Cases T-624/15, T-694/15 and T-705/15 Micula
In a long-awaited judgment handed down on 18 June 2019, the General Court of the European Union ("GC") annulled the European Commission's ("EC") decision that Romania's payment of EUR 178 million to two Swedish investors, the Micula brothers, in accordance with an arbitral award rendered under the Sweden-Romania Bilateral Investment Treaty ("BIT"), violated EU state aid rules. The EC's decision had required Romania to recover the sums that it had paid to the Micula brothers under the award.
The GC's judgment was eagerly anticipated by investors in a number of EU Member States. This is because the question of whether payments pursuant to awards rendered in accordance with intra-EU BITs amount to illegal state aid is highly controversial. The issue has arisen in arbitrations brought by investors against Member States arising out of retroactive amendments to, and cancellation of, national support schemes for renewable energy production. Both Spain and Hungary intervened in the case in support of the EC.
The GC chose to side-step the most important legal questions on the relationship between compensation in damages and the EU state aid rules. Instead, the GC annulled the EC's decision on the basis that (i) the EC had no competence to review the legality of pre-accession incentive schemes and the damages paid as compensation for their abolition, and (ii) the arbitral award was wrongly classified as an economic advantage for purposes of Art 107 (1) TFEU. As the EC had not distinguished between pre- and post-accession damages, the GC could not make a finding on whether the post-accession portion of the damages could have been dealt with under the EU state aid rules.
Regardless of whether the decision is appealed to the Court of Justice of the European Union ("CJEU"), the case is unlikely to settle the issue. Until that occurs, the enforcement of intra-EU BIT arbitral awards granting compensation to investors will remain contentious. This is a risk that investors contemplating pursuing claims under intra-EU investment treaties or the Energy Charter Treaty ("ECT") will need to consider closely.
Background to the decision
In October 1998, the Romanian government granted various incentives to investors in disadvantaged regions of the country, including substantial tax breaks valid for 10 years. The Micula brothers relied upon this scheme to invest in sugar production in a disadvantaged region. During Romania's accession negotiations, the EU and Romania discussed whether such incentives violated EU's state aid rules and needed to be phased out.
From February 2005 (which was prior to Romania's accession), Romania repealed the incentives, with the exception of a profit tax facility. In July 2005, the Micula brothers commenced arbitration proceedings under the 2002 Sweden-Romania BIT, arguing that Romania's withdrawal of their incentives breached their rights under that treaty.
In 2008, the arbitral tribunal held that the Micula brothers' claims were admissible. The EC intervened as amicus curiae in 2009. In 2013, the tribunal awarded compensation of approximately EUR 178 million to the Micula brothers. Romania sought to annul the award, but that effort failed, leading to the partial payment of compensation due under the award. In effect, the EC's decision of March 2015 ordered Romania to recover the compensation it paid because it amounted to illegal state aid. Romania was prohibited from making any further payments under the award.
The Micula brothers have since sought to enforce the award against Romania in a number of EU Member states and in the United States. An appeal is currently pending in the UK Supreme Court, concerning the English enforcement proceedings. That appeal was due to be held this month but was adjourned until October as result of the GC's ruling.
The two pleas upheld by the GC
The Micula brothers presented eight pleas to the GC in support of their application for the annulment of the EC decision. The GC dealt with only two: the EC's lack of competence given that the relevant matters pre-date Romania's accession to the EU, and the alleged error in classifying the arbitral award as an "economic advantage" within the meaning of Art 107(1) TFEU. The GC's findings on these issues are summarized below.
EC's lack of competence to conduct a retroactive assessment
The applicants contended that all material events which culminated in the award occurred before Romania's accession to the EU. Accordingly, EU law, including the state aid rules, did not apply. In response, the EC pointed out that the actual payments which constituted the state aid were made after Romania's accession. According to the EC, this was "new" aid and subject to the full state aid review mechanisms set out in Articles 107 and 108 TFEU.
The GC dismissed the EC's arguments. The adoption of the subsidy scheme in 1998, the entry into force of the BIT, the revocation of the incentive scheme, the infringements committed by Romania, and the initiation of the ICSID proceedings by the Micula brothers all occurred before Romania's accession to the EU. The GC held that the right to receive compensation was, therefore, already unconditional prior to accession. The award could not be considered as "new" aid, and the fact that the payments were made after accession was irrelevant. In this manner, the GC distinguished the present dispute from the CJEU's March 2018 ruling in Achmea, where the CJEU found that investor-State dispute settlement mechanisms in intra-EU BITs violated EU law.
Damages and Economic Advantage
The second plea was based on the Micula brothers' claim that the arbitral award was intended solely to provide compensation for the damage suffered as a result of Romania's breach of the BIT. It did not, according to the Micula brothers, reinstate the state aid scheme that had been available at the time of their investment. The EC had not shown that the award merely substituted the monies that would have been due under the Romanian incentive scheme. In that regard, the Micula brothers relied on Asteris, a CJEU decision from 1988 which held that compensation for damage suffered as a result of illegal state action cannot be regarded as state aid (unless the compensation has the effect of providing compensation for the withdrawal of unlawful or incompatible state aid). The EC had determined that the award had exactly this effect: it compensated for the withdrawal of a measure that was impermissible state aid.
The GC held that compensation relating to the period from withdrawal of the incentives in February 2005 to the date of accession could not be regarded as compensation for the withdrawal of unlawful or incompatible state aid because EU law was not applicable at the relevant time. Interestingly, the GC did not go on to consider whether Asteris could be relied on for any post-accession compensation. Thus, it left open the crucial issue of whether compensation for the withdrawal or amendment of a subsidy scheme that has never been cleared by the EC as compatible aid is itself unlawful state aid.
Future challenges and implications
The Micula saga will continue to cast a long shadow over the enforceability of investor-state arbitration awards. The GC's decision is welcome news for investors who already have a "pre-accession" award in their favour. From an investor perspective, the bad news is that there is still no clarity on the treatment of awards related to post-accession events. Until the European courts rule directly on the application of the EU state aid rules to awards under investment treaties, entities seeking to pursue arbitration proceedings against EU Member States for breach of rights conferred by intra-EU BITs or the ECT will face uncertainty.
The annulment of the EC's decision does not mean that it is likely to give up its fight against investor-state arbitration provisions in BITs, and multi-lateral agreements such as the ECT. The EC could adopt a new decision on Micula and continue to frustrate the enforcement of the award. Another important issue that remains open is whether the EC is competent to overrule an arbitral tribunal's decision and impose its own methodology for the calculation of damages.
Finally, the formal annulment of an EC decision by the European courts does not necessarily free the hands of national courts in the EU. Courts may still be reluctant to allow enforcement of the arbitral award to proceed in the coming months. Their obligation, if any, to continue to stay proceedings until the appeal process is exhausted remains unclear. The EC has already asserted before the UK Supreme Court that, in accordance with the EU law principle of "sincere cooperation", enforcement should be stayed until the outcome of any appeal to the CJEU is decided.
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