THE AUTHOR:
Erica Li, Associate and Solicitor Advocate at Wilmer Cutler Pickering Hale and Dorr LLP
In the latest chapter of the Micula saga, the Court of Justice of the European Union (“CJEU”) held in European Commission v United Kingdom, Case C-516/22, that the UK Supreme Court’s (“UKSC”) decision in Micula v Romania [2020] UKSC 5, where the UKSC lifted a stay on the enforcement of an ICSID Award (“Award”), violated the UK’s EU law obligations.
Background
The Micula saga began in the early 2000s when the Micula brothers made investments in Romania under an aid scheme, which was subsequently repealed by Romania in preparation for its accession to the EU. The Micula brothers and the entities under their control (“Investors”) commenced arbitration against Romania under the 2002 Sweden-Romania BIT to obtain compensation for the damage that they allegedly suffered arising from Romania’s repeal of the scheme.
In 2013, an ICSID tribunal found in the Investors’ favour and ordered Romania to pay the Investors compensation in the amount of €178 million. Since then, the Investors have sought to enforce the Award under the ICSID Convention (“Convention”) in various jurisdictions, including the UK.
In May 2014, after Romania made a partial payment under the Award, the European Commission (“Commission”) issued an injunction mandating Romania to refrain from implementing the Award (“Injunction”). This was followed by the Commission’s decision in October 2014 to initiate a formal investigation into the compatibility of the Award with EU state aid rules (“Opening Decision”), which culminated in the Commission’s decision in 2015 that payment under the Award would violate EU state aid rules (“Final Decision”).
In 2019, the Final Decision was annulled by the CJEU on the ground that the Commission was not competent ratione temporis to adopt the Final Decision (“Annulment Judgment”). The Commission appealed. As a result, the Annulment Judgment was set aside in January 2022, and the case was referred back to the CJEU, where it remains pending.
The UKSC Decision
The UKSC decided unanimously in 2020 to lift the stay on the enforcement of the Award and held that a stay was incompatible with the UK’s obligations under the Convention, notwithstanding the pending appeal in respect of the Annulment Judgment at the time. In particular, the UKSC recognised the UK’s obligation under the Convention to enforce ICSID awards as if they were final judgments of the UK courts.
Although the UKSC recognised that the UK’s duty of sincere co-operation under Article 4(3) of the Treaty on European Union (“TEU”) was engaged, it held that this duty did not apply in the present case, nor did it require the UK to stay the enforcement of the Award pending resolution of the EU proceedings.
In arriving at this conclusion, the UKSC held that Article 351 of the Treaty on the Functioning of the European Union (“TFEU”), which provides an exception to the primacy of EU law, applies in the present case. Article 351(1) provides that:
“The rights and obligations arising from agreements … 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, shall not be affected by the provisions of the Treaties.”
The UKSC considered that the UK became a party to the Convention prior to its accession to the EU and held that the UK’s obligation to enforce the Award under the Convention was owed not only to Sweden and Romania, but to all contracting states to the Convention, which include non-EU Member States, as they have an interest in the enforcement of awards under the Convention. Thus, the UKSC concluded that the UK’s obligation to enforce the Award arising from the Convention was unaffected by EU law.
After the UKSC issued its decision, the Commission (who had participated in the UK proceedings as an intervener) brought infringement proceedings against the UK before the CJEU. This was possible notwithstanding Brexit because the UKSC’s decision was issued during the transition period during which the UK continued to be bound by EU law obligations under the EU-UK Withdrawal Agreement.
The CJEU Decision
The CJEU disagreed with the UKSC’s decision. In the CJEU’s view, not only would enforcement of the Award constitute a breach of the UK’s EU law obligations, but it also “seriously compromised the EU legal order”.
The difference in opinion between the CJEU and the UKSC stemmed from their different interpretations of Article 351 TFEU. While the CJEU held that the Convention was, in principle, an international agreement capable of falling within the scope of Article 351, the UK did not owe any obligations to third countries (i.e, non-EU Member States) under the Convention to enforce the Award.
In particular, the CJEU held that “a purely factual interest” of third countries in the enforcement of an award under the Convention “cannot be equated with a ‘right’” under Article 351 TFEU. According to the CJEU, the UK only owed an obligation to the Investors’ home state, i.e., Sweden, to enforce the Award. Accordingly, because Sweden is an EU Member State, Article 351 TFEU did not apply.
The CJEU emphasised that Article 351 TFEU must be narrowly construed because it constitutes an exception to the primacy of EU law. Consistently with its judgment in Achmea, the CJEU also repeated its position that the system of judicial remedies provided for under EU law has now “replaced the arbitration procedures established between the Member States”. The UKSC’s decision would have the effect of removing disputes concerning EU law from the judicial system of the EU and entrusting them to arbitral tribunals established under the Convention and is, therefore, contrary to the primacy of EU law.
In addition to the UK’s infringement of Article 351 TFEU, the CJEU found that the UK failed to comply with:
- The duty of sincere cooperation under Article 4(3) TEU by failing to stay the enforcement of the Award pending the proceedings before the CJEU.
- The standstill obligation under Article 108(3) TFEU, as the enforcement of the Award was effectively an order for Romania to breach its obligations under EU law stemming from the Injunction and the Opening Decision (which remained unaffected by the annulment of the Final Decision).
- The obligation to request a preliminary ruling under Article 267 TFEU, by failing to submit a reference for a preliminary ruling to the CJEU in respect of the interpretation of Article 351 TFEU, in order to avert the risk of an incorrect interpretation of EU law.
Comment
The CJEU’s decision serves as another example of the EU’s persistent campaign against intra-EU investor-state arbitration. Although the CJEU’s decision was made in the specific context of UK-EU relations post-Brexit, its message to all EU Member States on the primacy of EU law is clear: where an EU Member State owes conflicting obligations under EU law and other international law instruments, the former takes precedence over the latter.
However, the UKSC is not alone in defying the CJEU’s assertions of the primacy of EU law. In a radical departure from CJEU jurisprudence, the Swiss Supreme Court (which is not bound by EU law) recently held in Kingdom of Spain v EDF Energies Nouvelles(Case number 4A_244/2023 dated 3 April 2024) that EU law does not take precedence over international agreements even if there is a conflict between them. In a strong rebuke of the CJEU’s position in Achmea and Komstroy, the Swiss Supreme Court criticised the EU for having waged a “crusade” against intra-EU arbitration, and raised issues over the CJEU’s impartiality in favouring EU institutions where conflicts arise under EU law and international law.
As the UK has now exited the EU and is no longer subject to the duty of sincere co-operation under EU law, the CJEU’s decision is unlikely to have any effect on the UK courts’ enforcement of ICSID awards. However, EU Member States that remain bound by EU law, will have to grapple with conflicting obligations arising under EU law and other international law instruments in the wake of the CJEU’s decision.
ABOUT THE AUTHOR
Erica Li is an Associate and Solicitor Advocate (England and Wales) at the London office of Wilmer Cutler Pickering Hale and Dorr LLP, where she specialises in international arbitration.
*The views and opinions expressed by authors are theirs and do not necessarily reflect those of their organizations, employers, or Daily Jus, Jus Mundi, or Jus Connect.
