REUTERS | Bogdan Cristel

Micula v Romania: an OK (and not a KO) in the latest round of proceedings

In the latest round of the long-running Micula saga, the US District Court for the District of Columbia has confirmed an ICSID award against Romania, entering judgment for approximately US $331 million in an action to enforce the award.

Background

The dispute between the Micula brothers and Romania has now been running for over 14 years with proceedings having taken place in a number of jurisdictions and forums worldwide. A short recap is set out below.

The ICSID arbitration (ICSID Case No. ARB/05/20)

Ioan and Viorel Micula commenced ICSID arbitration proceedings against Romania in 2005 under the 2002 Sweden-Romania bilateral investment treaty (BIT), seeking compensation for Romania’s premature repeal of a number of tax incentives that had been previously granted to promote investment in underdeveloped regions of the country. The incentives were meant to last ten years, but Romania withdrew them in 2005 in preparation for its accession to the EU on 1 January 2007. This is because the tax incentives were considered to constitute state aid, which is prohibited under EU law.

In 2013, a majority ICSID tribunal (Dr Laurent Lévy, Dr Stanimir A. Alexandrov, and Prof Georges Abi-Saab (dissenting)) concluded that the withdrawal of the incentives constituted a breach of the fair and equitable treatment standard and ordered Romania to pay EUR 178 million in compensation (the award).

The 2015 EC decision (Commission Decision (EU) 2015/1470)

Shortly after the award and after giving Romania the opportunity to submit its comments, the European Commission issued an injunction (under Article 108 of the Treaty on the Functioning of the European Union (TFEU) and Article 11(1) of Council Regulation No 659/1999) preventing Romania from paying the award, whilst it conducted a state aid investigation (the EC injunction). In 2015, the Commission issued its decision prohibiting Romania from paying the award (the 2015 EC decision) on the basis that the award was incompatible with Article 107 of the TFEU, in that payment of compensation also constituted illegal state aid. The Miculas appealed the 2015 EC decision to the General Court of the European Union (the GCEU and the GCEU appeal).

The ICSID annulment committee

Romania, in the meantime, sought to annul the award on the basis, inter alia, of the 2015 EC decision. On 26 February 2016, however, an ICSID ad hoc committee declined to annul the award. The committee expressly rejected the state aid arguments put forward by the Commission, which had intervened in the annulment proceedings.

Achmea v Slovakia (Case C-284/16)

In the intervening period and whilst the appeal was pending, the Court of Justice of the European Union (CJEU) issued its decision in Achmea, which called into question the validity of intra-EU BITs; it appeared that a further spanner had now been thrown into the works.

The GCEU appeal (Cases T‑624/15, T‑694/15 and T‑704/15)

However, on 18 June 2019, the GCEU issued its decision on the GCEU appeal and ruled in favour of the Miculas, annulling the 2015 EC decision (GCEU decision). The GCEU reasoned that all relevant events that led to the award had predated Romania’s accession to the EU, such that the Commission had no authority retroactively to apply its powers under the TFEU before 1 January 2007 (that is, the date of Romania’s accession). The GCEU also clarified that complying with the award would not classify as “new” state aid, because the award was merely an ancillary element of the compensation at issue and was not severable from the earlier tax incentives.

The GCEU also distinguished Achmea by reference to the law that the Micula and the Achmea tribunals had to apply. The GCEU noted that in Micula, the tribunal was not bound to apply EU law at the relevant time as the granting and subsequent reversal of tax benefits took place prior to Romania’s accession to the EU. In Achmea, on the other hand, the CJEU had ruled that EU law formed part of the law applicable to the dispute pursuant to the wording of Article 8 of the Netherlands-Slovakia BIT.

The US judgment

On 6 November 2017, the Miculas sought confirmation of the award before the US District Court. Romania, and the Commission, appearing as amicus curiae, both opposed the confirmation of the award. The US court handed down its decision on 11 September 2019 rejecting all of the objections raised.

The Achmea decision and lack of jurisdiction

Romania and the Commission both relied on the Achmea judgment, arguing that this had the effect of rendering the arbitration agreement in the Sweden-Romania BIT invalid and unenforceable and that accordingly, the US Court lacked subject matter jurisdiction under the US Foreign Sovereign Immunities Act of 1976 (FSIA). The US court, however, sided with the Miculas and ruled that it had jurisdiction to confirm the award based on the FSIA’s arbitration exception; that is, Romania could not claim immunity from jurisdiction of the US courts because it had consented to the underlying arbitration by concluding the Sweden-Romania BIT.

Referring to the Micula decision by the GCEU, the US court also dismissed the argument that the arbitration agreement in the Sweden-Romania BIT had been declared invalid by virtue of the CJEU’s ruling in Achmea. The court noted that Achmea was not applicable to the Micula enforcement proceedings because the GCEU had differentiated Micula from Achmea in a significant aspect in that the Micula tribunal did not have to interpret or apply EU law in reaching its decision. In addition, and as the GCEU had also concluded, the award only compensated the Micula brothers for Romania’s pre-accession actions, and thus could not constitute illegal state aid within the meaning of the TFEU.

Act of state and foreign sovereign compulsion doctrines

Romania and the Commission also relied on the “act of state” and the “foreign sovereign compulsion” doctrines of US law. The first of these prevents a court from questioning the validity of public acts performed by a foreign sovereign state within its own borders. The second bars the review of actions carrying out the mandate of a foreign government. It was argued that the Miculas had never challenged the Commission’s decision to open a state aid investigation, which resulted in Romania being prohibited from paying the award under EU law. However, the US court was persuaded by a declaration (signed by a former GCEU judge), submitted on behalf of the Miculas, which stated that the state aid investigation and the EC Injunction were no longer effective in light of the Micula decision by the GCEU.

Purported satisfaction of award

Romania’s final argument was that it had already paid the award in full through a series of tax set-offs and forced executions (by the Miculas) against various accounts held by Romania’s Ministry of Finance. However, the US court disagreed, noting that a significant portion of the award remained unsatisfied.

Conclusion

This latest act in the Micula drama is further testament that, notwithstanding the perceived difficulties with intra-EU investor-state proceedings following Achmea, the picture is far from clear. It remains to be seen whether the US judgment will be appealed or indeed, whether this decision will further muddy the already turbulent waters following the GCEU decision. What appears clear, however, is that the Micula saga remains far from concluded.

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