Interim Relief Against the Host State: Analysis of Emergency Awards against Moldova

Applications for interim relief have become a frequently used procedural tool among foreign investors arbitrating against CIS states.

Emergency arbitration proceedings under the Stockholm Chamber of Commerce (SCC) Arbitration Rules are particularly in demand: at least four applications for interim reliefs against CIS states have been filed since 2014 (TSIKInvest v Republic of Moldova; JKX Oil & Gas plc, Poltava Gas BV and Poltava Petroleum Company v Ukraine; Evrobalt v Republic of Moldova; Kompozit v Republic of Moldova).

Two recent SCC emergency arbitration awards (reported by CIS Arbitration Forum), however, show that the prospects of obtaining interim relief against a sovereign state are far from being clear. The awards in Evrobalt and Kompozit, reaching different conclusions based on similar factual and legal background, bring to the surface the uncertainty that surrounds the interpretation of criteria for granting interim relief in investment arbitration.

Factual and legal background

Claimants in both proceedings (Evrobalt LLC and Kompozit LLC, companies incorporated in Russia) are shareholders of Moldova Agroindbank (MAIB), the country’s largest commercial bank. In March 2016, the National Bank of Moldova issued Decision 43, where it found both Evrobalt and Kompozit, as well as other 18 shareholders of MAIB, to have acted in concert and acquired a substantial shareholding without its prior permission. As the claimants alleged, earlier in 2015-2016 they were also subjected to anti-corruption investigation procedures by the Moldovan authorities.

The National Bank suspended the claimants’ shareholder rights and required them to dispose of the shares within a three-month period (ie by June 2016). Should the sale of shares fail, they are to be cancelled in accordance with Moldovan Law on Financial Institutions. Evrobalt and Kompozit attempted to annul Decision 43, however, without success.

The claimants decided to pursue arbitration against the Republic of Moldova under Article 10 of the 1998 Russia-Moldova BIT, providing for the Arbitration Institute of SCC as one of the available fora. While the details of their claims are not publicly available at this stage, it is known that Evrobalt and Kompozit allege that the Moldovan authorities’ actions amount to violations of the Treaty provisions on fair and equitable treatment (Article 3) and expropriation (Article 6).

As a three-month period required for the sale of shares was expiring, Evrobalt and Kompozit separately applied for interim relief from emergency arbitrators under the SCC Arbitration Rules, in order to prevent forced disposition of its shares. Although formulated differently, their applications in essence requested that the Moldovan authorities refrain from any further steps leading to the cancellation of their shareholdings in MAIB, pending the final resolution of the disputes.

Two emergency arbitration proceedings ended with different outcomes for the claimants: Mr Georgios Petrochilos, acting as emergency arbitrator in Evrobalt, denied its application, while Mr José Rosell, emergency arbitrator in Kompozit, partially granted the application.

Cooling off Period in the BIT Does Not Bar Emergency Arbitration

Article 10 of the Treaty provides for a six-month period for the amicable resolution of disputes between investor and host state, upon expiry of which the parties can submit their dispute to arbitration. In both cases, the six-month period did not expire at the moment of the application for interim relief: Evrobalt and Kompozit sent notices of the dispute to the Government of Moldova in May-June 2016. The Ministry of Justice responded to them that it was not authorised to conduct any negotiations with the claimants with regard to the resolution of the dispute.

Both emergency arbitrators agreed that this requirement, irrespective of its qualification as being procedural or one of admissibility, does not preclude the initiation of emergency arbitration proceedings. The respondent’s refusal to either to engage in amicable settlement with the claimants or to suspend Decision 43 made it futile to insist on the exhaustion of the cooling off period provided in the Treaty. Notably, Mr Rosell pointed out the language of Article 10 of the Treaty “as far as possible“, implying that failing an attempt at amicable settlement, the parties are entitled to proceed with arbitration.

2010 Version of the SCC Arbitration Rules Is Applicable, Regardless the Date of the BIT 

Another issue that both emergency arbitrators agreed upon concerns the applicability of the 2010 SCC Arbitration Rules in light of the fact that the Treaty, containing the offer to arbitrate, was signed in 1998. Neither did the 1998 SCC Arbitration Rules, in force at that time, provide for emergency interim measures, nor did the subsequent 1999 and 2007 versions. The question that arose is whether Article 10 of the Treaty can encompass the 2010 version, including emergency arbitration rules in Appendix II.

Both Mr Petrochilos and Mr Rosell found the 2010 version prima facie applicable based on the following rationale. First, under the Preamble to the 2010 version, any reference to the SCC arbitration in the arbitration agreement shall mean the rules in force on the date of the filing of an application for emergency arbitration. Second, had the contracting parties wished to freeze any applicable version of the SCC Rules, they would have provided for it in the Treaty. In the absence of such specific mention, they concluded that the 2010 Rules were within the reasonable contemplation of the parties to the Treaty.

Divergence Regarding Standards for Granting Interim Relief: Non-Compensable Harm or Substantial Prejudice

The issue that provoked divergent conclusions from the two arbitrators relates to one of the requirements for granting interim relief – risk of non-compensable harm that is likely to result if the measure is not ordered. In the absence of any specific requirements for interim reliefs in the SCC Arbitration Rules, the arbitrators turned to Articles 17-17 A of the UNCITRAL Model law on International Arbitration and Article 26 of the UNCITRAL Arbitration Rules as codifications of these requirements.

The emergency arbitrator in Evrobalt, dismissing the application, concluded that the harm suffered by the claimant due to the measures by the Moldovan authorities was adequately reparable by an award of damages, as it “is purely economic in its nature and confined in its scope“. If the tribunal in the main proceedings further establishes the respondent’s duty to make reparation under the Treaty, it can be made good by an award of monetary compensation. Also, Mr Petrochilos did not see any suggestions either that the harm may economically ruin the claimant, or that the requested measures “would serve to avoid aggravation or expansion of the parties’ existing dispute“.

The emergency arbitrator in Kompozit applied a lower threshold for this requirement: the test of “substantial prejudice” instead of “non-compensable harm”. Mr Rosell accepted the position of the tribunal in Sergei Paushok v Mongolia that the criterion of “irreparable harm” has a flexible meaning in international law. He also shared the view that “the possibility of monetary compensation does not necessarily eliminate the possible need for interim measures”.

On this premise Mr Rosell concluded that the compensation to be potentially awarded to Kompozit in main proceedings will not necessarily reflect the real value of shares and enjoined the respondent from divesting Kompozit of its shareholding in MAIB. Another of the claimant’s requests – to restore its shareholder’s rights – was denied due to the lack of urgency and left for the tribunal in the main proceedings to consider.

Effect of Emergency Arbitrator Award

According to Article 9 of Appendix II of the SCC Arbitration Rules, the emergency award ceases to be binding if (i) the arbitration is not commenced within 30 days from the date of the award or (ii) if the case is not referred to an arbitral tribunal within 90 days from the date of the award. While the information regarding the commencement of the main arbitral proceedings has not been made public yet, the Government of Moldova recently initiated the bidding process for legal services in relation to these disputes.

MAIB has recently disclosed that its management board took the decision on the cancellation of shares that approximately amount to the shareholding of the claimants and other 18 shareholders mentioned by the National bank in Decision 43. It suggests that, contrary to the interim order in Kompozit, the Republic of Moldova most probably proceeded with the divestiture of the claimant’s shares.

Practical implications

Emergency arbitration awards in Evrobalt and Kompozit demonstrate that the issue whether the possibility of monetary compensation is sufficient to bar an application for interim relief is far from being settled in investment arbitration. It revived the interpretative debates on the criterion of necessity for granting interim relief that also appeared in some ICSID arbitral awards (eg Burlington v Ecuador).

At the same time, the emergency arbitration awards also reaffirmed the view that the cooling off period in the BIT does not preclude the investor from applying for interim relief, previously taken by Prof Dr Kaj Hobér, emergency arbitrator in another SCC proceedings against Moldova. Also, the emergency awards in Evrobalt and Kompozit are remarkable to be among the first to express the position on the applicability of the 2010 SCC Arbitration Rules in disputes arising out of BITs concluded before 2010, previously discussed in the arbitration community.