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Micula v Romania: rematch clause activated?

The Micula v Romania world tour continues. In a judgment handed down by the UK Supreme Court on 19 February 2020, the court held that the Miculas were entitled to enforce their ICSID award of approximately US $331 million against Romania, despite the fact that the award remains subject to an ongoing state aid investigation by the European Commission.

Background

The dispute between the Miculas and Romania has now been running for 15 years with proceedings in a number of forums, including the ICSID arbitration, the EU courts and a number of other jurisdictions worldwide. A central element of the dispute is the interaction between Romanian domestic law (the 1998 legislation granting economic incentives to foreign investors in disfavoured regions), EU state aid law, and public international law enshrined in the ICSID Convention and the European Commission’s stance in this respect. For a recap, please refer to our previous blog.

UK proceedings: trading blows, evenly matched?

The Miculas secured the arbitration award in 2013 and sought recognition and enforcement of the award before the English Commercial Court in London in 2014. Romania applied for a stay of enforcement pending a resolution of the proceedings before the General Court of the European Union (GCEU), and the Miculas countered with a request for security for costs as a condition of the stay. In 2017, Blair J granted Romania’s application for a stay and refused to order security for costs.

The Miculas appealed. The Court of Appeal confirmed the stay of enforcement but also ordered Romania to pay £150 million in security for costs on 27 July 2018. The Miculas and Romania both appealed this decision to the Supreme Court.

The GCEU decision: the Miculas score a knock down?

Meanwhile, on 18 June 2019, the GCEU issued its decision rejecting the European Commission and Romania’s argument that Romania was precluded from paying the award because it would constitute illegal state aid (which would be a violation of Article 107 of the Treaty on the Functioning of the European Union (TFEU)).

Back to the UK: final round?

The main question posed before the Supreme Court was whether the court should prioritise the duty of “sincere co-operation” enshrined in Article 4(3) of the Treaty on European Union (TEU) or the UK’s international obligations assumed under Article 54 of the ICSID Convention. The UK would arguably have a duty of sincere co-operation on the basis that the European Commission has not finalised its state aid investigation, which would prevent the UK from enforcing an award that would constitute state aid in itself (or could be regarded as compensation from previously promised state aid). At the same time, the UK is obliged, under Article 54(1) of the ICSID Convention, to “recognize an award rendered… as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment” of an English court.

The Miculas argued that the GCEU’s ruling annulled the European Commission’s decision on state aid. Romania, in turn, countered that the European Commission has not finalised its state aid investigation and, as a result, the UK was still bound to a duty of sincere co-operation.

Stay of enforcement of ICSID award

The Miculas maintained that the ICSID Convention prohibits the stay of enforcement of an ICSID award. The UK Supreme Court noted that Article 54(1) of the ICSID Convention provides that each contracting state shall recognise ICSID awards as binding, and enforce its pecuniary obligations in the same way as a final judgment of a court in that state. As a consequence, English courts are not allowed to re-examine the merits of an ICSID award once its authenticity had been established. English courts also may not deny recognition based on grounds of public policy.

The Supreme Court considered two possible ways of interpreting Article 54(1) of the ICSID Convention. On the one hand, if ICSID awards are to be treated as final judgments of the English courts, then they arguably should be subject to the same defences as would be available to enforcement of a judgment. On the other hand, Article 54(1) could also arguably be read to equate ICSID awards with final judgments of domestic courts for the sole purpose of providing a machinery for the execution of such awards; therefore, a stay could only be granted if temporary and in accordance with the purposes of the ICSID Convention.

The Supreme Court noted that only the International Court of Justice had the authority to determine the proper interpretation of Article 54(1), pursuant to Article 64 of the ICSID Convention. Nevertheless, the Supreme Court took a stand and sided with the argument that English courts have the power to stay execution of an ICSID award in limited, procedural circumstances, and on a temporary basis. English courts, however, do not have the power to stay execution based on a substantive objection. The Supreme Court held that the Court of Appeal had granted a stay of execution on substantive grounds and thus exceeded the limits of its power.

Obligations Toward non-EU member states

The Miculas argued that the UK’s obligations under the ICSID Convention were not subject to the overriding effect of EU law. The Miculas relied on Article 351 of the TFEU, which provides that the EU treaties do not affect the duty of an EU member state to honour obligations to non-member states under a prior agreement, and that therefore the obligations assumed by the UK under the ICSID Convention remained valid and could not be affected by EU state aid law.

The Supreme Court agreed, holding that the UK had to respect its obligations under the ICSID Convention in relation to all contracting states (and not only in relation to EU member states). Therefore, applying Article 351 of the TFEU, the UK’s ICSID Convention obligations took priority over EU state aid legislation. As a consequence, an English court could not stay enforcement due to an obligation arising under EU law.

Duty of sincere co-operation

The Supreme Court also found that the duty of sincere co-operation was not applicable to the case at hand, relying again on Article 351 of the TFEU, which provides that “the rights and obligations arising from agreements concluded before 1 January 1958 or, 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 [EU] Treaties”. The UK ratified the ICSID Convention on 19 December 1966, seven years prior to its accession to the EU on 1 January 1973. Accordingly, the duty of sincere co-operation embodied in one of the EU treaties (Article 4(3), TEU) could not be used as a valid justification to overrule an international obligation to recognise and enforce ICSID awards previously assumed by the UK (Article 54(1) of the ICSID Convention).

The Supreme Court, therefore, overturned the Court of Appeal’s decision and granted the Miculas’ application for enforcement of the award.

Ringside report

This decision is significant for the Miculas as it is the second time they have secured a victory in enforcement proceedings (the first one being the US District Court for the District of Columbia’s decision in September 2019, as discussed in our previous blog).

It is also significant for the wider pool of investors who may want to enforce intra-EU awards in the UK. It would appear that, despite the European Commission’s best efforts, the door is not quite closed on this issue. Has the UK Supreme Court signalled a statement of intent as we approach the uncharted waters of Brexit, following the end of the transition period on 31 December 2020 and the UK’s effective departure from the EU? Is this the end of the Micula saga or will the conclusion of the European Commission’s investigation result in yet another battle? For now, the gloves stay on.

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