Recent years have seen a remarkable increase in the number of international arbitration disputes involving Romanian parties. In light of its flexibility, of the freedom parties have in constituting the arbitral tribunal and choosing the seat and language of the arbitration, and the perceived speedy and effortless enforceability of arbitral awards, international arbitration has become a widely-used dispute settlement mechanism.
A great number of disputes referred to international arbitration involve state-owned companies and arise from contracts regarding projects of national importance spanning various sectors and industries. Often highly publicized, these high-stake cases often entail lengthy and complex arbitration proceedings, involving a multitude of sensitive and intricate contractual and legal matters. Recent highly-publicized arbitrations in Romania have involved the privatization of state-owned companies responsible for the supply and distribution of energy and the modernization and rehabilitation of several major national roads.
Parties taking part in such disputes face a difficult and challenging legal battle, in which retaining experienced and specialized legal counsel possessing a strong knowledge of the applicable procedural rules and a good understanding of the particularities of the arbitration proceedings is a key component.
Nevertheless, while the stakes are high, in practice, Romanian state-owned companies often struggle with the process of retaining proper and timely legal representation, all too often pursuing an excessively burdensome and unnecessarily long public procurement procedure, which can have a significantly detrimental effect on the company’s interests and legal position.
In particular, this may be seen where a private entity initiates arbitration proceedings against a Romanian state-owned company which is forced to react promptly in preparing its defense. Failing to retain counsel in a prompt and speedy manner in these cases can deprive the state-owned company of legal representation during the incipient stages of the arbitration, which include several essential elements in the proceedings, such as the constitution of the arbitral tribunal, the execution of the terms of reference, the finalization of the procedural timetable, and the submission of potential counterclaims.
Thus, it is not unusual to find that by the time a state-owned company has succeeded in retaining legal counsel, the arbitration proceedings are already well underway, and significant opportunities to consolidate its position have been irrevocably lost.
In addition to its considerable length, the process employed by Romanian state-owned companies to retain legal representation is often rigid and formalistic, with the essential criterion being the lowest price, rather than an appropriate level of arbitration expertise. Indeed, a selection process relying on the lowest price, grounded in apparent budgetary constraints, has several disadvantages, including the fact that relying on a purely formal analysis makes a genuine assessment of the candidates based on the breadth of their international arbitration expertise or their understanding of the particular legal and factual circumstances of the case impossible.
As a consequence, the lowest price approach, by prioritizing the short-term benefits of controlling the immediate and direct costs of the legal representation, risks surrendering the ability to retain the firm with the highest professional expertise and track record in favor of an inadequately prepared counsel who lacks the resources and experience required to provide efficient and proper legal representation. Thus, in the long-term, failure to retain suitable counsel may have a significant impact on the position of the state-owned company in the arbitration proceedings and on its ability to effectively present its case.
Considering the specific and complex nature of international arbitration proceedings, entailing substantial amounts in dispute and a host of difficult legal and contractual matters, we recommended that state-owned entities rethink the manner in which they retain legal representation and focus on ensuring that they benefit from the services of highly experienced external counsel that is familiar with the specifics of the arbitration process. In order for that to happen, Romanian state-owned enterprises need to identify a simplified and speedy selection process grounded on multiple objective criteria, rather than the restrictive “lowest price” requirement currently in place.
By Gheorghe Buta, Partner, Head of Litigation & Arbitration, Musat & Asociatii
This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.