Moldova Gets a Mixed Result in the First ICSID Arbitration against it

On 8 April 2013, the tribunal rendered an award in Arif v Moldova, the first ICSID arbitration against Moldova, which commenced several months after it had ratified the ICSID Convention. The tribunal (Cremades, Hanotiau, Knieper) rejected the majority of the investor’s claims, but found that Moldova had in one instance violated the obligation to provide fair and equitable treatment.

The dispute concerned Le Bridge duty free shops operated in Moldova by a Moldovan company owned by a French national Mr Arif.
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A competitor of Le Bridge successfully challenged before the Moldovan courts various agreements permitting Mr Arif’s company to operate the shops. In the ICSID proceedings, the investor argued that these court decisions constituted unlawful expropriation or, in the alternative, amounted to a denial of justice.

Invalidity of the Underlying Agreements

The Moldovan courts declared that various lease contracts entered into by Mr Arif’s company were void. Moldova argued that this should lead to the claimant lacking a protected investment or, in the alternative, the claims based on the umbrella clause being inadmissible.

On the first objection, the tribunal sided with the claimant. The BIT required an investment to comply with the national laws of Moldova.
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However, the tribunal concluded that originally both parties had perceived the leases as valid and the leases were not on their face void, nor was their alleged illegality concealed. In these circumstances, the tribunal concluded that it was not open for Moldova to claim that there was no investment.

However, the tribunal went on to find that the claimant cannot base its umbrella clause claims on the same agreements.
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It reasoned that the agreements had been declared void by the Moldovan courts and therefore there were no obligations to form the subject matter of an umbrella clause claim. The tribunal did however acknowledge that an umbrella clause may be “imported” into the BIT by operation of an MFN clause.

The decisions of the Moldovan courts were also fatal for Mr Arif’s expropriation claim. The tribunal found that invalidation of the leases may not constitute expropriation, unless the relevant court decisions amounted to a denial of justice. Finding that there was no denial of justice, the tribunal dismissed this claim.

Allegations of Denial of Justice

Mr Arif alleged that the decisions of the Moldovan courts invalidating the leases were a product of a denial of justice. His claim was based on breach of the customary international law prohibition of the denial of justice as well as breach of the fair and equitable treatment standard.

The tribunal summarily rejected the claim based on customary international law. It found that such a claim may only be brought by a person to whom justice was denied, which in the circumstances meant Le Bridge and not Mr Arif.

The tribunal however agreed that the prohibition of the denial of justice formed part of the fair and equitable treatment standard. On the facts of the case the tribunal concluded that justice had not been denied by the Moldovan courts.

The tribunal began with two general observations: (i) mere disagreement with the application of the law by a court is insufficient for a denial of justice claim to succeed; and (ii) a denial of justice claim may only be based on the final and binding decision of the national court and in assessing whether justice was denied the tribunal should look at the treatment the claimant received from all levels of the respondent’s judiciary.

The tribunal concluded that the Moldovan courts had based their decisions on a tenable interpretation of the applicable legal provisions and their decisions were reasoned. None of them disclosed any bias or collusion between the judiciary and the claimant in these proceedings. For these reasons the denial of justice claim failed.

Moldova Frustrated the Claimant’s Legitimate Expectations

The tribunal began its analysis by recognising that protection of legitimate expectations formed part of the fair and equitable treatment standard.  It went on to note that the investor’s expectation that all contractual obligations of a state would be fully performed is not generally protected on an international level.

The tribunal found that Mr Arif was legitimately entitled to expect that the lease agreements would be valid and enforceable. This expectation was created by several circumstances. First, the responsible state authority had approved the leases. Second, for a significant period after the leases had been signed both parties operated under the assumption of the leases’ validity.

Finally, the Moldovan authorities frustrated Mr Arif’s expectations in breach of the FET standard with respect to one of the leases. Not only had they allowed the lease to be invalidated on the basis of a formal defect, but they did nothing to remedy the situation (e.g. enter into a new lease for the same premises or offer a different site).

Tribunal’s Creative Approach to Remedies

Having concluded that Moldova violated the obligation to provide FET with respect to one of the leases the tribunal had to decide on an appropriate remedy. Mr Arif was asking for both restitution and, in the alternative, compensation.

For the tribunal restitution would have been the preferred remedy had it not been for Moldova’s uncertainty whether restitution would be possible and the tribunal’s lack of power to effectively supervise and enforce restitution. Eventually, the tribunal granted Moldova a period to effect restitution failing which it would be required to pay compensation to the investor.

The full text of the award is available here.

Sergey Usoskin