Who Should Speak on Behalf of the State? Rethinking State Representation by External Counsel in International Arbitration: the Lithuanian Experience

International arbitration can be reasonably attributed to the crème de la crème of the legal profession. This is especially true when counsel represents governmental interests in either investment or commercial arbitration, which often lies at the complex interplay between law and politics.

Since the restoration of its independence (1990), Lithuania has faced a relatively small number (overall, nine) of investment disputes brought against it. Regarding commercial arbitration, the exact number [AC1] [AA2] of such disputes is unknown due to the confidential nature of these proceedings. In publicly available sources, it was possible to identify only one commercial arbitration case, OAO Gazprom v. The Republic of Lithuania.

As of 2025, there are two pending investment arbitration cases involving Lithuania as the Respondent: one filed against it by OAO „Belaruskalij“ and another by „Hasenberg AG“.  The amount of damages sought by applicants therein is indeed a record, with OAO „Belaruskalij“ alleging USD 12 billion in damages, while „Hasenberg AG“ claims EUR 15 billion. If successful, the enforcement of potential awards may have significant implications for the Lithuanian budget. Consequently, the defence strategy in these high-profile cases would require a scrupulous approach from experienced practitioners in the domain.

Against this backdrop, the Government’s recent initiative to transition the state interests representation in all arbitration cases to the Lithuanian Ministry of Justice, excluding external counsel due to the high costs of their services, caused resonance. In this post, we analyze the current Lithuanian regulation on the engagement of external advisors in investment and commercial arbitration, the practices of other countries in this respect, and attempt to answer the question of whether this initiative is justifiable.

Current Lithuanian Regulation on External Counsel Engagement and Suggested Changes

As it stands today, the matter is regulated by the Law on Representation of the State and the Government of the Republic of Lithuania. It is stipulated therein that the interests of Lithuania are represented in the arbitration by the Government itself or state institutions authorized by the Government. Attorneys or other legal professionals may be engaged if the case is complex, requires special knowledge, expertise, understanding of foreign law, or in other instances where this is necessary to ensure the proper and effective protection of the state’s interests (see Article 5).

It is difficult to disagree that counsel fees often constitute the vast majority of the overall cost in arbitration. Some studies even note the situations where more than 80% of all legal costs in arbitration were spent on counsel.

To solve this issue, the Lithuanian Ministry of Justice suggests that representation in all arbitration proceedings should fall within its exclusive mandate. As reported, for this purpose, the Ministry of Justice plans to open 4-5 new positions in order to onboard specialists with relevant expertise. The allocated state servants within the Ministry would take over the arbitration cases, thereby avoiding the high expense of external advisors.

In the authors’ opinion, in the context of ongoing arbitrations alleging tremendous damage amounts, this approach is not without disadvantages.

First, the number of internal advisors for disputes that may have a significant impact on the state budget (if they are lost) is unjustifiably small. Such complex disputes require a much larger number of counsels engaged, especially taking into account that some of them may leave the Ministry later on.

Second, it goes without saying that arbitration has numerous nuances, ranging from selecting the “right” arbitrator for a particular case to challenging the award. As the Lithuanian practice demonstrates (e.g., in Veolia arbitration), this type of dispute may last for decades. In the long run, the competence of specialists who practice arbitration on a daily basis may be crucial to achieving a successful outcome.

Last but not least, the cost of external counsel against the relief sought by claimants appears not that huge if compared in proportion. We consider that analyzing the practices of foreign states could help identify alternative ways to mitigate controversies.

Worldwide Practice on Representation of a State by External and Internal Counsels

The most recent empirical survey on this topic has been carried out for the Latin American countries (2024). The survey demonstrates that there are three predominant approaches present with respect to hiring external legal advisors for representation in arbitration proceedings: (i) direct contact by state authorities, (ii) open public procurement, and (iii) invitations to tender to firms that have already been pre-selected by the state authorities.

The last point means that a state authority maintains a roster of certain law firms that can be suggested to file their proposals to represent the state in arbitration. A mixed approach is also possible: for example, a state authority typically organizes a public procurement procedure but may contact law firms directly in emergency cases.

Among the nineteen American States that submitted answers to the survey, only three states replied that they currently rely on their own government lawyers to handle the state’s defence. Argentina is one of the countries that operates in this manner. The Argentine experience is noteworthy, as this country has been involved in investment arbitration as the respondent state on multiple occasions (according to the UNCTAD, 65 times). As analytics indicate, in Argentina, the process of creating an internal counsel team entailed considerable expenses (e.g., for human resources, staff training, and access to legal materials) and created ongoing costs, at the expense of budgets for other areas.

Moreover, although internal counsel can indeed understand governmental legal and policy interests more deeply, the drawback is that a government-trained specialist may later leave the state service to work in the private sector (see e.g. here, page 29).

As for Europe, the examples of the Czech Republic and Ukraine are notable, as these states have also experienced numerous investment disputes in the past. So far, 44 and 34 investment arbitration cases, respectively, have been brought against them. To compare, for Lithuania, this number amounts to only nine to date. In Czechia, the representation of the state’s interests in arbitration is conducted by a separate department (Independent Unit 9008), established within the Ministry of Finance. The Department may engage external counsel for cooperation in accordance with the Law on Public Procurement of the Czech Republic and its internal regulations. In Ukraine, as reported, together with internal counsel, services of external legal advisors may also be employed. With this, either an open public procurement is organized, or the government invites pre-selected law firms to negotiate. 

A Balanced Solution Taking into Account the Lithuanian Context

Considering the Lithuanian setting, it seems unreasonable to create a separate unit within the Ministry of Justice for a fraction of cases. The number of arbitration disputes that Lithuania has been facing is not as significant as in Argentina, the Czech Republic, Ukraine, or, for example, in Spain. Moreover, engagement of even four to five specialists, for this purpose, would require the time and cost for their training, which would have to be incurred anew should they quit their position while the disputes are pending. This possibility should not be excluded, as arbitration cases involving states are usually long-lasting.

Coordination between an authorized state institution and external counsel, as it currently stands, seems to be already a balanced approach. In the words of Jeremy K. Sharpe, such a combination allows a state to retain substantial control of its defence, while also accessing the experience and expertise of leading international lawyers.

What can be suggested as a room for improvement, in the authors’ opinion, is the introduction of transparent tenders by Lithuanian authorities for the provision of legal services in investment and commercial arbitration. Currently, engagement of external law firms for the representation of Lithuanian interests does not require the announcement of a tender. It is because, under Article 6(1)(4) of the Law on Public Procurement of the Republic of Lithuania, provision of legal services in the arbitration domain is excluded from the scope of the mandatory bidding process. It means that, in practice, state authorities may contact law firms directly, and the choice of the external counsel depends solely on their discretion. Though the rationale behind Article 6(1)(4) may pertain to concerns over confidentiality in arbitration cases, down the road, it may potentially lead to the problem of favoritism for certain law firms, substantiated by the closeness of their representatives to the governmental circles rather than by objective criteria such as experience.

In addition, to save costs, it could be suggested that only one law firm is chosen to represent Lithuania in arbitration (subject to the case complexity). Currently, in Lithuania, there is a practice of involving international law firms alongside local lawyers, who work hand in hand on the case, which indeed multiplies the cost. Local counsels have extensive experience in international arbitration and, hence, can lead a dispute themselves. Presumably, their service fees are not that high, which would enable them to prevail in public procurement over other bidders.

Conclusion

To foster competition and enable the public to monitor the costs incurred, public procurement should be organized in Lithuania. Transparent tenders may not only set up the predictable “rules of the game” for interested law firms but also diminish tensions over costs, because service rates, fee caps, and other conditions would be publicly announced and agreed upon in advance.