The short read
The UK may be slated to leave the EU, but the English courts still have plenty of EU law to grapple with in the meantime.
This case concerned the competing obligations of the UK under the EU treaties and the Convention on the International Centre for Settlement of Investment Disputes (the “ICSID Convention”); in particular whether the English court should enforce an ICSID award in circumstances where the European Commission had determined that implementation or execution of the award would constitute State aid.
This case is primarily interesting because it considers the interplay between the UK’s international obligations under the ICSID Convention and the applicable EU treaties to the issue of State aid.
The award in question was issued in ICSID proceedings brought by Viorel Micula and Ioan Micula and their companies against Romania under the Romania-Sweden Bilateral Investment Treaty. The claims arose out of Romania’s repeal of tax incentives because they were seen as constituting State aid; state subsidies impermissible under EU law for distorting competition.
This is a long running case; the arbitration was commenced in 2005, an award was issued in 2013 (“the Award”). Throughout the long history of this case, the European Commission has taken an active approach in advocating the position that payment of any compensation to the Micula brothers would constitute State aid and be invalid under EU law. It: (i) intervened in the ICSID arbitration; (ii) issued an injunction to Romania in 2014 to restrain Romania from complying with the Award; and (iii) on 30 March 2015 it adopted Final Decision 2015/1470 (the “Final Decision”). The Final Decision declared that payment of the Award would constitute State aid, prohibited Romania from making any payment under the Award and directed it to recover any payments made already. The Micula brothers are seeking the annulment of the Final Decision before the General Court of the European Union (“GCEU”).
The role of the English court in the saga arose because in October 2014 it issued an order registering the Award (the “Registration Order”). However, following the Final Decision, Romania applied to set aside the Registration Order. The European Commission intervened in support of Romania.
This case is primarily interesting because it considers the interplay between the UK’s international obligations under the ICSID Convention and the applicable EU treaties in respect of the issue of State aid.
The enforcement regime under the ICSID Convention stands in contrast to the enforcement regime for New York Convention arbitral awards; in particular the same exceptions to enforcement. Instead, an ICSID award must be recognised as if it were a final judgment of a Contracting state’s own national courts. But how to comply with this obligation in the event enforcement of the Award would constitute a breach of EU law?
The English court’s distinction between registration and enforcement is a useful device in this particular context, but it also has an element of artifice to it in this context.
Blair J resolved a possible conflict in two ways.
First, he drew a distinction between the registering of an arbitral award as a judgment and execution on that judgment. The fact that the Award had been registered only meant that it reached the same stage of proceedings as if a judgment had been issued by the Court, which was a prior step to execution. Given that proceedings had not proceeded to execution, the English court had not put Romania in a position where it was in conflict with the Final Decision.
Second, given that various issues argued on the set-aside application were also subject to determination in the annulment proceedings before the GCEU, in order to avoid conflicting decisions between the GCEU and the English court, the English enforcement proceedings were stayed pending its outcome.
The English court’s distinction between registration and enforcement is a useful device in this particular context, but it also has an element of artifice to it.
The Award was registered under s1(2) of the Arbitration (International Investment Disputes) Act 1996, which implements the ICSID Convention in English law. Registration takes place where a person seeks “recognition or enforcement” of an award. The Court’s view was that just as there is a distinction between the giving of a judgment and the enforcement of it, so there is a distinction between registering an award, and enforcing it.
The distinction being drawn is one between a judgment, or registration in this case, and execution steps. However, once an award is registered, or judgment entered, obligations arise to satisfy the terms of the judgment: in this case, an obligation on Romania to pay damages to the Micula brothers as a matter of English law. Execution is the means by which payment is achieved in circumstances where the judgment is not honoured.
As to the broader impact of this case as a matter of English law:
If there is no annulment of the European Commission’s Final Decision and assuming Blair J’s decision is not overturned on appeal, the writing does appear to be on the wall for the Micula brothers. Blair J has opened up the possibility for execution against the Award to be in breach of the UK’s EU treaty obligations, but not its obligations under the ICSID Convention. This distinction may well be applicable in other contexts, for example where payment of a judgment would be impermissible under the EU sanction regime.
However, the fate of the Award in England has been pushed off to another day, once the GCEU annulment proceedings have been completed. If sufficient time passes, the Micula brothers may find themselves in a position where the UK is no longer a Contracting State to the EU treaties post-Brexit. Quite what the status of the UK’s international obligations will be then and how this will affect the Award will be open to debate. One thing is clear: going forwards the UK will escape the intra-EU BIT complexities which the Micula case has become emblematic of. (We will be posting more on that shortly.) Although, this will remain an issue for other European Member States where enforcement proceedings are on-going.
For those wanting to know more about this case, read on below.
The longer read…
At the heart of this case are the UK’s competing obligations; on the one had as a Contracting State to the ICSID Convention and on the other as a Member State of the EU.
The investment and claim: During the early 2000s, the Micula brothers invested in a large food production operation in Romania. They did so on the basis of an investment incentive scheme in the form of an emergency government ordinance. However, in 2004 the Romanian Government repealed the tax incentives provided under this scheme because it was seen as State aid. The ICSID claim arose out of this repeal.
The Award: the Award was issued in December 2013. As at 31 August 2016, the outstanding amount under the Award was £173 million (converted into sterling); the damages awarded being the equivalent of the assistance which it would have received but for the measures taken by the State to withdraw the aid which had been extended. Romania sought, unsuccessfully, to annul the Award; as determined by an ICSID ad hoc Committee on 26 February 2016. Enforcement proceedings were commenced not only in England but also the United States, France, Belgium, Luxembourg and Sweden.
The decision of the European Commission: Following the issue of the Award, Romania sought to set-off taxes it claimed were owed to it by the claimants against payment of the Award. Further, the European Commission issued an injunction to restrain Romania from taking any action to execute or implement the Award until it had taken a final decision on the compatibility of State aid. The Final Decision was issued on 30 March 2015, and annulment proceedings are still pending before GCEU.
English registration: In October 2014 the Award was registered in the English courts under the Arbitration (Investment Disputes) Act 1966, which implemented the ICSID Convention in the UK (the “1966 Act”). This was following an application from the Micula brothers and their companies; they are therefore the claimants in this action.
This Application: Romania applied to set aside or stay the registration, or alternatively submit the questions arising in this case to the Court of Justice for the European Union (“CJEU”). Romania argued that it followed from the Final Decision that the court is duty-bound, as matter of domestic constitutional law which incorporates EU law, to refuse registration or execution of the Award. The European Commission intervened in support of Roman’s position.
The UK’s competing international obligations
At the heart of this case are the UK’s competing obligations; on the one had as a Contracting State to the ICSID Convention and on the other as a Member State of the EU.
Under the ICSID Convention each contracting state must recognise an ICSID award as if it were a final judgment of its own national courts; as Blair J said: “[t]his is an important part of the fulfilment of the UK’s international obligations in respect of investment disputes decided under the Convention.” (This is to be contrasted with the enforcement regime under the New York Convention where there are certain limited grounds for refusal of an arbitral award by the enforcing courts, which may have provided an easier route for the resolution of the UK’s competing international obligations in respect of the enforcement of the Award).
On the other hand, the European Commission, supported by Romania, argued that the English court could not assist the claimants through the recognition and enforcement of the Award as this would prevent or impede Romania’s compliance with its EU law obligations as regards State aid. The UK’s obligations derive from the Treaty on the Functioning of the European Union (“TFEU”). The TFEU provides that “State aid” is, in principle, incompatible with the internal market and that it is the European Commission’s role to examine the compatibility of aid measures with the internal market. A decision of the European Commission “shall be binding in its entirety”, and national courts must refrain from taking decisions which conflict with a decision of the European Commission.
In resolving this tension of competing obligations, the English court considered the following issues:
Issue 1: finality of decisions
Given that the Final Decision of the European Commission decision post-dates the Award, can the Final Decision affect the Award? The claimants’ argument was that the Award has a res judicata status as a matter of EU, and thus could not be affected by a later decision of the European Commission.
Of particular relevance to this argument was the fact that the European Commission had intervened in the ICSID proceedings arguing that any payment of compensation under the Award would constitute illegal State aid, although the Tribunal had not decided the issue given that it was an issue which would arise on enforcement.
The court accepted that the Award had become final when it was issued, pre-dating the decision of the European Commission. However, it also noted that if it proceeded to enforce it as if it were a judgment of the English court, it would be in direct contradiction with the European Commission’s decision.
Ultimately the English court did not need to resolve this issue as it formed the view that the impact of the Award being res judicata on actions which may be taken by national courts of Member States was at issue in the annulment proceedings before the GCEU. Consequently, the English court determined that final determination of this issue should be stayed pending the decision of the GCEU.
Issue 2: the effect of the Arbitration (International Investment Disputes) Act 1996
The English Court considered whether, leaving aside questions of EU law, the court has a duty under the 1966 Act to register/enforce the Award.
This appeared to be an attempt by Romania and the European Commission to open up the scope for refusal of awards under the ICSID regime, as implemented through national legislation. The argument ran was that the 1966 Act is not an “automatic” registration requirement but only requires that the Award be treated in the same way the court would treat a judgment of the English Court – that the obligation was non-discrimination, not result. This would allow the English Court to give priority to EU law and refuse to enforce it in the present circumstances.
The Court tackled this issue by reference to the specific facts of the case, allowing it to avoid head on confrontation with the interpretative point raised. It held:
First, the claimants had sought registration of the Award as a judgment, not execution on it. The measure prohibited by the European Commission was payment of the Award. “Registration in itself does not create a risk of conflict between decisions of domestic and EU institutions in the sense established in case law.”
Second, once a judgment is entered in terms of the award, the award is to be treated the same as any other judgment of the English court. In reaching this view, the English court drew parallels with sovereign immunity national legislation; an award against a State may be registered in England but in order to execute, the restrictions set out in the State Immunity Act 1978 must be complied with. The English court put the requirement to comply with EU law into the same category. The court could not proceed to enforce the judgment consequent on registration of the Award in circumstances in which the Commission has prohibited Romania from making any payment to the claimants. It also avoided, the court’s view, any confrontation with the 1966 Act and the UK’s obligations under the ICSID Convention; noting “The question is a very limited and specific one of legality in enforcement”.
Issue 3: Article 351 TFEU
Article 351 of the TFEU is a carve-out for Member States’ international obligations existing prior to accession to the EU. The claimants argued that Article 351 applied because the UK’s membership of the ICSID Convention took effect in 1967, several years prior to the UK joining the EEC.
The English court declined to get into the substance of the arguments on this point, because the issue is also raised in the annulment proceedings before the GCEU. While the court accepted that the context in which they arose may be different (i.e. the English court is only concerned with the UK’s obligations to enforce the Award), as the issue was before the GCEU, there was still a risk of inconsistent decisions.
Issue 4: European Communities Act 1972
The 1972 Act is the Act that legislated for the accession of the UK to the European Union. When entering into the 1972 Act did the UK Parliament intend to put the UK in breach of its international obligations, including under the ICSID Convention?
Again, the English court said this issue was answered by the fact that there was no conflict between the enforcement regime for ICSID awards and EU law. Once an award had been registered as a final judgment of the English court, the UK’s obligations under the ICSID Convention (effective in national law through the 1966 Act) were complied with when judgment was entered. However, execution would need to be compatible with EU law.
Issue 5: EU law duties, especially Art 4(3)
The claimants also sought to argue that enforcement of the Award would not be contrary to EU law in any event (including specifically the obligation of sincere cooperation under Art 4(3) of the Treaty of the European Union). The claimants argued that any satisfaction of the Award would not amount to an act imputable to Romania because it would be involuntary, and not pursuant to an autonomous decision by Romania.
Again, the English court held that this issue was tied up with the annulment application to the GCEU. A decision on imputability would risk conflict with the GCEU’s decision as to Romania’s obligations. Although, it also appeared that the English court did not think much of the argument as things presently stood. If the English court were to enforce the Award, Romania would be required to pay the Award, which is what the European Commission’s Final Decision prohibits.
Issue 6: Payment
Romania also argued the Award had been paid in full, which meant that the registration should be set aside. However, the English court rejected this. While Romania had sought to set off tax owed by the claimants against the amount due under the Award, but set-off does not constitute payment unless the debt in question is extinguished, which had not happened in this case.
Issue 7: the Romania- Sweden BIT
The English court had been urged to determine that the Romania-Sweden BIT was invalid on the grounds that when Romania acceded to the European Union, it become invalid following on from the general primacy of EU law as it impinges on the EU’s exclusive competence to regulate intra-EU cross-border investments.
The English court held it did not have the competence to rule on this issue (although it could refer the issue to the CJEU), but in any event, the validity of the Romania-Sweden BIT was not an issue to be decided in this case.
Should the Court grant security in light of its decision to stay the enforcement proceedings?
The English court declined to determine this issue and invited further submissions from the parties. The matter had not yet been addressed fully because the parties had only had the opportunity to make written submissions.
The English court held that the claimants had advanced a persuasive case for security given that the proceedings relate to an ICSID Award which pre-dates the decisions of the European Commission, the Award is to be treated as a judgment of the English court and it has been unpaid for several years. However, before doing so, it required that it be satisfied that:
- the English court has power to direct security when an award is being enforced under the 1966 Act. The 1966 Act does not have the equivalent provision to the 1996 Arbitration Act which includes the express power for security when it comes to the enforcement of awards under the New York Convention; and
- the payment of security and any steps to be taken upon non-compliance would not violate EU law.