In Micula & Ors v Romania [2018] EWCA Civ 1801 the English Court of Appeal (the “Court”) dismissed an appeal against the High Court’s stay of enforcement of a 2013 ICSID award in favour of Swedish investors Ioan and Viorel Micula (the “Appellants” or “claimants“) against Romania (the “Award“), but allowed an appeal against the High Court’s refusal to order Romania to provide security.

The Court’s judgment is interesting because although it reaches the same conclusion as the High Court in respect of staying enforcement of the Award, it does so for different reasons. In particular, the Court found (by majority) that:

  1. The High Court was correct to find that an ICSID award is res judicata under English law from the time of the award.
  2. Although the English Arbitration (International Investment Disputes) Act 1966 (the “1966 Act“), which implements the ICSID Convention into English law, requires that ICSID awards be treated in the same way as judgments of the High Court, this does not mean that EU law applies in the same way as it would apply to domestic judgments simply because the UK is a member state at the date of registration of the award.
  3. The principle of res judicata cannot be used to circumvent or significantly obstruct state aid rules (per the CJEU case of Klausner).
  4. Only operative terms (and not, for example, recitals) of EU Commission decisions are legally binding.

The Court’s decision is the latest in the long-running Micula saga, which began as a dispute 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 the target of 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 have applied to the General Court of the European Union (the “GCEU“) to annul the Final Decision. The GCEU heard the application in March 2018 and a judgment is awaited.

In 2017, the High Court refused Romania’s application to set aside registration of the Award, but granted a stay of enforcement pending the decision of the GCEU on the annulment application. The Commission intervened in those proceedings. The High Court refused the claimants’ application for security in the meantime on the basis that it would itself risk breaching the Final Decision. The Appellants appealed against both the stay of enforcement and refusal to make the stay conditional upon payment of security. Please see here for our blog post on the High Court’s judgment, which was the subject of the present appeal.

  1. Stay of Enforcement

The Court unanimously held that enforcement of the Award should be stayed pending the GCEU’s decision on the Appellants’ challenge to the Final Decision, or further order of the Court in the meantime. The Appellants’ appeal on this point was accordingly dismissed. However, the Court’s reasoning on this was split (see below). 

Res Judicata and the Kapferer Principle

The Appellants argued that the CJEU case of Kapferer (Case C-234/04) established the principle that domestic laws of res judicata take precedence in cases of conflict between domestic court decisions (or registered awards) and EU law. Therefore they argued that the High Court was wrong not to enforce the Award, even if there was the potential for incompatibility with EU law.

The Court agreed with the High Court that under English law an ICSID award is res judicata from the time the award is rendered and not, as Romania and the Commission had argued, from the completion of any annulment proceedings.

However, the Court disagreed with the Appellants’ contention. In the case of Klausner (Case C 505/14), the CJEU held that res judicata cannot obstruct the effective application of the control of state aid. Accordingly, the Court held that enforcing the Award on the basis of the Kapferer principle would circumvent or frustrate the effective application of EU state aid law and was therefore prohibited by EU law. The Court therefore dismissed this ground of the appeal.

The UK’s obligations under the 1966 Act and potential conflict with EU law

Basis of stay of enforcement

Arden and Leggatt LJJ held (by majority) that the High Court had been wrong to conclude that the 1966 Act has the effect of applying EU law to the Award on registration simply because the UK is a member state of the EU at that date. They held that:

  • The 1966 Act has to be interpreted in the context of the ICSID Convention and with the presumption that Parliament intended the UK to perform its international treaty obligations.
  • Parliament is unlikely to have intended the 1966 Act to have the effect that registered ICSID awards are brought within the scope of a later international treaty (which does not expressly affect the UK’s ICSID Convention obligations) by the mere procedural step of registering the award under the 1966 Act.
  • It would be inconsistent with the ICSID Convention if a national court could refuse to enforce an award on the ground that if the award had been a domestic judgment, giving effect to it would be contrary to a provision of national law.

Leggatt LJ in particular drew a distinction between the ICSID Convention and the New York Convention, the latter of which allows contracting states to decline to enforce an award if its enforcement would be contrary to public policy in that state. He held that the 1966 Act cannot be interpreted as giving power to determine whether an award is to be enforced, but does give control over the process of execution of an award, including its manner and timing.

The majority held that it was nonetheless appropriate for the Court to use its powers to stay enforcement of the Award until the GCEU proceedings are resolved or until a further order of the Court in the meantime. This was on the basis that the CPR give the Court discretion to stay execution of final judgments and that this must apply to ICSID awards on registration to some extent, pursuant to the 1966 Act. This discretion must be used in fulfilment of the objectives of the ICSID Convention and therefore it is likely that the most the Court can do is impose a temporary stay. Leggatt LJ was of the view that the Court could not stay enforcement permanently or indefinitely.

Accordingly, the majority considered that the effect of Article 351 TFEU (which preserves Member States’ pre-accession international obligations) had to be considered, in order to determine whether the UK’s obligations under the 1966 Act conflict with the Court’s obligation to apply EU law.

Article 351 TFEU

Hamblen and Leggatt LJJ held that if there is a conflict between the UK’s obligations under the 1966 Act and the Court’s duties as a matter of EU law, the resolution of this depended upon the proper application of Article 351. However, as the application of Article 351 was before the GCEU in the Final Decision annulment application, the High Court was right to stay this issue because of the risk of conflicting decisions.

Arden LJ disagreed that there was a risk of conflicting decisions regarding Article 351, as in her view there was little overlap between the proceedings before the GCEU and the present proceedings. The GCEU proceedings were concerned with the BIT between Sweden and Romania, to which the UK is not a party, whereas the Court proceedings are concerned with the UK’s role as the enforcer of the Award and with the scope of the UK’s obligations under the ICSID Convention, which the national court has to determine.

However, Arden LJ agreed that the stay of proceedings was already justified under ICSID Convention and 1966 Act principles in any event.

2. Security

The Court held that provision of security by Romania would not breach the Final Decision and was appropriate in this case as the “next best thing” to enforcement. The Court emphasised that only a Commission decision’s operative terms are legally binding, and rejected Romania and the Commission’s arguments that security should not be ordered based on one of the recitals in the Final Decision.

The Court considered that the consequence for failing to comply with the security order could not be an automatic lifting of the stay, but there were alternative measures available, such as an order to disclose assets in the jurisdiction, a freezing injunction or appointing a receiver. The Appellants’ appeal against the High Court’s decision was accordingly upheld and Romania was ordered to provide security of £150m. The parties were ordered to seek to reach agreement as to the time within which the security was to be provided and the form that it should take.

For further information, please contact Andrew Cannon, Partner, Joel Halliday, Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon

Andrew Cannon
+44 207 466 2852

Joel Halliday

Joel Halliday
+44 207 4662 592