In Micula and others (Respondents/Cross-Appellants) v Romania (Appellant/Cross-Respondent) [2020] UKSC 5 the UK Supreme Court (the “SC”) found that the duty of sincere cooperation under EU law does not preclude enforcement of an ICSID Convention (the “Convention”) award against Romania (the “Award”). In what is the enforcement stage of the long-running and well-known saga of Micula v Romania, the SC has lifted an almost three-year enforcement stay, which was ordered by the High Court (the “HC”) and later confirmed by the Court of Appeal (the “CA”). The SC’s decision is interesting because it deals with the interplay of (sometimes) conflicting obligations of national, international and EU law in the context of investment arbitration, and confirms that the UK’s obligations under the Convention to recognise and enforce ICSID awards are not prevented by the duty of sincere cooperation under EU law.

Background

ICSID proceedings

Following Romania’s repeal of certain investment incentive schemes prior to its accession to the EU, Swedish investors Ioan and Viorel Micula (the “Claimants”) initiated ICSID arbitration proceedings in July 2005. As discussed earlier in our blog, in its December 2013 Award the tribunal held that Romania had breached the 2002 Romania-Sweden BIT by failing to ensure fair and equitable treatment, ordering that it pay approximately RON376 million (around EUR83 million), plus interest to the Claimants. Romania attempted to annul the Award in April 2014, however the ICSID annulment committee rejected Romania’s claims in February 2016.

EU proceedings

The European Commission (the “Commission”) participated in the ICSID proceedings as amicus, arguing that any payment of compensation arising out of the arbitration would constitute illegal state aid under EU law and render the Award unenforceable in the EU. In May 2014, following the issue of the Award, the Commission issued an injunction ordering Romania to suspend any action which might lead to the implementation of the Award (the “Injunction”). In October 2014, the Commission took a decision formally opening the State aid investigation (the “Initiating Decision”). Then in March 2015, the Commission adopted Final Decision 2015/1470 (the “Commission Decision”), prohibiting Romania from making any payment under the Award. In June 2019, in proceedings commenced by the Claimants in November 2015, the General Court of the EU (“GCEU”) annulled the Commission Decision. The Commission appealed to the Court of Justice of the EU (the “CJEU”), which judgment is still awaited.

English proceedings

As discussed in our previous blog post on this case, in October 2014 the Award was registered by the HC pursuant to the English Arbitration (International Investment Disputes) Act 1966, which implements the Convention into English law. In 2017, the HC granted Romania’s application to stay enforcement proceedings (refusing an application for it to be set aside).

The Claimants appealed, and in 2018 the CA continued the stay and ordered Romania to pay security for the Award, as explained in more detail in another of our previous blog posts.

SC’s decision: overview

The Claimants appealed to the SC, and in its judgment of 19 February 2020 the SC unanimously allowed the appeal and lifted the stay. It concluded that (i) there existed a duty of sincere cooperation under EU law engaged by the Initiating Decision, notwithstanding the annulment of the Commission Decision by the GCEU; however (ii) a stay of the Award would be incompatible with the UK’s obligations under the Convention; and (iii) the duty of sincere cooperation under EU law did not preclude the UK from enforcing the Award in accordance with its Convention obligations. Given this decision, the SC did not consider Romania’s appeal against the CA’s order to provide security.

Duty of sincere cooperation under EU law

The Claimants argued that the annulment by the GCEU of the Commission Decision meant that the UK courts were no longer bound by a duty of sincere cooperation to maintain the stay. The Commission and Romania, however, argued that the Initiating Decision and the Injunction remained in place, and were not vitiated by the annulment. These measures, together with the pending appeal of the GCEU’s decision to the CJEU, meant the stay should be continued. The SC held that the Initiating Decision did indeed subsist and continue to engage the duty of sincere cooperation (no clear conclusion was reached on whether the same should be said of the Injunction), and that the existence of the pending appeal to the CJEU with a real prospect of success was, in itself, sufficient to trigger that duty.

The stay was incompatible with the Convention

However, the SC then turned to consider the Claimants’ further ground of appeal that the stay was incompatible with the Convention. The Claimants argued that the CA had erred in granting a stay, submitting that a stay may only be granted pursuant to Articles 50-52 of the Convention (which make specific provision for staying enforcement in certain situations, none of which applied in the present circumstances). Article 54(1), which requires that Contracting States shall enforce ICSID awards as if they were final judgments of a court in that State, imposes a duty on national courts to enforce awards, and does not allow a domestic court to refuse enforcement where it would refuse to enforce a domestic judgment.

In reaching its decision on this question, the SC considered at length the travaux préparatoires of the Convention and related commentary, as well as the differing views set out in the CA judgment. It concluded that in the circumstances of the present case the English courts were obliged under Article 54(1) of the Convention to give effect to the Award.

It was arguable, in certain exceptional or extraordinary circumstances which are not defined, that certain defences against enforcement may be possible, if such defences were recognised in national law in respect of final judgments of national courts and they did not directly overlap with the defences set down in Articles 50-52.  However, this was not such a case. If the Award were a final judgment of an English court it would be enforced without question.

EU law does not restrict UK’s obligations under the Convention

Romania sought to argue against this conclusion on the basis of the duty of sincere cooperation. However, the SC noted that Article 351 of the Treaty on the Functioning of the EU (the “TFEU”) meant that the UK’s obligations under the Convention could not be affected by anything in the EU Treaties (which were the foundation for the duty). Article 351 TFEU provides that the rights and obligations of Member States to third countries arising from international agreements concluded before the date of their accession to the EU, shall not be affected by the EU Treaties.

Romania argued that Article 351 should not apply given that the Convention obligations in question (Articles 54 and 69 of the Convention) were owed by the UK only to Sweden, the other party to the BIT under which the claim was brought, and an EU state, not a third country.

The Claimants, on the other hand, submitted that the UK’s obligations under those Articles of the Convention were owed to all states party to the Convention, not just to Sweden. The SC agreed, noting that the scheme of the Convention is one of mutual trust and confidence which depends on the participation and compliance of every Contracting State.

As such, the SC concluded that (i) Article 351 TFEU was engaged; and, as a result, (ii) EU law did not restrict the UK’s obligations under the Convention, which were to enforce the Award. In such circumstances, the duty of sincere cooperation was not applicable, and the UK was bound as a matter of international law to lift the stay.

Comment

The SC’s decision brings some clarity as to the English courts’ approach regarding enforcement of ICSID awards, and is a significant development in this area of law. It remains to be seen whether and to what extent the SC’s decision affects enforcement of the Award in other jurisdictions: currently there are on-going enforcement proceedings (with various levels of success) in the US, France, Belgium, Luxembourg and Sweden.

For more information, please contact Andrew Cannon, Partner, Iain Maxwell, Of Counsel, Olga Dementyeva, Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon
Andrew Cannon
Partner
+44 20 7466 2852

Iain Maxwell
Iain Maxwell
Of Counsel
+44 20 7466 2646

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644