CASE OF BIMER S.A. v. MOLDOVA
Violation of P1-1;Pecuniary damage - financial award
Nicolas Bratza
7. The applicant, Bimer S.A., is a company incorporated in the Republic of Moldova. From the moment of incorporation its shares were owned by Moldovan, American and Bahamian investors, it therefore qualified as a company owned by foreign investors and thus benefited from special incentives and guarantees under the Law on Foreign Investments (see paragraph 24 below). 8. On 10 June 1994 Presidential Decree No. 195 (“the Decree”) was promulgated. It made possible the creation and operation of duty free shops at land, water and air-border crossings. According to the Decree, the duty free shops were entitled to sell imported goods without having to pay customs tax (see paragraph 23 below). 9. On 12 June 1997 the applicant company signed a contract with the Leuşeni Customs Office, at the border between Moldova and Romania, providing for the opening of duty free shops on the territory of the customs zone. The contract did not contain any provisions as to its duration. It was approved by the Head of the Customs Department of the Government and by the Minister of National Security. 10. On 3 July 1998 and on 2 December 1998 the company obtained two licences to operate a duty free shop and a duty free bar, within the shop, at the Leuşeni Customs Office. The licences were issued in accordance with the Decree and they did not contain any provisions as to their duration. Subsequently, the applicant company bought the necessary equipment, built the premises of the shop and bar and started operating them. 11. On 24 April 2002 the Moldovan Parliament made an amendment to the Customs Code by which duty free sales outlets were thenceforward restricted to international airports and on board aircraft flying international routes (see paragraph 25 below). 12. On 18 May 2002 the Customs Department ordered the closure of all duty free outlets which were not located in international airports or on board aircraft flying international routes (“the order”). 13. On 12 June 2002 the applicant company, together with other companies similarly affected, lodged a court action against the order with the Court of Appeal of the Republic of Moldova. 14. The applicant argued inter alia that the grounds relied on by the Customs Department in closing down its duty free shop and bar were not enumerated in the exhaustive list of grounds for closing down such shops provided for in section 56 of the Customs Code. 15. Moreover, in the light of section 46 of Law No. 780 (see paragraph 26 below), the new amendments to the Customs Code could not have retroactive effect and could be interpreted only as limiting the opening of duty free shops in the future, and not as closing down those already open. 16. According to the applicant, the order conflicted with section 40 of the Law on Foreign Investments (see paragraph 24 below), which stipulated that the activity of a company owned by foreign investors could be terminated only by a governmental decision or a court order, and only when the company had seriously breached Moldovan legislation and its articles of incorporation. 17. The applicant further argued that according to section 43 of the Law on Foreign Investments (see paragraph 24 below), in the event of the adoption of new, less favourable legislation, companies owned by foreign investors were entitled to rely on the old legislation for a period of ten years. The ten-year period began to run from the date of enactment of the new legislation. Moreover, the second paragraph of the same section specifically provided that foreign-owned companies which enjoyed customs incentives in accordance with the former legislation of the Republic of Moldova had the right to enjoy those incentives after new legislation came into effect. 18. On 26 June 2002 the Court of Appeal of the Republic of Moldova ruled in favour of the applicant company and quashed the order, relying inter alia on the following reasons: “...The court considers that the order of the Customs Department No. 127 of 18 May 2002, issued for the purpose of applying Law No. 1022 of 25 April 2002 [concerning the modification of the Customs Code], by which the activity of duty free shops was terminated starting with 18 May 2002... is illegal because it is contrary to the legislation in force. Law No. 1022 of 25 April 2002, by which Article 51 of the Customs Code was modified ... does not provide for the termination of the activity of the duty free shops already open in places other than airports and on board aeroplanes. Moreover, the above mentioned Order [of the Customs Department] runs contrary to Article 56 of the Customs Code which does not provide among the reasons for liquidating a duty free shop the reason provided for in the Order – a change in the legislation. The Court considers that the modified text of Article 51 of the Customs Code cannot have a bearing on the duty free shops already open and in operation, because this would also run contrary to Article 46 (1) of the Law on the Normative Acts, which stipulates that a law cannot be retroactive or ultra active. Since the applicants are enterprises with foreign investments, the Court considers that the Order runs contrary to Article 39 (1) of the Law on Foreign Investments, which provides that the foreign investments are guaranteed full security and protection in the Republic of Moldova. Moreover, according to Article 40 of the Law on Foreign Investment, the applicants' activity ...can be terminated only by means of a Government Decision or a court judgment and only if they have seriously breached the legislation or their statute of incorporation. However, the Order in question does not contain any reference to any breaches committed by the applicant and is not based on a Government Decision or a court judgment. It is necessary to indicate that in accordance with Article 43 (1) of the Law on Foreign Investment, in case of enactment of new laws which change the conditions of a company with foreign investment created before the enactment of such laws, the company in question has the right to guide itself by the old legislation for a period of 10 years calculated from the date of enactment of the new legislation. According to the second paragraph of section 43 of the Law on Foreign Investments, foreign investors and enterprises with foreign capital which enjoyed customs, tax and other incentives in accordance with the legislation of the Republic of Moldova formerly in force, have the right to enjoy these incentives after the new legislation comes into effect. ... The court considers that the Order violated the applicants' right to property guaranteed by Article 46 of the Constitution, Sections 1, 40 and 41 of the Law on Property and by Article 1 of Protocol No. 1 to the Convention.” 19. The Customs Department appealed against this judgment to the Supreme Court of Justice. 20. On 11 September 2002 the Supreme Court of Justice allowed the Customs Department's appeal, quashed the judgment of the Court of Appeal and dismissed the applicant's action. The grounds relied on by the Supreme Court were as follows: “The first instance court, in finding for the applicants, reached conclusions which are based on a wrong interpretation of the law because the Order in question does not provide for a total termination of the activity of duty free shops but only for the termination of their activity in certain places. Therefore the first instance court's conclusion that the Order had as effect the termination of the entire activity of the foreign investors who had opened these shops and that thus their right to total security and protection provided for by Article 31 of the Law on Foreign Investment was violated is incorrect. Article 51 of the Customs Code, as modified by Law No. 1022 of 25 April 2002, defines the duty free as a customs regime which consists of sale of goods under customs supervision in especially dedicated places in international airports and onboard aeroplanes. Accordingly, through this provision the legislators regulate and limit the places in which such shops can be located but they do not create any interdiction in so far as their activity is concerned. Therefore the arguments of the first instance court that the right to activity of the foreign investors has been violated, is devoid of legal support. The applicants are not prohibited to place their shops in the places provided for by law, i.e. in airports and onboard aeroplanes. ... According to the documents of incorporation of these companies, they practice different kinds of activities, including the sale of goods in the Duty Free regime. The conclusion of the first instance court that the Order violated the right to property guaranteed by the Constitution and the international law is incorrect because the companies in question have the right to open duty free shops in other places, as provided by Article 51 of the Customs Code. The activity of the companies is not totally stopped and nothing is taken away from them. ... The first instance court's reference to Article 40 of the Law on Foreign Investment which says that the activity of a company with foreign investment can only be terminated by a Government Decision or a court judgment is wrong because the Order did not totally terminate the applicants' activity but only the sale of goods in the Duty Free regime. They can do other activities which are provided in their documents of incorporation.” 21. The Supreme Court of Justice did not express any view on the applicant's argument or the ruling of the Court of Appeal concerning the applicability of the second paragraph of section 43 (2) of the Law on Foreign Investment to the case. Its judgment was final. 22. The relevant extracts from the Constitution of the Republic of Moldova read as follows: “Article 46. The right to private property and its protection (1) The right to possess private property ... [is] guaranteed. (2) No one may have his property expropriated except for reasons dictated by public necessity, as established by law, and subject to the payment of just and appropriate compensation made in advance. (3) No assets legally acquired may be confiscated. The effective presumption is that of legal acquirement. ...” 23. Presidential Decree No. 195 of 10 June 1994, in so far as relevant, reads: “... Section 3. Imported goods which are to be sold at “duty free” shops... shall be exempted from customs tax; ... “Duty free” shops may be operated at the road, naval and air border crossing points....” 24. The Law on Foreign Investments of 1 April 1992, in so far as relevant, reads: “Section 1. The applicable law ... 3.... Laws which contradict the present law in the part concerning foreign investments shall not be applicable. ... Section 35. Customs incentives for goods brought into the country 1. The goods referred to in section 3 of the present law [cars, equipment, office equipment, row material...], which are brought into the country as a contribution to the statutory capital shall be exempted from customs tax. ... Section 36. Customs incentives for import and export ... 2. A company owned by foreign investors shall be exempt from customs tax for merchandise (raw materials...), imported for the purpose of producing goods to be exported. Section 39. Guarantees concerning nationalisation or expropriation of foreign capital investments 1. Foreign investments in the Republic of Moldova are granted complete security and protection. 2. Foreign investments cannot be expropriated, nationalised or subjected to any other similar measures in any way other than according to the law, on the basis of a law serving the national interest and against the payment of appropriate compensation. 3. Compensation shall correspond to the value of investment assessed immediately before the moment of expropriation, nationalisation or other similar measure. It must be paid not later than three months from the moment the above measures are taken, with an appropriate bank interest rate calculated before the date of payment. The compensation has to be paid in the currency in which the investment was made and it may be transferred abroad without any restrictions. 4. The payment of compensation is ensured by the State body entitled to carry out the expropriation, nationalisation or any other similar measures. The State body must determine the value of investment and pay the compensation not later than the day of the expropriation, nationalisation or other similar measure. If the State body does not have sufficient funds, the compensation shall be paid from the State budget. 5. The affected investor is entitled to request verification of the legality of the expropriation, nationalisation or other similar measure and of the amount of the compensation in the manner provided for by law.” Section 40. Guarantees concerning forcible suspension and cessation of activity 1. The activity of an enterprise with foreign investors can be forcibly suspended only in accordance with a decision of the Government of the Republic of Moldova or a competent court, when the enterprise has seriously violated the terms of the legislation of the Republic of Moldova or the provisions of its articles of incorporation... 2. If the activity of an enterprise with foreign investors is suspended on the initiative of a body of State control, and no violations of legislation or of the constitutive documents are found, the above body shall compensate the enterprise for any damage including lost profit. If the State body does not have sufficient money, the payment is made from the State budget. 3. The assets of a foreign investor whose enterprise is liquidated or who withdraws from the enterprise may be taken abroad by him without any licence.” ... “Section 43. Guarantees concerning changes of legislation 1. In the event of the adoption of new legislative acts changing the conditions of activity of an enterprise with foreign capital created before the adoption of such acts, that enterprise shall have the right to have applied to it the legislation of the Republic of Moldova operating on the day of its creation for a period of ten years calculated from the day of the entry into force of the new legislative act. 2. The provisions of paragraph 1 do not extend to legislation related to tax, customs, finance, monetary, credit, currency or anti-trust measures, or to legislation regulating State security, protection of the environment, social order, morals or the health of the population. Foreign investors and enterprises with foreign investors which enjoyed customs, tax and other incentives in accordance with the former legislation of the Republic of Moldova shall enjoy those incentives after the new legislation comes into effect....” 25. The Customs Code of the Republic of Moldova as amended on 24 April 2002 reads: “Section 51. The duty free outlet – a customs regime (regim vamal) which consists of the sale of goods under customs supervision in specially designed places situated in international airports and on board aircraft. Section 56. A duty free outlet may be closed down if the licence expires or if it is annulled or withdrawn in accordance with the law.” 26. The relevant provisions of Law No. 780 of 27 December 2001 read as follows: “Section 46 § 1. A law may have effect only during the period of its validity and may not have retroactive or prospective effect.” 27. The treaty between the United States of America and the Republic of Moldova concerning the encouragement and reciprocal protection of investment, signed at Washington on 21 April 1993, in so far as relevant, reads as follows: “... Article II. 3. (a) Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law. (b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. For purposes of dispute resolution under Articles VI and VII, a measure may be arbitrary or discriminatory notwithstanding the fact that a Party has had or has exercised the opportunity to review such measure in the courts or administrative tribunals of a Party. (c) Each Party shall observe any obligation it may have entered into with regard to investments. ... Article III. 1. Investments shall not be expropriated or nationalized either directly or indirectly through measures tantamount to expropriation or nationalization ("expropriation") except: for public purpose; in a nondiscriminatory manner; upon payment of prompt, adequate and effective compensation; and in accordance with due process of law and the general principles of treatment provided for in Article II(3). Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known, whichever is earlier; be calculated in a freely usable currency on the basis of the prevailing market rate of exchange at that time; be paid without delay; include interest at a commercially reasonable rate from the date of expropriation; be fully realizable; and be freely transferable.” 28. On 31 July 2001 the Commission on the Economy, Industry, Budget and Finance of the Parliament of the Republic of Moldova replied to an enquiry made by the applicant concerning the interpretation of Section 43 of the Law on Foreign Investment. In a letter signed by the Chairman of the Commission, Mr. N. B., it stated the following: “Subsection 1 of Section 43 provides that in the event of new legislation, changing the conditions of activity of a company with foreign investors which was created before the adoption of such new legislation, that company has the right to rely on the legislation in force on the day of its creation for a period of ten years calculated from the day of the entry into force of the new legislation. The above is a general rule, which refers to any legislation changing the general conditions of activity of a company owned by foreign investors. Paragraph 1 of Subsection 2 states the type of legislation not covered by the rule in Subsection 1, and which is applicable from the very moment of its entering into force. Paragraph 2 of Subsection 2 states the exceptions to Paragraph 1 of Subsection 2. These exceptions refer only to privileges (facilităţi), incentives (înlesniri), exemption of payments (scutiri de plăţi), etc., which were provided for in law when the company was set up. Accordingly, Paragraph 2 of Subsection 2 does not contradict the provisions of Paragraph 1 of Subsection 2, but makes clear that companies with foreign investors, which enjoyed customs, tax or other forms of privileges in accordance with the legislation of the Republic of Moldova formerly in force, have the right to enjoy those privileges for ten years after the entry into force of new legislation.” 29. In their observations of October 2005 the Government argued that the above letter had not been signed by the Chairman of the Commission on the Economy, Industry, Budget and Finance of the Parliament, but by an ordinary member of that Commission and that in any event, according to Moldovan legislation, it could not be considered an official interpretation of section 43 of the Law on Foreign Investment but merely an explanation. They requested the Court not to admit the letter as evidence. 30. The applicant company submitted for the Court's attention a judgment of the Court of Appeal of the Republic of Moldova in the case of Bimer S.A. versus the Ungheni Customs Office in which a similar matter had been decided. In that case the applicant had successfully challenged the closure of another duty free shop operated by it at the Ungheni customs point on the same grounds as in the present case. By its final judgment of 9 July 2002 the Court of Appeal found inter alia that the applicant company had been entitled to rely on the second paragraph of section 43 (2) of the Law on Foreign Investments and that the amended section 51 of the Customs Code could not have any bearing on the applicant company since according to section 46 of Law No. 780 it could not have retroactive effect on the duty free shops opened prior to its enactment.