In the latest episode of the long-running Micula saga, the UK Supreme Court has today finally closed the English chapter of a 15-year long investment treaty dispute, by allowing for the enforcement of this infamous ICSID award against Romania in the UK. While this is just one piece of the global jigsaw, with enforcement proceedings still ongoing in Romania, Belgium, France, Luxembourg, Sweden and the United States, it nevertheless constitutes an important milestone in the Micula case and recognises, more widely, the very high level of deference and respect paid by the English Courts to the parameters set upon them by the ICSID Convention.
Background
ICSID arbitration (ICSID Case No. ARB/05/20)
The Micula brothers commenced ICSID arbitration proceedings against Romania in 2005, under the 2002 Sweden-Romania bilateral investment treaty (“BIT”), seeking compensation for Romania’s premature revocation of a number of tax incentives that had been previously granted to promote investment in underdeveloped regions of the country. The brothers claimed that, in reliance on those incentives, and in reliance on the expectation that these incentives would be maintained during a ten-year period, they made substantial investments in the Ştei-Nucet-Drăgăneşti disfavoured region located in Bihor County in north-western Romania. Those investments consisted contributions of over €200 million through the purchase or importation of machinery, raw materials, lands, buildings, equipment and means of transportation for food production facilities. They further claimed that Romania’s premature repeal of those incentives, in the context of Romania’s accession to the EU, was in breach of its obligations under the Sweden-Romania BIT and caused damages to them.
In December 2013, a majority ICSID tribunal held that the withdrawal of the tax incentives constituted a breach of the fair and equitable treatment standard and ordered Romania to pay €178 million in compensation ("ICSID Award"). This was despite the claim of the European Commission, intervening as amicus curiae during the arbitration proceedings, that any ruling of the ICSID tribunal reinstating the privileges abolished by Romania, or compensating the brothers for the loss of those privileges, would lead to the granting of new aid incompatible with EU State aid rules.
In 2014, Romania subsequently made a partial payment of the ICSID Award of approximately €76 million by offsetting a tax debt owed by one of the claimants to the ICSID arbitration.
European Commission Decision 2015/1470
In 2015, following Romania’s partial payment of the award, the European Commission ruled that such payment constituted illegal State aid, and precluded any further payment by Romania, ordering it to recover the partial payment that had been made ("2015 Commission Decision").
ICSID annulment proceedings
Romania requested the annulment of the ICSID Award before an ad hoc ICSID Committee on the basis of, among other things, the 2015 European Commission Decision. The ad hoc Committee unanimously rejected Romania’s application for annulment and found that none of the grounds for annulment of Article 52 of the ICSID Convention invoked by Romania had been met, namely that (1) the ICSID Tribunal manifestly exceeded its powers, (2) there was a serious departure from a fundamental rule of procedure and (3) the award failed to state the reasons upon which it was based. In addition, the ad hoc Committee expressly rejected the State aid arguments put forward by the European Commission, who had also intervened in the annulment proceedings.
English Commercial Court proceedings
In October 2014, the Micula brothers successfully registered the ICSID Award in the UK, by way of a registration order from the English High Court. Romania filed an application in the Commercial Court in July 2015 to set aside (or, in the alternative, vary and stay) the registration order.
In September 2016, the Micula brothers filed a cross-application for security for the ICSID Award as a condition of the stay, in the event of the English court allowing Romania’s application.
In January 2017, the English court refused to set aside the registration order, but granted a stay of enforcement of the ICSID Award pending determination of the proceedings before the General Court of the CJEU (“GCEU”) with respect to the requested annulment of the 2015 Commission Decision – see below.
In June 2017, the Miculas’ application for security was refused.
English Court of Appeal proceedings
The Micula brothers appealed against the stay of the enforcement of the ICSID Award (the “Stay Appeal”) and the refusal to grant security (the “Security Appeal”) by the English Commercial Court. In July 2018 the English Court of Appeal rejected the Stay Appeal, upholding the stay on enforcement until the conclusion of the GCEU proceedings. However, the Court of Appeal granted the Security Appeal and ordered Romania to provide £150 million as security. Although the payment of this security was expressed as a term of the continued stay, the stay was not conditioned on such payment.
In refusing the Stay Appeal, the judges’ reasoning differed in interpreting Section 2 of the Arbitration (International Investment Disputes) Act 1966 (the “1966 Act”). Section 2 of the 1966 Act provides that a registered ICSID award holds the same force and effect, for the purposes of execution, as if it had been an English High Court judgment. The issue under Section 2 of the 1966 Act was whether an English court was obliged to stay the enforcement of an ICSID award simply because it would be contrary to EU law.
Romania argued that the effect of Section 2 was to give the ICSID Award, on registration, the same status under English law as any other English High Court judgment and that the enforcement of any other such judgment would, in theory and practice, be subject to any restrictions on enforcement that may exist under EU law. Accordingly, Romania argued that the registered ICSID Award would have to be subject to any restrictions on enforcement under EU law, in this case being the 2015 Commission Decision prohibiting Romania’s payment of the ICSID Award.
Hamblen LJ broadly accepted Romania’s argument and adopted a wide interpretation of Section 2, agreeing that EU law could provide a bar to enforcement which would apply, equally, to a registered ICSID award just as it would to an English High Court judgment.
Arden and Leggatt LJJ disagreed with this approach. They adopted a narrower interpretation of Section 2, holding that its proper interpretation limits the analogy with a High Court judgment to defining the force and effect of a registered award for the purposes of execution. The analogy does not, they held, give the High Court power to refuse to enforce an award for a reason that would justify staying the enforcement of an ordinary domestic judgment. In that regard, under the ICSID Convention, the UK has an obligation to enforce ICSID awards and the 1966 Act cannot logically be understood as overriding the UK’s enforcement obligation by requiring the English courts to decline to enforce a judgment contrary to EU law. A wide interpretation of 1966 Act would result in a situation where domestic courts could thwart execution of enforceable ICSID awards and would go against the ICSID Convention’s fundamental principle of effective enforcement.
Nevertheless, Arden and Leggatt LJJ considered that the ICSID Convention allows domestic courts a limited discretion to stay the execution of an ICSID award. Any stay on the enforcement of an ICSID award could only be for a temporary purpose if the award were enforceable under the ICSID Convention. If the GCEU set aside the 2015 Commission Decision and there were no appeal, it would be difficult to see how there could be any extension of the stay.
In granting the Security Appeal, the Court of Appeal held that while it had power under English law to require Romania to provide security as a condition of the stay, such a condition would conflict with the duty of sincere cooperation under EU law. The duty of sincere cooperation recognises a mutual legal obligation for the EU and its Member States to assist each other in carrying out the tasks which flow from the EU treaties and the fulfilment of EU law obligations. Accordingly, national courts must refrain from taking decisions that conflict with a decision of the European Commission. The 2015 Commission Decision precluded any further payment by Romania to the Micula brothers on the basis that it constituted State aid. If Romania failed to furnish security and the Court of Appeal lifted the stay on enforcement, then that would directly conflict with the 2015 Commission Decision, therefore undermining the duty of sincere cooperation. On the other hand, an order for Romania to provide security, without the consequence that the stay would be lifted if security was not provided, did not conflict with EU law and would not conflict with the 2015 Commission Decision. The Court of Appeal also found that the provision of security could not reasonably be regarded as a breach of the 2015 Commission Decision.
The Court of Appeal concluded that the UK has an obligation under the ICSID Convention to enforce the ICSID Award. If that obligation could not be complied with at that point in time, the English court should in principle do the “next best” to permitting enforcement. In this case, the next best that could be achieved without potentially violating EU law was to order Romania to provide security; such an order would at least assist the Micula brothers to recover sums due to them promptly if the European courts ruled in their favour.
Romania appealed the Security Appeal and the Micula brothers cross-appealed the Stay Appeal.
Annulment proceedings before the GCEU
The Micula brothers filed an annulment application of the 2015 Commission Decision with the GCEU in November 2015. In June 2019, the GCEU upheld the brothers’ application and annulled the 2015 Decision in its entirety, considering that EU State aid law was inapplicable and that the European Commission had exercised its power retroactively. The GCEU found that all key events at stake, being Romania’s adoption of the incentive measures, the brothers’ acquisition of the licences enabling them to benefit from the tax incentives, the entry into force of the Sweden-Romania BIT, Romania’s revocation of the incentives and the initiation of the ICSID arbitration proceedings, took place before Romania acceded to the EU in 2007.
The UK Supreme Court’s judgment
Today, 19 February 2020, the UK Supreme Court (the “UKSC”) unanimously lifted the stay on enforcement of the ICSID Award. It did so on the basis that there was no impediment to the lifting of the stay given that, as a matter of international law, this would not constitute an unlawful measure and, as a matter of English law, to do so would not be unjustified or unlawful.
The Micula brothers had cross-appealed the Stay Appeal on the following grounds:
- The effect of the GCEU’s judgment annulling the 2015 Commission Decision is that the duty of sincere cooperation can no longer require English courts to stay the enforcement of the ICSID Award;
- Under the ICSID Convention and the 1966 Act, the English courts have no power to order a stay of the ICSID Award;
- The stay is incompatible with the ICSID Convention in any event and serves no useful purpose;
- The European Communities Act 1972 does not require the UK to breach its pre-accession obligations under the ICSID Convention as implemented by the 1966 Act; and
- Article 351 of the Treaty of the Functioning of the European Union (“TFEU”) applies with the result that UK’s obligations under the pre-accession ICSID Convention are not subject to the overriding effect of EU law.
The UKSC dismissed the first ground on the basis that, while the 2015 Commission Decision was annulled, the initiating decision which commenced the formal Commission investigation into State aid still subsisted. Without a final Commission decision closing the investigation, it necessarily imposed a duty of sincere cooperation on the part of the UK. Moreover, the existence of a pending appeal of the GCEU’s decision was, in itself, sufficient to trigger the duty of sincere cooperation.
The UKSC considered grounds 2 and 3 above together. In interpreting the wording of Article 54(1) of the ICSID Convention and its travaux préparatoires, the UKSC found that the Court of Appeal reasoning provided by Hamblen J, on one hand, and Arden and Leggatt LJJ, on the other hand, regarding the proper interpretation of Article 54(1), were both arguable and that only the International Court of Justice could authoritatively resolve the distinction. The UKSC agreed with the majority of the Court of Appeal that English courts had a power to stay the execution of the ICSID Award in limited circumstances. However, the UKSC also found that the Court of Appeal exceeded the proper limits of that power on the basis that it was not a limited stay of execution on procedural grounds but, rather, a prohibition on the enforcement of the ICSID Award on substantive grounds until the GCEU’s ruling was handed down. This was held not to be consistent with the ICSID Convention, under which English courts had a duty to recognise and enforce the ICSID Award. The UKSC found that the Court of Appeal disregarded the principle laid down in Article 53(1) of the ICSID Convention, that awards are binding on parties and are not subject to any appeal or other remedy except those provided under the ICSID Convention, and reflected in Article 54. In conducting this analysis, the UKSC drew sharp contrasts with the New York Convention, which provides domestic courts with far wider powers with respect to enforcement issues.
The UKSC considered grounds 4 and 5 above together to determine the interplay between the UK’s international obligations with its EU obligations. Article 351 of the TFEU is an express provision of EU law which establishes that the application of EU treaties does not affect the duty of a Member State to respect the rights of non-Member States under a prior agreement and to perform its obligations thereunder. The UKSC found that the UK’s obligations under Articles 54 and 69 of the ICSID Convention, being a pre-accession international agreement, relating to the effective recognition and enforcement of ICSID awards, were owed to all other ICSID contracting states. The ICSID Convention is one of mutual trust and confidence which depends on the participation and compliance of every contracting state and therefore, obligations under the ICSID Convention are owed by all contracting states to all other contracting states. The community of ICSID contracting states includes non-EU Member States and therefore the UKSC held that Article 351 of the TFEU applied to uphold the UK’s obligations under the ICSID Convention. Moreover, the UKSC held that the duty of sincere cooperation as arising from EU law does not require English courts to decline to decide this issue pending its resolution by the EU courts, or otherwise to defer to the EU courts on this issue. This conclusion was reached on the basis that (i) questions as to the existence and extent of obligations under the ICSID Convention are not reserved to the EU courts; (ii) the issue brought to the UKSC concerning Article 351 TFEU is not the same issue raised in EU proceedings and (iii) the prospect of an EU court addressing the applicability of Article 351 TFEU to pre-accession obligations under the ICSID Convention, in the context of the present dispute before the UKSC, is remote. Therefore, it was held that the duty of sincere cooperation does not require the imposition of a stay of enforcement of the ICSID Award.
In light of its conclusion to lift the stay of the enforcement of the ICSID Award, the UKSC no longer found it necessary to consider Romania’s appeal in relation to the Security Appeal.
What can be learned?
As the curtain comes down on the English act of the Micula drama, the UK Supreme Court’s judgment bears strong testament to the UK’s commitment to its international obligations and, specifically, international conventions in the context of international arbitration.
For cross-border investors, this decision will be a welcome development in English case law, underpinning the effectiveness of the ICSID Convention. The exceptionally principled judgment further strengthens England’s position as a viable jurisdiction for enforcement of investment treaty awards, and lays the foundation for navigating the post-Brexit dialogue between the English and EU courts.
