Company closure a threat to state reputation.

VILNIUS -- British lawyer Michael Polonsky says that the Republic of Lithuania will be liable to repay 2.7 billion litas (782.6 million euros) to the company NDX Energija for its decision to close LEO LT, reports news agency bbn.ee. After Lithuanian politicians have taken the decision to end operations of LEO LT, the Republic of Lithuania will have to repay investments to its founders and redeem any forfeiture due in the contract signed with NDX Energija.

Meanwhile, forfeit claims that would be examined in the International Court of Arbitration would have a negative impact on Lithuania's reliability as an investment partner. According to the lawyers, the contract signed by its founders clearly indicates all possible ways of solving disputes, whereas a cooperation contract signed between private companies and the state cannot be treated differently than provided in the contract. According to Polonsky, if a state breaches a contract by deciding to withdraw from commitments indicated in it, the state has to take the consequences.

"To the extent that the claims which are envisaged against the Lithuanian state are claims relating to, or arising out of, a commercial transaction, in our opinion there would be no immunity from the jurisdiction," says Michael Polonsky, partner at the London-based law-firm Berwin Leighton Paisner. Polonsky has made a name for himself, and is regarded for his expertise in all aspects of commercial litigation, including claims for breach of contract. LEO LT was established on May 20, 2008 as the national energy company, with the help of its secondary enterprises, controlling the main part of the Lithuanian electricity system--the transmission system and distribution networks.

The company was set up to facilitate the development of the new nuclear power station scheduled to replace the existing Ignalina plant, planned for shutdown at the end of this year. Establishment of the company was also linked to the country's goal to independently develop its energy strategy and to create electricity connections with Sweden and Poland. Investments by NDX Energija in the creation of LEO LT have reached a reported 2.7 billion litas. This amount should be repaid if LEO LT is closed, whereas damage which occurred due to forfeit would have to be determined in court, with the Republic of Lithuania being the main defendant in breach of the contract, as it initiated liquidation of the company.

The Lithuanian government made the decision this summer to withdraw from the contract and to dissolve LEO LT. According to Lithuanian Prime Minister Andrius Kubilius, liquidation of LEO LT was to be included on the agenda of the shareholders' meeting on the Sept. 4.

Lithuanian politicians claim that dissolution of LEO LT would cost around 3 billion litas. According to Lithuanian daily Kauno diena, this amount, in the form of forfeiture and compensation, should be paid from the country's budget. Kubilius has mentioned potential huge losses for the country and therefore has evaluated the radical proposal to dissolve the company in a modest, and even skeptical, way. According to Polonsky, no exceptions can be applied that are not included in the contract

While establishing LEO LT both the Lithuanian state and NDX Energija put in shares into the new venture. NDX Energija provided the newly established company with the shares of Vakaru skirstomieji tinklai (Western Distribution Networks), having a market value at the time of 2.7 billion litas. The Lithuanian state put in shares of Rytu skirstomieji tinklai (Eastern Distribution Networks) and shares of Lietuvos energija (Lithuanian energy).

According to Polonsky, in case of dissolution of the jointly established company, investments from each side have to be returned, whereas in the case of a breach of contract, the solution has to be found in the Stockholm Court of Arbitration.

He claims that such a dispute undoubtedly would be disadvantageous to the state, both financially and due to the loss of reputation. "Such a dispute would substantially damage the reliability of any country. This would mean a severe mistake, having consequences in the long run as well," said Polonsky. This would not be the first case in the Baltics where a country, obliged to repay all investments from private capital, in addition to compensation, in forfeiture. Stockholm Court of Arbitration already had a case, between the Republic of Latvia and Swedish energy company Nycomb, which was won by the Swedish concern. Nycomb lodged a complaint concerning Latvia's self-directed actions while it was developing a common energy project.

LEO LT is 61.7 percent owned by the Republic of Lithuania, with the balance 38.3 percent owned by NDX Energija.

Staff and wire reports