30 March 2020
In Micula & Ors v Romania, the UK Supreme Court allowed an appeal to lift a stay on enforcement of an investor-State arbitral award rendered by a tribunal constituted under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) (“Convention”). The decision demonstrates the degree to which the courts uphold Contracting States’ obligations under the Convention to enforce arbitral awards rendered pursuant to the Convention.
During the early 2000s, two Swedish nationals and their companies (“Claimants”) invested in a food production operation in reliance on an investment incentive scheme (“Scheme”) operated by Romania.
During accession negotiations between Romania and the European Union (“EU”) before its accession on 1 January 2007, the EU informed Romania that the Scheme was contrary to EU State aid rules. Romania thus repealed most of the incentives under the Scheme. In 2005, claiming that the repeal of the Scheme was a breach of a 2003 bilateral investment treaty (“BIT”) concluded between Romania and Sweden providing for reciprocal protection of investments and investor-State arbitration under the Convention, the Claimants commenced arbitration proceedings under the Convention. In 2013, the tribunal issued its award (“Award”), deciding that Romania had breached the BIT and awarding compensation to the Claimants.
Following Romania’s purported implementation of the Award by setting off tax debts owed by one of the Claimants, the European Commission (“Commission”) ordered Romania to suspend any action which might lead to the implementation of the Award until the Commission had taken a final decision on its compatibility with State aid rules under the Treaty of the Functioning of the EU (“TFEU”). Following the Commission’s commencement of a State aid investigation (“Initiating Decision”), the Commission adopted a final decision (“Commission Decision”) which concluded that the payment of the Award by Romania constituted unlawful State aid.
In 2019, following an application by the Claimants, the General Court of the European Union (“GCEU”) annulled the Commission Decision on the ground that the Commission had purported retroactively to apply its powers to events predating Romania’s accession to the EU. The Commission applied to appeal against the GCEU’s decision.
Proceedings in England commenced in 2014 when the Claimants applied for registration of the Award pursuant to the UK Arbitration (International Investment Disputes) Act 1966 (“1966 Act”). The application was granted. Romania then applied to stay enforcement pending the GCEU proceedings. This stay was upheld by the English Court of Appeal. The Claimants appealed.
The Supreme Court unanimously allowed the appeal and lifted the stay.
The Claimants’ first ground of appeal was that the effect of the GCEU’s judgment annulling the Commission Decision was that the duty of sincere cooperation could no longer require the English courts to stay enforcement of the award. The principle of sincere cooperation under the Treaty of the European Union (“TEU”) requires national courts to take all necessary measures to ensure fulfilment of the obligations under EU law and refrain from those which may jeopardise the attainment of the EU’s objectives. The Supreme Court found that the GCEU’s judgment left in existence an extant Commission investigation into State aid. Without a final decision of the Commission closing the formal investigation procedure, the effects of the Initiating Decision subsisted. Moreover, the existence of a pending appeal to the Court of Justice with a real prospect of success was in itself sufficient to trigger the duty of cooperation and, subject to the other grounds of appeal submitted by the Claimants, required the grant of a stay so as not to undermine the effect of the Commission Decision. The duty of sincere cooperation thus continued to be engaged.
Second, the Claimants argued that there was no power to order a stay of the Award under the Convention and the 1966 Act, and that the stay was incompatible with the Convention. Article 54(1) of the Convention required each Contracting State to recognise a Convention award as binding and to enforce that award as if it were a final judgment of a court in that State. The Supreme Court agreed with the majority in the Court of Appeal that the English courts have the power to stay execution of an award under the Convention in limited circumstances. In this regard, a stay may be granted if in the particular circumstances of the case it was just to do so, provided that the stay was temporary and consistent with the purposes of the Convention. The courts’ power, however, could not extend to declining to enforce an award because of a substantive objection to it or staying enforcement of an award permanently or indefinitely. The case before the Supreme Court however did not involve a limited stay of execution on procedural grounds, but a prohibition on enforcement of the Award on substantive grounds until the GCEU had ruled on the apparent conflict between the Convention and the EU treaties. Even if the grounds of objection raised by the Commission were upheld before the EU courts, they were not valid grounds of objection to the Award or its enforcement under the Convention. In the view of the Supreme Court, the Court of Appeal had disregarded the principle in Article 53(1) of the Convention that awards are binding on the parties and are not subject to any appeal or other remedy except those provided under the Convention.
Lastly, the Claimants argued that the European Communities Act 1972 does not require the UK to breach its pre-accession obligations under the Convention as implemented by the 1966 Act, and that Article 351 TFEU applied with the result that the UK’s obligations under the pre-accession Convention are not subject to the overriding effect of EU law. Article 351 TFEU establishes that the application of the EU treaties does not affect the duty of a member state to respect the rights of non-member states under a prior agreement and to perform its obligations thereunder. Romania and the Commission submitted that the EU duty of sincere cooperation required the imposition of the stay. The Supreme Court found that the specific duties in Article 54, and Article 69, which provides that each Contracting State shall take such legislative or other measures as may be necessary for making the provisions of the Convention effective in its territories, are owed to all other Contracting States, including non-member states. The Convention scheme is one of mutual trust and confidence which depends on the participation and compliance of every Contracting State. Finally, the Supreme Court found that the duty of sincere cooperation did not require the English courts to decline to decide the issue pending its resolution by the EU courts, or to otherwise defer to the EU courts. This was because (1) questions as to the existence and extent of obligations under prior treaties, in the context of Article 351 TFEU, are not reserved to the EU courts, (2) the Article 351 TFEU issue in proceedings before the EU courts (Romania’s obligation to abide by and comply with the award under Article 53 of the Convention) and before the Supreme Court (the UK’s obligations to implement the Convention and to recognise and enforce the award) were different, and (3) the possibility that the EU courts may consider the issue at some future stage was contingent and remote.
In the circumstances, the Supreme Court lifted the stay.
The judgment is available from the UK Supreme Court website by clicking here.