The Micula saga has been one of the most controversial talking points in the arbitration world over the last two decades. 


Micula and others v Romania [2020] UKSC 5

The background is well-known: the underlying arbitral proceedings arose out of Romania's repeal of certain tax incentives determined by the EU to be incompatible with EU State aid rules, at the behest of the EU during the formal accession negotiations between Romania and the EU from 2000 to 2004.  Romania subsequently acceded to the EU in 2007.  Six years later, in 2013, an ICSID tribunal rendered a final award against Romania (the "Award"), finding Romania liable for breach of the Sweden-Romania bilateral investment treaty on the basis of its repeal of the incentives.  The amount of compensation awarded was approximately £150m.   

The UK Supreme Court ("UKSC") proceedings were the latest instalment of the long-running international enforcement efforts of the Award creditors (the "Claimants").  On 19 February 2020, the UKSC lifted a stay of enforcement of the Award.  In doing so, it considered the interplay between the UK's international obligations under the ICSID Convention, on the one hand, and EU law, on the other.        

Following the issue of the Award, Romania applied for its annulment under the ICSID Convention, as well as for a stay of enforcement by the ICSID ad hoc Committee.  The annulment application was dismissed in early 2016.  In the meantime, Romania purported to partially implement the adverse Award voluntarily by means of tax relief.  This resulted in the  European Commission (the "Commission") issuing an injunction in May 2014, ordering Romania to suspend action which might lead to execution or implementation of the Award until the Commission had taken a final decision on the compatibility of that State aid with the rules of the EU internal market.  On 1 October 2014, the Commission took a decision formally opening the State aid investigation (the "Initiating Decision").  In the same month,  the Claimants successfully applied to the English Commercial Court to have the Award registered pursuant to the Arbitration (International Investment Disputes) Act 1966 (the "1966 Act").    

In March 2015, following a formal State aid investigation, the Commission adopted a Decision (the "Commission Decision") determining that the payment of the Award by Romania constituted State aid within the meaning of article 107(1) of the Treaty on the Functioning of the European Union ("TFEU").  Later that year, the Claimants commenced proceedings before the General Court of the European Union (the "GCEU") seeking annulment of the Commission Decision.

Romania duly applied to the Commercial Court in July 2015 for the registration order to be set aside or varied, and the Claimants made a counter-application seeking an order for security in the event that a stay of enforcement should be ordered.

In January 2017, the Commercial Court dismissed Romania's application to set aside registration, although it ordered a stay of enforcement pending determination of proceedings before the GCEU.  The Commercial Court handed down a second judgment in June 2017, refusing the Claimants' application for security.  The Claimants appealed both of these orders, and in July 2018 the English Court of Appeal dismissed the appeal against the order of a stay, but allowed the appeal against the security order, and ordered Romania to provide security in the sum of £150m. 

In June 2019, the GCEU proceeded to annul the Commission Decision on the ground that the Commission had purported to apply its powers retroactively to events pre-dating Romania’s accession to the EU.  In August 2019, the Commission lodged an appeal with the Court of Justice of the European Union ("CJEU").  In September 2019, the English Commercial Court issued an order, pursuant to Romania's application, for a continued stay of enforcement of the Award (which had lapsed with the GCEU's judgment) pending the outcome of Romania's appeal to the CJEU.  The parties subsequently obtained certificates for a leapfrog appeal to the UKSC.  Romania's appeal to the CJEU remains pending.

The arguments before the UK Supreme Court

The UKSC heard Romania's appeal against the order for security, and a cross-appeal by the Claimants against the grant of a stay.  Given that the UKSC ultimately accepted the Claimants' cross-appeal, it did not deal with Romania's appeal.  The Claimants' successful cross-appeal against the stay of enforcement was premised on the following essential grounds: 

  1. The effect of the GCEU's judgment annulling the Commission Decision was that the duty to observe the principle of sincere co-operation under Article 4(3) of the Treaty on European Union ("TEU") no longer required the English courts to stay enforcement of the Award.  
  2. Under the ICSID Convention and the 1966 Act there is no power to order a stay of the Award, and such a stay was in any event incompatible with the ICSID Convention and served no useful purpose.
  3. The effect of the European Communities Act 1972 was not to require the UK to breach its pre-accession international obligations under the ICSID Convention and the 1966 Act.  Article 351 TFEU applied with the result that the obligations of the UK under the pre-accession ICSID Convention were not subject to the overriding effect of EU law.

The Judgment

The duty of sincere cooperation applied, notwithstanding annulment by the GCEU of a decision of the Commission

The UKSC accepted Romania's position on this issue, finding that the judgment of the GCEU did not affect the extant Commission investigation into State aid, and that absent a final decision closing the formal investigation procedure, the effects of the Initiating Decision subsisted.  This, in turn, imposed the duty of sincere co-operation on the English courts, and the UKSC held that such a duty remained notwithstanding that the Initiating Decision had been premised on the same flaws as the Commission Decision.     

English courts have the power to stay execution of an ICSID award in limited circumstances 

The Commercial Court previously stayed enforcement of the Award on the basis that under both the ICSID Convention and s.2 of the 1966 Act, an ICSID award is to be equated for enforcement purposes with a judgment of the High Court.  It followed that just as the High Court would not enforce a domestic judgment which conflicted with a decision of the Commission, it would not enforce the Award pending the outcome of annulment proceedings. The Court of Appeal unanimously reached the same result, albeit the bench was split with respect to the question whether the ICSID Convention and 1966 Act operated so as to equate an ICSID Award to a domestic judgment for all purposes.

The Claimants argued before the UKSC that, in line with the scheme of the ICSID Convention, once the authenticity of an ICSID award has been established, a domestic court before which recognition is sought may not re-examine that award on its merits.  The Claimants drew a distinction in this respect between the English courts' power to order a stay of enforcement, on the one hand, and a stay of execution, on the other. They argued that while to grant a stay of execution may be permissible in certain circumstances, this could only be the case on strictly procedural (as opposed to substantive) grounds. 

The UKSC agreed with the majority of the Court of Appeal, finding that English courts have the power to stay execution of an ICSID award in circumstances in which it is just to do so, provided that any stay of execution is temporary and consistent with the purposes of the ICSID Convention.  However, in granting a stay of execution of the Award pending determination of the annulment proceedings in the GCEU, the Court of Appeal had exceeded the proper limits of its power, since in substance the Court of Appeal had made use of the powers to stay execution granted by domestic law in order to thwart enforcement of an award which had become enforceable under the ICSID Convention.    

The UK's enforcement obligations under the ICSID Convention are unaffected by the EU Treaties

Article 351 TFEU is intended to establish that the application of the 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.   

At first instance, the Commercial Court held that the obligation on the English courts under Article 351 TFEU to eliminate perceived incompatibility between the ICSID Convention and the EU Treaties could not apply, since, in the event, no such incompatibility existed.  The Court of Appeal, for its part, found that it was not required to reach a final decision on the point. 

The UKSC approached the question on the basis that the issue only arose if the lower courts had erred in finding the decision to stay enforcement or execution of the Award pending the annulment proceedings was consistent with the ICSID Convention.  According to Romania, in those circumstances the EU duty of sincere cooperation nevertheless required imposition of a stay.  The Claimants, on the other hand, argued that the UK's obligations of recognition and enforcement under the ICSID Convention are pre-accession obligations - and therefore unaffected by obligations arising under the EU Treaties. 

The UKSC found that on a proper interpretation, the UK owes its obligations under the ICSID Convention to all other Contracting States, as opposed to the home State of the award beneficiary.  Accordingly, the case did not involve only intra-EU relations.  It was noted that Article 267 TFEU (which empowers the CJEU to give preliminary rulings on EU law) does not confer any power to interpret treaties which EU member states concluded with non-member states prior to their accession to the EU, and accordingly it was not possible for the UKSC to make a preliminary reference to the CJEU on the issue in the present case.  

The UKSC rejected Romania's argument that the UKSC should be precluded from determining the extent of the UK's obligations under the ICSID Convention on the basis that such a ruling might conflict with a future ruling by an EU court.  It held that neither EU courts nor domestic courts have competence to give a binding decision as to the existence and extent of obligations under a prior multilateral convention, such function being reserved in the case of the ICSID Convention to the International Court of Justice.  On the facts, there was no congruence of issues before the EU Courts (which are questions of EU law) and the question before the English courts.  The prospect of an EU court addressing the applicability of Article 351 TFEU to pre-accession obligations under the ICSID Convention was remote.  In such circumstances, the duty of sincere co-operation could not require imposition of a stay on the enforcement of the Award.

Commentary

The decision confirms that while the English courts will have due regard to the obligation of sincere cooperation under Article 4(3) TEU, the EU Treaties can have no effect in respect of the UK's international obligations arising under pre-accession treaties, as long as those obligations do not conflict with the UK's obligations under the EU Treaties.  The UKSC's decision should give comfort to parties contemplating initiating ICSID proceedings against states holding non-immune assets in the UK. 

While the UKSC's judgment was not affected by the UK's departure from the EU, given the continuing effect of EU law for the pendency of the Brexit transition period, the decision represents another significant development in the broader context of the well-documented antipathy of the Commission to resolution of investment disputes outside the EU legal framework, and its treatment by national courts.  Given the pending appeal by the Commission to the CJEU on the question whether payment of the Award by Romania constitutes unlawful State aid, and the Claimants' efforts to enforce the Award in multiple jurisdictions in the meantime, the UKSC's decision will not be the end of the story.

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Ben Burnham

Ben Burnham

Managing Associate, Litigation
London, UK

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Tom Walmsley

Tom Walmsley

Associate, Litigation
London

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