CJEU disagrees with the UK Supreme Court in Micula saga

The CJEU has further expanded its body of case law on intra-EU investment treaty arbitration with its judgment in Commission v United Kingdom (Case No. C-516/22), in which it found that the UK  infringed EU law by the UKSC’s authorisation of the enforcement of an ICSID arbitral award in the Micula v Romania proceedings.

Background

At its core, the Micula saga, concerns a decision made in 2005 by Romania to revoke certain incentives offered to investors under the 2002 Romania-Sweden BIT. Two investors, the Romanian-born Swedish twin brothers Micula (and companies controlled by them), alleged that the revocations infringed on their rights and devalued their investments, and brought arbitral proceedings under the BIT before the International Centre for Settlement of Investment Disputes (“ICSID”). The tribunal, in 2013, ruled in favour of the Micula brothers and awarded them damages of approximately EUR 178 million.

In 2015, the European Commission ruled that payment of compensation to the Micula brothers would constitute illegal state aid. This decision was quashed in 2019 by the EU’s General Court (“GC”), but the Commission appealed to the Court of Justice of the European Union (“CJEU”), which, as previously reported, overturned the GC’s decision and remanded the case back to it.

UK proceedings

In the meantime, the Micula brothers sought to enforce the ICSID award in a number of jurisdictions, including the UK where the award was registered in 2014. Romania applied for a stay of enforcement, which the English Commercial Court granted in 2017, pending the outcome of the proceedings before the GC (as well as parallel ICISD annulment proceedings, where Romania’s arguments were ultimately rejected). The Micula brothers appealed against the stay but the English Court of Appeal upheld it in 2018.

The proceedings then continued before the UK Supreme Court (UKSC). In February 2020 it lifted the stay of enforcement. As previously reported, this was, in short, because it viewed the stay as incompatible with the UK’s obligations under the ICSID Convention (as incorporated into domestic law). Moreover, the UKSC held that EU law was no restraint because Article 351 provides that the EU treaties do not affect “[t]he rights and obligations arising [...], for acceding States, before the date of their accession, between one or more Member States on the one hand, and one or more third countries on the other […]”). In the UKSC’s view this was engaged as the UK had become a party to the ICSID Convention before it joined the EU and obligations vis-à-vis non-EU member states (third countries) were concerned because, under the ICSID Convention, enforcement of awards is owed to all other contracting states (i.e. obligations were owed not only to Sweden as the Micula brothers’ home state, but also to all of the other ICSID states, some of which are not in the EU).

The UKSC also found that the duty of sincere cooperation towards other EU Member States did not require the English courts to decline to decide on issues pending before the EU courts. The UKSC observed that questions regarding prior treaties under Article 351 TFEU were not reserved for the EU courts: “The possibility that the EU courts may consider this issue at some stage in the future is both contingent and remote”.

The Commission appeared as an intervener in the proceedings before the UKSC and, after its judgment, brought infringement proceedings against the UK before the CJEU. This was possible under Article 87(1) of the EU-UK Withdrawal Agreement, which allows, for four years after the end of the Brexit transition period, the Commission to bring such proceedings against the UK where the alleged breach of EU law was committed before the end of the Brexit transition period.

The CJEU’s position

The CJEU ruled that the UKSC decision caused the UK to be in violation of EU law. Whilst the CJEU acknowledged that the ICSID Convention constitutes prior international law within the meaning of Article 351 TFEU, it disagreed with the UKSC on whom obligations as to the enforcement of an ICSID award is owed to: According to the CJEU, this is only the investors’ home state, i.e., there is no obligation vis-à-vis other ICSID contracting states. So, in the present case, enforcement was owed only to Sweden, meaning that no third state relations were involved. The ICSID Convention, “despite its multilateral nature, is intended to govern bilateral relations between the contracting parties in an analogous way to a bilateral treaty”, says the CJEU.

The CJEU also took the view that the UKSC failed to observe the duty of sincere cooperation under Article 4(3) of the TEU by lifting the stay of proceedings when the GC’s judgment was overturned. The CJEU notes that decision did not invalidate the initiation of proceedings by the Commission, which themselves required the stay of enforcement, and that, in any case, the Commission had appealed the judgment, meaning that no definitive decision had yet been rendered by the EU courts and a risk of conflicting decisions hence continued to exist.

Furthermore, the CJEU also asserted that the UKSC should have referred the matter to the CJEU for a preliminary ruling under Article 267 TFEU, due to the uncertainties around the interpretation of Article 351 TFEU. Finally, the CJEU holds that by lifting the stay of enforcement, the UKSC breached Article 108(3) TFEU, which prescribed a standstill obligation while state aid proceedings are pending.

Conclusion

This most recent judgment by the CJEU is (another) clear sign of its critical stance towards intra-EU investor-state dispute settlement (ISDS). Whilst the specific context of the case arose within the framework of UK/EU Brexit relations, the underlying reasoning will also need to be heeded in EU Member States and their courts insofar as it carries relevance to issues which may arise in the context of ICSID awards granted under ISDS provisions in intra-EU investment treaties.

Click here for the CJEU’s judgment.