ICSID Review, Vol. 31, No. 1 (2016), pp. 122–128
doi:10.1093/icsidreview/siv049 Published Advance Access January 7, 2016
CASE COMMENT
Franck Charles Arif v Republic of
Moldova1
Courts Behaving Nicely and What to Do About It
Martins Paparinskis2
I. INTRODUCTION
The 2013 Award of the International Centre for Settlement of Investment
Disputes (ICSID) Tribunal in the case of Frank Charles Arif v Republic of Moldova
is noteworthy for squarely addressing an important point of international
investment law: how to deal with courts behaving nicely?3
Or, to put it in more
technical terms, how should investment tribunals approach claims about conduct
of domestic courts that, while unobjectionable on its own terms, has the effect of
harming the investment by diverging from a position taken by other public
authorities in their dealings with the investor? Reasonable people may disagree on
whether the Tribunal’s answer—that a State may incur international responsibility
for the breach of fair and equitable treatment because of legitimate expectations by
investors to consistent behaviour by public authorities—is the best possible one.
Still, the Tribunal is to be commended for asking the right questions in an explicit
manner, which should hopefully contribute to development of law on the issue
(whether jurisprudence constante is eventually formed on the basis of the rationale of
Arif or on its rejection).4
II. BACKGROUND
Frank Charles Arif, a French national, was an owner of ICS ‘Le Bridge
Corporation Limited’, SRL (Le Bridge), a company incorporated in Moldova.5
1
Franck Charles Arif v Republic of Moldova, ICSID Case No ARB/11/23, Award (8 April 2013) (Professor
Bernando Cremades, President; Professor Bernard Hanotiau; Professor Rolf Knieper) (Arif ).
2
Lecturer, Faculty of Law, University College London, United Kingdom. Email: m.paparinskis@ucl.ac.uk.
3
An important question for many areas of human activity, see Mark van Vugt and Wendy Iredale, ‘Men Behaving
Nicely: Public Goods as Peacock Tails’ (2013) 104 Brit J Psych 104.
4
This case note is limited to discussion of the merits of the Arif award, but it bears noting that its discussion of
moral damages, Arif (n 1) paras 584–615, has been relied upon by Antoine Abou Lahoud and Leila Bounafeh-Abou
Lahoud v Democratic Republic of Congo, ICSID Case No ARB/10/4, Award (7 February 2014) paras 620, 622;
Quiborax SA and Non-Metallic Minerals SA v Plurinational State of Bolivia, ICSID Case No ARB/06/2, Award (16
September 2015) para 618.
5
Arif (n 1) para 43.
ß The Author 2016. Published by Oxford University Press on behalf of ICSID. All rights reserved.
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Le Bridge won a tender organized by the Government of Moldova for the creation
of a network of duty free stores on the border with Romania.6
Le Bridge
concluded a contract with the Customs Service,7
executed lease agreements with
four local customs offices, obtained licences to operate duty-free stores and was
ready to open four duty-free stores in November 2009.8
Le Bridge also signed a
lease agreement with a State Enterprise Chisinau International Airport, which was
approved by the State Administration of Civil Aviation and the Board of Directors
of the State Enterprise; its licences to operate duty free stores were updated to
include the airport.9
(The distinction between ‘border stores’ and ‘airport stores’
was important in the resolution of the Claim.)
In December, a competitor brought a case against Le Bridge, the Ministry of
Economy and Commerce and the National Customs Service before Moldovan
courts in relation to border stores, seeking to cancel the results of the tender and
the four lease agreements with customs offices.10
Much judicial to-ing and fro-ing
followed in 2009–12. While Moldova’s courts for the most part accepted the
competitor’s arguments and ordered the cancelation of tender and existing
contracts, Le Bridge was granted the right to open a few new stores, and the
Supreme Court eventually overturned the unfavourable judgment and sent the
case back to lower courts.11
In November 2009, the same competitor also brought
another case against Le Bridge and the Airport State Enterprise in relation to
airport stores, seeking to cancel the lease agreement.12
Again, after numerous
judicial decisions in 2009–12, domestic courts accepted these arguments, ordering
eviction of Le Bridge.13
Arif claimed that the conduct of Moldova’s authorities and courts had been in
breach of a number of obligations under the 1997 France–Moldova BIT relating
to expropriation,14
specific commitments, fair and equitable treatment, arbitrary
and unreasonable measures, discrimination, and denial of justice.15
III. MERITS
International law has a robust set of rules for courts behaving badly.16
The
problem in Arif (to use the word ‘problem’ rather loosely) was that the Moldovan
courts appeared to be behaving nicely. Hence the question: when, if ever, will a
State incur responsibility under international investment law for decisions of
domestic courts in investment-related claims brought by private parties? The
Tribunal considered this issue from the perspective of several primary obligations.
First, had expropriation taken place? The Tribunal was not persuaded that it had,
primarily because an investor could not be deprived of rights that were invalid.
6
ibid paras 41–3.
7
ibid paras 44–8.
8
ibid paras 50–1.
9
ibid paras 87–92.
10
ibid para 59.
11
ibid paras 60–86.
12
ibid para 93.
13
ibid paras 94–124.
14
Agreement between the Government of the Republic of France and the Government of the Republic of Moldova
on the Reciprocal Promotion and Protection of Investments (signed 21 March 1995, entered into force 20 June 1996)
(France–Moldova BIT).
15
Arif (n 1) paras 187–224.
16
Jan Paulsson, Denial of Justice (CUP 2005).
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Contracts had been declared invalid by Moldovan courts, which had been
applying Moldovan law legitimately and in good faith.17
Nor was the investor’s
argument improved by being rephrased as relating to estoppel. To accept the
argument that Moldova was estopped from denying the rights that it had itself
granted, ‘would inevitably imply that Moldova [could] be liable at an international
level for the correct application by the Moldovan courts of Moldovan law in
lawsuits filed by a private competitor’. 18
The Tribunal then addressed the issue of denial of justice. It first considered
whether an investor could rely on denial of justice under customary international law.
Drawing a distinction between customary obligations of denial of justice and
obligations under investment protection treaties,19
it noted, ‘firstly, that international
law allows a free-standing claim for denial of justice and secondly, that such claim can
only be successfully pursued by a person that was denied justice through court
proceedings in which it participated as a party’. Since Le Bridge, rather than Arif,
had been the party before domestic courts, the claim based on customary law was
dismissed.20
At the same time, these arguments could be considered as part of a fair
and equitable treatment claim regarding injury to shareholders’ rights,21
with
responsibility arising ‘if and when the judiciary breached the standard by fundamentally
unfair proceedings and outrageously wrong, final and binding decisions’.22
The Tribunal proceeded to consider whether the proceedings regarding airport
stores had constituted denial of justice. While courts had committed procedural
errors, these did not ‘amount to such a manifest disrespect of due process that
they offend a sense of judicial propriety’.23
No substantive denial of justice had
been committed either—even if the court’s reasoning could have been less
formalistic, it could be followed throughout.24
The Tribunal then considered
judicial proceedings regarding the tender and border stores.25
Some aspects of
these proceedings did appear to the Tribunal to be problematic or wrong, but the
standard of international wrongfulness was never reached: ‘courts did not render
decisions that no competent and honest court would have possibly been able to
render’,26
‘there was [not] a general animus against [investor’s] business, and . . .
the judiciary [had not] tried to destroy [its] business in Moldova in general’,27
‘the
error [was not] tainted by impermissible bias and bad faith’,28
and ‘procedures
[were] not so void of reason that they breathe bad faith’.29
The Tribunal finally addressed the claim regarding breach of fair and equitable
treatment, expressed in Article 3 of the BIT as an obligation ‘to ensure.. ., in
accordance with Public International Law principles, fair and equitable treatment’.
Even though the language of ‘Public International Law principles’ could be read as
17
Arif (n 1) ibid paras 415–17. In any event, border stores were still operating and generating considerable
revenue, (n 1) para 418.
18
ibid para 419, see also ibid paras 420–1.
19
ibid paras 423–4.
20
ibid para 435.
21
ibid paras 436–45.
22
ibid para 445.
23
ibid para 447.
24
ibid paras 450–4.
25
ibid paras 455–97.
26
ibid para 464.
27
ibid para 465.
28
ibid para 470.
29
ibid para 482.
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a reference to customary international law, the Tribunal considered the issue to be
‘increasingly of historic significance’ because of treaty practice accelerating the
development of custom, and, in any event, the particular provision, put in its
context and by reference to object and purpose, was imposing ‘an autonomous
standard’. 30
It then elaborated the content of that obligation from the perspective
of legitimate expectations, describing them as expectations with ‘an objective basis,
. . . not fanciful or the result of misplaced optimism’,31
with an identifiable scope
and origin,32
which are balanced with the State’s right to regulate, 33
and may be
breached by both substantive changes in policy and treatment of the investor
during that process.34
By applying this standard, the Tribunal concluded that
‘[t]he legitimate expectation of the investor of a secure legal framework to operate
a duty free store at Chisinau Airport was breached’ because of the inconsistency
between the conduct of authorities that endorsed and encouraged the investment,
and the conduct of courts that found investment to be unlawful.35
Conversely,
legitimate expectations had not been breached regarding border stores because
there had been no expectation of exclusivity, and the investor was not precluded
from operating there.36
IV. COMMENTS
The Tribunal’s observations in relation to the nature of treaty obligations of fair
and equitable treatment and modern developments of customary international law
are in line with a significant amount of arbitral decisions and legal writings. It is
fair to say that whatever reservations one might have about that position will not
be dispelled by the brief reasoning of this Award.37
But even if one were to accept
the position as correct in general terms, its articulation by the Tribunal does not
easily fit within the framework of sources and interpretation. One might take the
view that the rule on fair and equitable treatment is ‘autonomous’ (a term
tolerably clear in substance, signifying the minimal impact of general international
law in the interpretative process, even if slightly awkward because ‘autonomous
interpretation’ has its own and different meaning within the law of treaties38
). And
one might take the view that customary rules on denial of justice provide criteria
and presumptions of primary obligations of customary law regarding denial of
justice. But it seems slightly strained for an interpreter to simultaneously exclude
custom (by necessary implication, also customary rules on denial of justice) and
engage in an inquiry under the rubric of ‘Denial of Justice under the Fair and
Equitable Treatment’, relying on concepts taken from a customary law.
It may be more convenient to approach the issue from the procedural
perspective. Investment treaty tribunals, just as international tribunals more
broadly, are institutions of limited jurisdiction, therefore a tribunal has to first
30
ibid para 529.
31
ibid para 532.
32
ibid para 535.
33
ibid para 537.
34
ibid para 538.
35
ibid para 547.
36
ibid paras 548–55.
37
Martins Paparinskis, ‘Introduction to the Paperback Edition’, in Martins Paparinskis, The International Minimum
Standard and Fair and Equitable Treatment (OUP 2014) xlvi–xlix.
38
Richard Gardiner, Treaty Interpretation (2nd edn, OUP 2015) 30–5.
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determine whether claims based on customary law would fall within their ratione
materiae jurisdiction. Jurisdictional rules in treaty claims are not usually read as
providing jurisdiction for interpreting and applying other rules of international
law.39
If customary law-based claims do not directly fall within the jurisdictional
four corners, the next question (again, as for any other international tribunal), is
whether rules not within jurisdiction nevertheless play a role for adjudicating upon
rules within jurisdiction. For example, treaty rules could themselves refer to
customary law (as the ‘Public International Law principles’ proviso in Article 3
might have done), or custom may be a ‘relevant’ rule that has to be taken into
account according to principles of treaty interpretation.40
If, by one route or
another, customary law can be articulated as a relevant part of the interpretative
argument, a further question, expressed with exceptional clarity by the Tribunal in
the Rompetrol Group v Romania Award, needs to be considered. Is denial of
justice—‘a legal institution which has as its very essence the relationship between a
State and aliens’, ‘not a barrier interposed between a State and its own citizens’—
applicable to the particular legal relationship considered in the investment
dispute?41
It is not obvious that it is: by applying Rompetrol to Arif, one would
probably conclude that, while Moldova had an obligation not to mistreat a French
national under customary law on treatment of aliens, it did not have such an
obligation regarding LeBridge, a company with Moldovan nationality.42
Consequently, the simple point that Moldova could not commit a breach of
customary law on the treatment of aliens by mistreating its national is sufficient to
dispose of the customary law issue.
Another issue, likely to raise the readers’ eyebrows, is the Tribunal’s decision on
wrongfulness. To recall, the Tribunal found Moldova responsible for unobjectionable
judgments of domestic courts because that had frustrated legitimate
expectations of the investor generated by the conduct of administrative authorities.
The starting point for thinking about the issue should be the mainstream reading
of the law of denial of justice, influentially explained by Jan Paulsson as focusing
on procedural denial of justice and requiring a full exhaustion of system of
justice.43
One challenge to this explanation has been expressed by relying on
different treaty obligations, alleged to qualify the rigour of either the requirement
of full exhaustion (‘effective means’) or the procedural focus (expropriation).44
Another challenge distances the treaty obligations from criteria of denial of justice
39
Although note that the dispute settlement clause in the particular BIT is expressed prima facie in broad terms, as
covering ‘[a]ny disputes relating to investments’, art 7(1) France–Moldova BIT (n 14), and not explicitly limited to
disputes regarding the BIT.
40
Vienna Convention on the Law of Treaties (opened for signature 23 May 1969, entered into force 27 January
1980) (VCLT) arts 31(1), 31(3)(c); Chagos Marine Protected Area Arbitration (Mauritius v UK), annex VII Arbitration
(18 March 2015) paras 293–8; Martins Paparinskis, ‘Come Together or Do It My Way: No Systemic Preference’
(2014) 108 ASIL Proceedings 246.
41
The Rompetrol Group v Romania, ICSID Case No ARB/06/3, Award (6 May 2013) para 165, see also ibid, paras
166–7.
42
It is unclear whether the conditions of International Law Commission Articles on Diplomatic Protection (2006),
art 11(b), were satisfied in the facts of this case, nor indeed whether this proposition reflects customary law, Ahmadou
Sadio Diallo (Guinea v Democratic Republic of the Congo) [2007] ICJ Rep 582, para 93. Of course, other regimes of
international law, particularly human rights law, may impose obligations on States regarding treatment of their
nationals.
43
Paulsson (n 16); Zachary Douglas, ‘International Responsibility for Domestic Adjudication: Denial of Justice
Deconstructed’ (2014) 1 ICLQ 867.
44
Mavluda Sattorova, ‘Denial of Justice Disguised? Investment Arbitration and the Protection of Foreign Investors
from Judicial Misconduct’ (2012) 61 ICLQ 223, 233–43.
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set out in customary law.45
There is scope for reasonable disagreement about the
merits and degree of success of these challenges. Whatever reservations one
might have in that regard are applicable with particular force to Arif. It is distinctly
odd to conclude that, as the Tribunal itself noted regarding the investor’s
invocation of estoppel and expropriation, ‘Moldova can be liable at an international
level for the correct application by the Moldovan courts of Moldovan law
in lawsuits filed by a private competitor’.46
International dispute settlement
faces sufficient challenges when disciplining conduct of courts that are allegedly
engaged in wrongful conduct.47
It is not at all obvious that deepening the
responsibility of States for lawful conduct of courts is a development in a
systemically desirable direction.
A proposition about international law may, of course, be simultaneously odd,
systemically undesirable, and accurate, but one would expect the argument in
favour of such a rule to be particularly persuasive. It is not entirely clear that the
Tribunal’s argument satisfies this benchmark. The Tribunal starts by noting (in
the concluding paragraph of elaboration of fair and equitable treatment) that ‘[t]he
international responsibility of a State is not determined by the legality of an act
under domestic law, but by the principle of attribution in international law’.48
Both of these points are right, but the statement, if taken to be exhaustive, is not.
International responsibility is determined by attribution of conduct to the State
and breach of a primary obligation,49
and it is the existence of a primary obligation
not to permit ‘correct application by the Moldovan courts of Moldovan law in
lawsuits’ if it differs from the position taken by other organs of the State that the
Tribunal has to demonstrate.
The Tribunal makes a step in that direction, suggesting that inconsistency may
be an element of fair and equitable treatment with a nod to the MTD Equity Sdn
Bhd and MTD Chile SA v Chile Award.50
But an unelaborated reference that does
not even specify relevant paragraph(s) cannot quite carry the day on its own. The
language of MTD award regarding ‘inconsistency of action between two arms of
the same Government vis-a`-vis the same investor’ is, admittedly, broad.51
Still, the
rationale of MTD, where ‘the legal framework of the country provide[d] for a
mechanism to coordinate’,52
may be unduly strained by applying it to inconsistency
of action between arms of the government that are set up precisely to be
constitutionally autonomous. Indeed, undue coordination of executive and judicial
conduct may itself give rise to responsibility for denial of justice under investment
law.53
The nods to attribution do not reinforce the reasoning, and rather seem to
be attempts to bridge the gap regarding primary rules by relying on secondary
45
Rompetrol (n 41) paras 160, 197.
46
Arif (n 1) para 419.
47
Chevron Corporation and Texaco Petroleum Company v Republic of Ecuador, PCA Case No 2009-23, Fourth Interim
Award on Interim Measures (7 February 2013) paras 77–86.
48
Arif (n 1) para 539.
49
International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, UN Doc
A/56/83 (2001) (ILC Articles on State Responsibility) art 2 (b). James Crawford, State Responsibility: The General Part
(CUP 2013) pt III.
50
Arif (n 1) para 547(b), also para 538.
51
MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile, ICSID Case No ARB/01/7, Award (15 May 2004)
para 163.
52
ibid.
53
Flughafen Zu¨rich AG and Gestio´n e Ingenierı´a IDC SA v Bolivarian Republic of Venezuela, ICSID Case No ARB/10/
19, Award (18 November 2014) paras 630–721.
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rules.54
That, as the MTD Annulment Committee noted, is not a done thing: ‘to
mix up attribution and breach would require explanation and would indicate
confusion’.55
These observations should not be read as belittling the complexity of questions
that domestic courts’ reversals of positions held by other public authorities, or the
courts themselves, may create for investment law.56
The modest point made here
is that the far-reaching implications of the Arif Award do not appear to be
matched by reasoning that will persuade everybody. Future tribunals faced with
similar challenges may be better served by treating the authority of these particular
passages with a light touch.
54
Arif (n 1) para 547(c).
55
MTD Equity Sdn Bhd and MTD Chile SA v Chile, ICSID Case No ARB/01/7, Decision on Annulment (21 March
2007) para 89; see also Compan˜ı´a de Aguas del Aconquija SA and Vivendi Universal v Argentine Republic, ICSID Case
No ARB/97/3, Decision on Annulment (3 July 2002) fn 17.
56
Vaughan Lowe, ‘Regulation or Expropriation?’ (2002) 55(1) Current Legal Problems 447, 448, 458 and 465.
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