Was the Micula Award State Aid? Back to the EU General Court

In a judgment of 25 January, the EU Court of Justice has quashed the General Court’s decision  that the European Commission was not competent ratione temporis to assess whether compensation paid by Romania to two Swedish investors (the Micula brothers), under a 2013 ICSID award rendered under the 2002 Sweden-Romania BIT, constituted state aid. The Court of Justice found that the investors’ definitive right to compensation arose from the award itself (rendered after Romania’s accession to the EU) and not from Romania’s breach of the BIT (which occurred before such accession). Therefore the Commission had competence over the state aid question as it was obtained at a time when EU law was applicable.

Background

An ICSID tribunal constituted in 2005 under the 2002 Sweden-Romania BIT ruled in 2013 that Romania impaired the Micula brothers’ investments by repealing certain incentives offered to investors. Romania repealed these in 2005, shortly before its accession to the EU on 1 January 2007, in order to eliminate domestic measures that could constitute state aid incompatible with EU Law. The investors were awarded around EUR 178 million for their damage covering a period of 22 February 2005 to 31 March 2009.

Following partial payment of the award by Romania, the European Commission ruled in 2015 that such payment constituted illegal state aid. It precluded any further payment by Romania and ordered it to recover the partial payment that had been made. This decision was quashed by the General Court in June 2019, on the basis that the award recognised a right to compensation for the investors existing before Romania’s accession to the EU and thus that the Commission was precluded from applying EU state aid rules to this situation (see our previous post). This allowed the General Court to avoid discussing the relationship between EU law and intra-EU investment arbitration, by ruling that “in the present case, the arbitral tribunal was not bound to apply EU law to events occurring prior to the accession before it, unlike the situation in the case which gave rise to the judgment [in Achmea]” (para. 87). The General Court’s decision was appealed by the Commission before the Court of Justice on 27 August 2019.

Spain also filed a cross-appeal, supported by the European Commission and Poland, claiming that the arbitral award was contrary to the Achmea decision concerning intra-EU BITs (see our previous post) and, as a result, that the investors would have had no legitimate interest in bringing an action against the Commission’s 2015 state aid decision.

When was the alleged aid measure granted?

On the first question, the Court of Justice held that “even if, as the General Court pointed out on numerous occasions in the judgment under appeal, the repeal, allegedly in breach of the BIT, of the tax incentives scheme at issue constitutes the event giving rise to the damage, the right to the compensation in question was granted solely by the arbitral award issued by that court, which, having upheld the claim brought by the arbitration applicants, not only found the existence of that right, but also quantified the amount thereof” (para. 125). As a result, the alleged state aid occurred after accession, thereby leading to the application of EU state aid rules and the competence of the European Commission to assess the compensation thereunder.

The Achmea judgment is relevant to the Micula case

Having concluded that the General Court’s decision had to be quashed, the Court of Justice did not rule on Spain’s cross-appeal (para. 148). However, it nevertheless pointed out that the General Court was wrong to have considered that the Achmea case was irrelevant in the case at hand. Since the compensation sought by the investors did not relate exclusively to the damage allegedly suffered before the 2007 accession (as the relevant period for such damage extended to 31 March 2009), the arbitral proceedings could not be regarded as being confined in all respects to a period prior to such accession. As a result, “with effect from Romania’s accession to the European Union, the system of judicial remedies provided for by the EU and FEU Treaties replaced that arbitration procedure, the consent given to that effect by Romania, from that time onwards, lacked any force” (para. 145).

The state aid assessment is referred back to the General Court

The case will be referred back to the General Court, which will thus have to determine whether the Commission was right to consider that the payment by Romania of the compensation granted by the award was unlawful state aid. To reach this conclusion, the Commission relied heavily on the fact that the award would have been rendered on the basis of an intra-EU BIT contrary to EU law (although Romania’s accession occurred during the proceedings). In its upcoming assessment, the General Court will have to factor in the Achmea case as well, in view of the Court of Justice’s conclusion on its relevance.

The upcoming assessment of the General Court will be key for other intra-EU BIT/ECT arbitration proceedings. Since many arbitral tribunals have remained undeterred by the Achmea case law, the state aid argument offers another way for the European Commission to oppose the enforcement of the awards rendered by these tribunals, in addition to the filing of amicus curiae briefs in (non-EU) enforcement proceedings and in its efforts to have intra-EU BITs repealed by the Member States.

Almost 20 years after the start of the arbitration proceedings, this upcoming General Court decision may, even then, not be the end of the story, as it may also be subject to a new appeal to the Court of Justice.

A longer version of this article was first published on Kluwer Arbitration Blog