Opposite Results in Two SCC Emergency Arbitrations (Evrobalt v Moldova and Kompozit v Moldova)

Practical implications

The messages to be taken from these recent emergency arbitration awards are two-fold. They reaffirmed that interim relief against the host state can be available for foreign investors before the expiry of a cooling-off period in a Bilateral Investment Treaty (“BIT“).

They lend support to the applicability of the 2010 version of the SCC Arbitration Rules (“SCC Rules 2010“) to disputes arising out of investment treaties concluded before 2010. This conclusion may be particularly relevant for investors choosing between different arbitral fora to hear a dispute (eg article 26 of the Energy Charter Treaty).

At the same time, they also demonstrate that the prospects of obtaining interim relief against a sovereign state are far from clear by revealing uncertainty about interpretation criteria of necessity for granting interim relief in investor-state dispute settlement.

What was the factual background?

In March 2016, the National Bank of Moldova decided that Evrobalt and Kompozit (companies incorporated in Russia), as well as 18 other shareholders of Moldova Agroindbank (MAIB), the country’s largest commercial bank, had acted in concert and acquired a substantial shareholding without its prior permission. The National Bank suspended shareholder rights and required the investors to dispose of the shares within a three-month period.
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Should the sale of shares fail, they were to be cancelled in accordance with the Moldovan Law on Financial Institutions.

Evrobalt and Kompozit attempted to annul the decision but without success. They then decided to pursue arbitration against the Republic of Moldova under Article 10 of the 1998 Russia-Moldova BIT, providing for the Arbitration Institute of the SCC as one of the available fora. 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, in May–June 2016, Evrobalt and Kompozit separately applied for interim reliefs from SCC emergency arbitrators, to prevent forced disposal of its shares. They requested that the Moldovan authorities refrain from any further steps leading to the cancellation of their shareholdings, pending the final resolution of the disputes.

What did the emergency arbitrators decide?

The emergency arbitrators reached different conclusions based on the similar factual and legal background. Mr Georgios Petrochilos, acting as emergency arbitrator in Evrobalt, denied its application, while Mr José Rosell, emergency arbitrator in Kompozit, partially granted the application. Below are the legal issues that were resolved similarly by two distinguished emergency arbitrators, as well as the issues that provoked controversy.

Does the cooling-off period in the treaty bar an application for emergency arbitration?

Both emergency arbitrators agreed that the cooling-off period provided in the BIT—the six-month period for the amicable resolution of the disputes between investor and host state—irrespective of its qualification as procedural or as one of admissibility, does not preclude a claimant from initiating emergency arbitration proceedings.

Evrobalt and Kompozit notified the Government of Moldova about the dispute in May–June 2016. However, the Ministry of Justice responded that it was not authorised to conduct any negotiations with them. The emergency arbitrators considered that the state’s refusal either to engage in amicable settlement or to suspend the impugned decision made it futile to insist on the exhaustion of the cooling-off period.

This position is in line with the conclusion by Professor Dr Kaj Hobér in TSIKInvest v Republic of Moldova—the first known SCC emergency arbitration against a sovereign state—also pointing out that applying a cooling-off period would be contrary to the purpose of the emergency arbitration procedure.

Do the SCC Rules 2010 apply to disputes arising out of treaties concluded before 2010?
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Both emergency arbitrators concluded that the SCC 2010 Rules were applicable in light of the fact that the BIT, containing the offer to arbitrate, was signed in 1998. The 1998 SCC Arbitration Rules, in force at that time, did not provide for emergency interim measures, nor did the subsequent 1999 and 2007 versions.
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Mr Petrochilos and Mr Rosell found the SCC 2010 Rules prima facie applicable based on the following rationale. First, under the preamble to the SCC 2010 Rules, any reference to SCC arbitration in an 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 2010, they would have provided for it in the Treaty. In the absence of such specific wording, they concluded that the 2010 Rules were within the reasonable contemplation of the parties to the BIT.

Does a potential award of damages in the main arbitral proceedings eliminate the need for emergency arbitration relief?

The emergency arbitrators reached different conclusions as to one of the conditions for ordering interim relief—risk of harm not adequately reparable by an award of damages. This requirement was taken from Articles 17-17A of the UNCITRAL Model law on International Arbitration and Article 26 of the UNCITRAL Arbitration Rules, in the absence of any specific criteria for emergency measures in the SCC 2010 Rules.

The emergency arbitrator in Evrobalt held that if the tribunal in the main proceedings further establishes the respondent’s duty to make reparation under the BIT, it can be made good by an award of monetary compensation, as harm suffered by the claimant “is purely economic in its nature and confined in its scope”. 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 and 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 the main proceedings will not necessarily reflect the real value of the shares. He enjoined the respondent from divesting Kompozit of its shareholding in MAIB.

What effect does an SCC emergency arbitration award have?

Leaving aside the question of enforceability of emergency arbitration awards, it should be noted that under the SCC Rules 2010, appendix II, art 9, the emergency award ceases to be binding if the arbitration is not commenced within 30 days from the date of the award. This may potentially pose difficulties for foreign investors, given that many BITs provide for cooling-off periods mostly exceeding one month.

A version of this article was published on Lexis®PSL Arbitration.