In Micula & Ors v Romania & Anor  EWHC 31 (Comm) the English High Court stayed enforcement of a 2013 ICSID award in favour of Swedish investors Ioan and Viorel Micula against Romania (the "Award"), but refused to set aside registration. Subsequently, in Micula & Ors v Romania & Anor  EWHC 1430 (Comm) the English High Court gave permission to appeal the stay of enforcement but refused to make the stay conditional on the provision of security by Romania.
The English Court’s decisions in this case consider interesting aspects of the interplay between potentially conflicting obligations of national, international and EU law. In particular, the Court found that:
- as a matter of English law read with Article 54 of the ICSID Convention, an ICSID Convention award achieves finality, and becomes res judicata, at the time of the award; and
- the English Arbitration (International Investment Disputes) Act 1966 (the "1966 Act"), which implements the ICSID Convention into English law, only requires that ICSID awards be treated in the same way as judgments of the English High Court. Therefore, as a judgment of the High Court is subject to EU rules as to state aid, the Court is restrained from taking a decision which conflicts with the European Commission's decisions on state aid.
The Court's decision represents the latest development in the long-running dispute between the parties arising out of Romania’s abolition of certain tax incentives in 2005 in order to comply with EU rules on state aid. Please see here for our blog post on the ICSID award.
The Award has been subject to decisions of the European Commission. In its final decision of 30 March 2015 (the "Final Decision"), the Commission found that payment of the Award by Romania would constitute new state aid incompatible with EU law, and was therefore prohibited. Please see here for our blog post on the Final Decision. The claimants in the case invited the Court to assume that the Final Decision was valid.
Given the Court's decision, the parties will now await the outcome of (i) the claimants' application to the General Court of the European Union ("GCEU") to annul the Commission’s Final Decision, which is expected to be heard before the end of the year; and (ii) the claimants' appeal, if brought, against the English High Court's stay of enforcement of the Award.
On 17 October 2014 the Award was registered by the English High Court pursuant to the 1966 Act. The 1966 Act entitles a person seeking recognition or enforcement of an ICSID Convention award to have the award registered in the English High Court.
An ICSID Convention award registered under s1 of the 1966 Act has, with respect to the pecuniary obligations which it imposes, the same force and effect for the purposes of execution as if it had been a judgment of the English High Court given when the award was rendered pursuant to the Convention and entered on the date of registration under this Act. In so far as the award's pecuniary obligations are concerned, proceedings may be taken on the award, and the sum for which the award is registered carries interest. Furthermore, after registration, the English High Court has the same control over the execution of the award, as if the award had been such a judgment of the English High Court.
Romania applied (i) to have the registration set aside (which the Court refused), or (ii) to have enforcement of the Award stayed (which the Court granted), or (iii) for a reference to the Court of Justice of the European Union for a preliminary ruling on the issues (which the Court refused). The Commission joined the application as an intervener. The claimants subsequently applied for permission to appeal against the stay of enforcement (which the Court granted) and for an order that Romania provide security as a condition of the stay (which the Court refused).
- Romania and the Commission’s arguments
Romania and the Commission argued that the Final Decision obliged the Court to refuse recognition of the Award on the basis that EU law prevents the court from acting contrary to the Final Decision. Further, they argued that the English High Court was not the correct place to resolve the issues raised, which were questions of law to be determined by the GCEU in the claimants’ application for annulment against the Final Decision.
Romania argued that the Award only became res judicata after its annulment application was refused on 26 February 2016, thereby post-dating the Final Decision.
The Commission further argued that on Romania's accession to the EU, the Sweden-Romania BIT under which the arbitration proceeded became invalid and therefore the Award was per incuriam and invalid.
- The claimants’ arguments
The claimants argued that the provisions of the 1966 Act clearly obliged the Court to recognise and enforce the Award, with no provision made for derogation. This would not conflict with the Court's obligations under EU law because (i) the principle of res judicata applied, as upheld by EU case law, such that the Final Decision cannot affect the Award; and (ii) Article 351 Treaty on the Functioning of the European Union ("TFEU") applied, such that the UK's international obligations owed to third countries under the ICSID Convention, which predate the UK's accession to the EU, take precedence over EU law.
- The operative part of the Court's decision
The Court's reasoning is discussed in more detail in Section 5, below.
Refusal to set aside the order for Registration
The Court refused Romania's application to set aside registration of the Award. It emphasised the difference between registration and enforcement, holding that there were legitimate commercial reasons for registering an award without immediately enforcing it (para. 125). Moreover, registration of the Award (which pre-dated the Final Decision) did not put any party in breach of the Commission's preliminary decision on the matter, which only prevented Romania from taking action to execute or implement the Award (para. 123).
Grant of stay of enforcement
The Court granted Romania's application to stay enforcement of the Award pending the outcome of the claimants' application to the GCEU to annul the Final Decision. This was on the alternative bases that either (i) the principle of sincere cooperation under Article 4(3) TEU prevents national courts from taking decisions which conflict with decisions of the Commission; or (ii) the issues the Court was being asked to determine overlapped with those that the GCEU will rule on, and therefore there was a risk of inconsistent decisions.
No reference to the CJEU
The Court decided not to exercise its discretion and make a reference to the Court of Justice of the European Union. This was on the basis that (i) the questions to be referred were not easily identifiable; and (ii) the dispute was already before the GCEU.
No security as a condition of the stay
The Court refused to order Romania to provide security as a condition of the stay, on the basis that there was a material risk that the provision of security would itself breach the Final Decision.
Permission to appeal
The Court granted the claimants permission to appeal the stay of enforcement on the basis that the case raised difficult issues of law and that similar issues arise in other arbitral proceedings between other parties.
- The Court's reasoning: comment on issues decided
Although resolution of the key issue for the parties, that of the enforcement of the Award, will now wait until the decision of the GCEU, the High Court's decision in this case discusses a number of interesting questions of law.
The claimants argued that the Award was res judicata from the date of the Award and therefore could not be affected by the Final Decision, which was issued after the Award.
The Court acknowledged there was force in Romania's argument that the Award became res judicata only after its annulment application failed, as regards finality of awards for the purposes of the ICSID Convention. However, the Court found that as a matter of English law read with Article 54 of the ICSID Convention, an ICSID Convention award achieves finality, and becomes res judicata, at the time of the award. This is because that is the time when, pursuant to the 1966 Act, an award is deemed to be a final judgment of the High Court for enforcement purposes and, under the English Civil Procedure Rules, a judgment takes effect from the day when it is given. The Award therefore became res judicata on 11 December 2013, pre-dating both the Commission's Decisions.
However, if the Court proceeded to enforce the Award as if it were a judgment of the Court, this would contravene the Commission's Final Decision. The issue of whether the Award was res judicata is before the GCEU because the Commission contends that there is jurisprudence showing that the courts will not accept an outcome which produces circumvention of state aid rules by way of res judicata. The Court therefore saw a real risk of inconsistent decisions if it were to decide, as a matter of European law, that the Award could be enforced. The question of whether this meant the Award could be enforced was therefore stayed, pending the outcome of the decision of the GCEU on the EU law position.
More generally, however, this is helpful clarification for investors that, in the UK, ICSID awards are res judicata from the date of the award rather than the conclusion of any annulment proceedings.
ICSID Awards: relationship between the UK's obligations under UK, EU and international law
The Court emphasised the importance of the UK's international obligations in respect of ICSID Convention awards. The 1966 Act implements the UK's international obligations under Article 54 of the ICSID Convention.
In particular, unlike the position in respect of New York Convention awards under the Arbitration Act 1996, there are no grounds for refusal of recognition or enforcement in the 1966 Act. Section 1(2) of the 1966 Act provides for what has been called "automatic" registration. Registration of the Award was not in conflict with a decision of the Commission. At the time of registration, the Commission had issued an injunction targeted at Romania, not the claimants, and prohibiting payment of the Award by Romania. Registration did not, therefore, breach the injunction. However, the 1966 Act only requires that ICSID awards be treated in the same way as judgments of the High Court. Once registered, therefore, they are in no better or worse position than a court judgment (para. 129).
However, a judgment of the High Court is subject to EU rules as to state aid and under EU law the Court is restrained from taking a decision which conflicts with a decision of the Commission. The Court could not therefore enforce the judgment consequent on registration of the Award in circumstances in which the Commission had prohibited payment of the Award by Romania, because to do so would be acting unlawfully under EU law. A domestic judgment would be subject to the same limitation. This is consonant with public policy but not based on it (para. 131) – i.e. there is no "public policy" ground to resist enforcement. For the same reason, there was no conflict between the Court's obligations under the 1966 Act and the provisions of the European Communities Act 1972 as to the primacy of EU law (para. 160).
Therefore, as a matter of English and EU law, the Court is not permitted to take decisions – as regards an ICSID award – which conflict with decisions of the Commission. This has the effect that enforcement of ICSID awards is subject to EU law. With the application for annulment of the GCEU's Final Decision pending, enforcement would be stayed.
The Court did not rule on the question of whether Article 351 TFEU (which preserves Member States' pre-accession international obligations) had the effect of subordinating EU law (in particular, the Final Decision) to the ICSID Convention. The Court held that to do so would risk a conflicting decision with the GCEU in the claimants' application for annulment because Article 351 is raised by the claimants in the annulment proceedings brought by the claimants against the Commission's Final Decision. In its Final Decision, the Commission determined that Article 351 was not relevant because the Romania-Sweden BIT is between two EU Member States and no third country contracting party to the ICSID Convention is party to the BIT. In the circumstances, the Court stayed the issue.
The claimants asked the court to order that Romania pay security for most if not all the amount of the Award as a condition of the stay of enforcement. In its first judgment, the Court postponed a decision pending further arguments from both sides. However, it indicated that the claimants had put forward a persuasive case. The Court placed particular emphasis on the following: (i) the Award pre-dates the decisions of the Commission; (ii) the Award is to be treated as a final judgment of the English Court given at the time of the Award (see above); (iii) the Award has been unpaid for a number of years now; and (iv) granting security is consonant with the obligation placed on the UK under the ICSID Convention to enforce awards. However, the Court wanted to hear further arguments on the following two points before ruling on the issue: (1) what the legal basis for imposing security in these circumstances is; and (2) whether granting security would itself be contrary to the Final Decision and violate EU law.
In its second judgment, following a further hearing on these two points, the Court refused, for the time being, to make the stay conditional on the provision of security by Romania. Although the Court stated that other things being equal, the claimants had made out their case for security, there were a number of factors that led the Court not to exercise its discretion (if it had such discretion, on which point the Court did not reach a final conclusion). This was because the Commission stated that it would consider the provision of security as payment under the Award, and therefore a breach of the Final Decision. Given the Commission's position, the Court therefore held that it was necessary to take into consideration what would happen on Romania's non-compliance with an order requiring it to provide security (the claimants' draft order provided that if Romania did not provide security, the claimants may enforce the Award without returning to Court).
The Court identified three considerations which militated against the provision of security, even on different terms to those proposed in the draft order: (1) there was a material risk that the provision of security would breach the Final Decision; (2) because the Court had granted permission for the claimants to appeal the stay of enforcement, there was a risk of confusion if, in the meantime, the Court was asked to enforce the provision of security for the stay; and (3) the GCEU has notified the Commission that it has given the claimants' annulment action priority so that this matter will be dealt with sooner than originally anticipated. However, the Court also stated that there was no need to rule out definitively the provision of security in the future, leaving it open for the claimants to try again if circumstances change.
In the 1966 Act there is no equivalent provision to that found in the English Arbitration Act 1996 in respect of New York Convention awards giving a statutory power to grant security in relevant circumstances (see here for our blog post on the Supreme Court's recent decision in relation to this statutory power). As mentioned above, the Court did not reach a final conclusion on its power to grant security. However, it indicated that there was force in the claimants' argument that if the Court has the power to order a stay, it has the power to do so on terms, including the grant of security (para. 9).
Permission to appeal
The Court dealt with this point briefly and granted permission to appeal on the basis that the case raised difficult areas of law and that similar issues arise in other arbitral proceedings involving other parties (para. 2). Interestingly, although permission to appeal requires the satisfaction of only one limb of CPR r.52.6(1), the Court held that both limbs were satisfied, i.e. the Court considered that the appeal would have a "real prospect of success" and there was "some other compelling reason" for the appeal to be heard.
One of the most interesting issues in the background to this dispute is the Commission's position that intra-EU BITs are invalid, because the EU has exclusive competence to regulate intra-EU investments. As the Court noted in this case, the Commission has recently issued an opinion to a number of EU Member States to the effect that they must terminate their intra-EU BITs. Although the issue of the validity of the Romania-Sweden BIT was before the Court, as the Commission argued that the invalidity of the BIT rendered the Award per incuriam and invalid, the Court determined that it was unable to rule on the validity of a treaty between Sweden and Romania (but did not give a reason for this) and held that in any case it was not relevant to the other issues to be decided. The Court declined to make a reference to the CJEU as the matter was already before the GCEU due to the annulment proceedings.
The CJEU has been asked for a preliminary ruling on intra-EU BITs by the Federal Court of Justice of Germany in another case, so the position may become clearer in due course.
For further information, please contact Iain Maxwell, Of Counsel, Joel Halliday, Associate, Hannah Ambrose, Professional Support Consultant, or your usual Herbert Smith Freehills contact.