Micula vs. (Brussels) Dracula

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1. Background

As we have reported in our previous article, the Micula case is developing into a major legal conflict between investment law and EU law.

After Micula obtained a USD 250 million ICSID award against Rumania, based on the Sweden-Romania BIT, the European Commission has significantly stepped up its intervening efforts. First, the Commission had issued an injunctive decision against Romania prohibiting it from executing the ICSID award, claiming that the payment of the compensation would constitute new, unlawful state aid. Second, the Commission finalized its formal state aid investigation against Romania concluding that indeed the payment of the award would constitute state aid that is incompatible with EU law. Subsequently, Micula also took legal steps by bringing the case before the first instance General Court of the Court of Justice of the EU (CJEU). Micula is requesting the General Court to annul the decision of the Commission.

In short, the Micula dispute, which originally was a normal ICSID arbitration case decided by an ICSID arbitral tribunal, suddenly has been transformed into an EU state aid case. This transformation has significant consequences regarding the enforcement of the award and the potential repayment of the award within the EU.

From the outset it should be emphasized that the important difference between ICSID awards and awards issued under other arbitration rules such as UNCITRAL, Stockholm Chamber of Commerce (SCC) or International Chamber of Commerce (ICC), is that according to Article 53 ICSID Convention:

Article 53
(1) The award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention. Each party shall abide by and comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention.

Accordingly, an ICSID award cannot be reviewed by or appealed before domestic courts. Moreover, Article 54 ICSID Convention prescribes that:

Article 54
(1) Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.

In other words, ICSID awards must be recognized and enforced by all ICSID parties, without that there is a possibility by domestic courts or the European Commission to prevent their enforcement.

Moreover, it is important to recall that the EU is neither party to the ICSID Convention nor to the Sweden-Romania BIT. Accordingly, the European Commission has – prima facie – nothing to do with this dispute. Nonetheless, the Commission has intervened as amicus curiae in the Micula ICSID proceedings by warning that any award that would be paid to Micula by Romania would constitute unlawful state aid. Due to the supremacy of EU law, the Commission claims that any such award would not be enforceable within the EU.

Hence, the question arises: what happens if Romania pays out the award? If the payment of the award is indeed qualified as unlawful, who will be obliged to recollect the money and how would this be done in practice? But the question is: what happens if Romania pays out the award to Micula? What can the European Commission do against that?

2. EU state aid law

For a proper understanding of the case, it is first of all important to highlight which measure is at issue in the Micula state aid procedure. As the Commission states in its letter to Romania:

(25) The measure here under assessment is the implementation of the Award, i.e. payment of the compensation awarded to the claimants by the Arbitration Tribunal plus interest that has accrued since the Award was issued.

Hence, in the EU state aid proceedings the European Commission is not considering the state aid paid to Micula since 1999, but rather the potential payment of the ICSID award, which is equated by the Commission to state aid. Prima facie, it may seem strange to qualify the payment of an ICSID award as state aid. After all, Romania is not voluntarily paying the award of USD 250 million, but is ordered by the arbitral tribunal to pay for the breaches of the BIT. However, the European Commission explains that:

(34) By implementing the Award, Romania has (for the part of the Award that has already been executed) and would (for the remainder) in reality grant to the claimants an amount corresponding to the advantages foreseen under the abolished EGO 24 scheme from the moment it was repealed (22 February 2005) until the scheduled expiry (1 April 2009). In addition, to ensure that the claimants would fully benefit from an amount corresponding to that of the abolished scheme, interest and compensation for the allegedly lost opportunity and lost profit would be granted. In effect, the implementation of the Award would re-establish the situation the claimants would have, in all likelihood, found themselves in if the EGO 24 scheme had never been repealed (which is the idea behind the compensation award by the Arbitration Tribunal).

Unsurprisingly, the European Commission concluded that the execution, in part or in full, of the ICSID Micula award would amount to granting of state aid.

In a next step, the unlawfulness of the “award-turned stated aid” must be determined.

According to Article 107(1) TFEU state aid is, in principle, incompatible with the internal market. Unless an aid measure is declared to be compatible with the internal market by the European Commission, the Member States are prohibited from putting state aid measures into effect.

Under Article 108(3) TFEU, a Member State must notify any plans to alter or grant aid to the European Commission and shall not put its proposed measure into effect until the Commission has taken a final decision on that measure’s compatibility with the internal market.

In other words, the European Commission must approve any state aid measure before it is implemented. This means a Member State must notify the Commission and await its final decision before granting any new state aid.

Regarding the Micula award, the Commission stressed that executing the award would constitute “new state aid” and that the Romanian authorities could only execute the award after the Commission has authorized it under EU state aid rules. According to the European Commission, the unlawfulness of the “award-turned into state aid” is based on the fact that Romania has already taken steps towards the execution of the award by partially offsetting the awarded damages against tax debts of Micula. However, this was not notified to the Commission and therefore – according to the Commission – was unlawfully put into effect, which in turn violates Article 108(3) TFEU.

Pursuant to Article 14 of Council Regulation No 659/1999 all unlawful state aid may be recovered from the recipient. Since the European Commission has formally decided that the partial payment of the award constitutes illegal state aid, the Commission is requesting Romania from recovering it from Micula.

Thus, in the next step the procedure for recovering illegal state aid must be examined.

3. Procedures for recovering unlawful state aid

The European Commission stated that Rumania has partially paid the award by offsetting it with outstanding tax duties of Micula. For the sake of argument, it is assumed that Romania has fully executed the award. Assuming further that the payment of the award is indeed qualified as unlawful state aid, the question arises how and who will the award be recovered?

The decision of the Commission to recover the unlawful state aid is addressed to Romania as a whole, which imposes the obligation to recover the state aid upon all public entities of Romania – including its national courts, which in principle are obliged to give full effect to the Commission decision. In essence, the obligation to comply with the Commission decision means that Romania must take all necessary measures to make recovery of the unlawful state aid possible.

Due to the autonomy of procedural law of the Member States, EU law does not contain the rules for the recovery of unlawful state aid. Accordingly, the procedural rules for the recovery of unlawful state aid are determined by the national procedural law of each Member State.

Pursuant to the general obligation of the Member States to ensure that EU law is at all times fully and properly implemented, Romania is required to recover the payments from Micula. Since the decision to offset Micula’s tax duties is based on an administrative decision, Romanian administrative procedural law determines the subsequent steps. Accordingly, Romanian authorities would have to adopt an administrative decision requiring Micula to repay the award. Micula could of course appeal against that decision before Romanian courts, which in turn could also ask preliminary questions to the CJEU as to the compatibility of that decision with EU law. One of the main issues in these proceedings would be the question of legitimate expectations of Micula regarding the legality of the enforcement of the “award-turned state aid”. According to the jurisprudence of the CJEU, beneficiaries of state aid cannot rely on legitimate expectations that the granted state aid is compatible with EU law. This is in sharp contrast with investment law, in particular the FET-standard and the umbrella clause, which protect the legitimate expectations of investors as regards acts and commitments of the host state to a much greater extent.

More specifically, since the Micula award concerns the enforcement of an ICSID award based on the ICSID Convention and the BIT between Sweden and Romania, which are binding international treaties for Romania, it must be assumed that Micula can reasonably rely on a high level of legitimate expectations that Romania would indeed fulfill its ICSID obligations and enforce the award.

Nonetheless, if the CJEU were requested to rule on this issue, it can be expected that the CJEU will argue against any legitimate expectations of Micula, so the state aid must be repaid. In that case, Romania will adopt an administrative decision requesting Micula to pay back the state aid. If Micula fails to pay back, Romania could confiscate any assets of Micula within or even outside Romania. For example, Romania could request Swedish authorities to assist in the confiscation of assets o Micula in Sweden. By virtue of EU law, Swedish authorities would be obliged to do their utmost to help Romania fulfill its EU law obligations.

Moreover, in case Micula ends up in financial difficulties due to the repayment of the award, the CJEU has repeatedly confirmed that the mere fact that the beneficiary of unlawful state aid is in financial difficulty does not impact on his repayment obligation. However, there can be situations where the assets of the beneficiary are not sufficient to meet all outstanding claims. In such cases, the CJEU has stated that the liquidation of the beneficiary can be regarded as an acceptable alternative to recovery. The reason for this approach is that, from an economic perspective, the competitive advantage of the beneficiary no longer exists in the event of formal liquidation. In any case, a Member State is obliged to register its recovery claim immediately if the beneficiary is subject to an insolvency proceeding.

If Romania fails to comply with the recovery decision of the Commission, the Commission may refer the matter to the CJEU. From the case law of the CJEU, it can be ascertained that the only acceptable argument is that recovery will be “absolutely impossible”. The case law of the CJEU also shows that a provision of domestic law and domestic practices or circumstances cannot impede the reimbursement of state aid. As long as the Member State has not taken any attempt to recover the unlawful aid, it will not be accepted that recovery is absolutely impossible.

In short, Romania is obliged to recover any payments made to Micula in the context of implementing the ICSID award – irrespective of the clear ICSID provisions, which require Romania to enforce the award automatically. Hence from the perspective of EU law, Micula will have to repay – in any case – the ICSID award.

However, assuming that Romania has fully paid the award to Micula, thereby fulfilling its ICSID obligations, the European Commission could start a so-called infringement procedure against Romania for violating its EU law obligations by disregarding its negative state aid decision. The CJEU would decide this dispute most likely in favour of the European Commission because it would place EU law above the ICSID Convention and the BIT. In this case, the CJEU would order Romania to recollect the payment of the award from Micula. Consequently, Romanian authorities would be required to do everything they can to collect the money back from Micula. This would essentially mean confiscating any assets of Micula in Romania or elsewhere in the world.

In short, in both scenarios Micula will not be in a position to enjoy the USD 250 million award.

4. Conclusions

The Micula case illustrates the increasing inability of foreign investors to enforce an award – even an ICSID award – within the EU. This problem is not new, but so far was limited to non-ICSID awards, such as the UNCITRAL award in the Eureko/Achmea v. Slovakia case. In contrast to ICSID awards, in UNCITRAL disputes national courts can be called upon by the Respondent host state for setting aside the award – as has been attempted – so far unsuccessful – by Slovakia in the Eureko/Achmea case. Moreover, if the seat of the arbitration is within the EU, this enables national courts which are asked to rule on setting aside an UNCITRAL award to request preliminary rulings from the CJEU. In this way an arbitral award is brought before the CJEU, which will decide on the basis of EU law alone. Hence, neither the ICSID Convention nor the BIT nor investment law principles will be taken into account. In essence, this is a comparable transformation of the dispute as is now the case with the Micula award.

In addition, by transforming the Micula award into a state aid issue, Micula will be unlikely to rely on the argument of legitimate expectations – in particular since in EU state aid law legitimate expectations are not accepted. Moreover, in cases such as Micula in which the payment of an award is qualified as unlawful state aid, the investor will be confronted with new legal proceedings requesting the repayment of the award. Thus, the investor is not only unable to enforce his award, but will in addition be confronted with extra legal proceedings and legal costs. As mentioned above, this recovery obligation extends up to the bankruptcy of the beneficiary.

5. Available solutions

However, investors can reduce such risks by taking appropriate steps.

Firstly, investors should always select the ICISD rules as the preferred arbitration rules, since compared to all other arbitration rules, ICSID rules provide the highest chance of recognition and enforcement of the award on a worldwide basis in more than 150 states.

Secondly, investors should always select a seat of the tribunal outside the EU, so as to reduce interferences by EU law and the CJEU. Unfortunately, this will not prevent interferences from the European Commission in the proceedings as amicus curiae, since it is up to each arbitral tribunal to decide whether or not to accept amicus briefs from the Commission.

Thirdly, investors who have obtained an ICSID award should preferably enforce the award outside the EU in order to avoid the transformation of the payment of the award into a state aid issue. This may entail additional costs and may be more complicated, but it is worth the money considering the danger of being unable to enforce the award at all and thus lose the whole award.

Finally, immediately after obtaining an ICSID award, foreign investors should be prepared to move their assets outside the EU in order to avoid confiscation and liquidation of the assets by a Member State.

Global Investment Protection (GIP) AG is ready to assist investors in restructuring their investments and in preparing arbitration proceedings on the basis of the ECT and BITs.