a. terminate the contract at a date and on terms to be fixed, or
b. adapt the contract with a view to restoring its equilibrium”,
the disadvantaged party (it is very doubtful whether Respondents due to their behaviour, can be qualified as disadvantaged parties) is entitled to request renegotiations. Only if the renegotiations fail may the disadvantaged party resort to the arbitral tribunal, which will decide whether to terminate the agreement or to adapt it. From this it follows that the Shareholders’ Agreement is valid and in force, since the grounds invoked and the attempted method of termination of the Agreement were unjustified on the facts and improper both by applicable Lithuanian law and relevant trade usages.