Updated: Micula brothers score enforcement victory, as EU General Court annuls Commission’s decision to prohibit Romania from paying ICSID award

In a judgment rendered on June 18, 2019, the General Court of the European Union has annulled the European Commission’s decision to bar Romania from complying with the 2013 ICSID award rendered in favour of Swedish investors Ioan Micula and Viorel Micula and a number of corporate entities controlled by them.

The Commission decision, which we covered here, had found that any Romanian payment to the Miculas would breach EU state aid rules.

The General Court has now annulled the Commission decision, thereby potentially removing an obstacle to enforcement of the underlying ICSID award.

In its reasons, the General Court emphasized that the measures found by the Commission to constitute state aid pre-dated Romania’s accession to the European Union, and as such were beyond the Commission’s competence.

The fact that the disputed measures pre-dated Romania’s EU accession also led the court to distinguish the Micula case from the Achmea case: the Micula tribunal, unlike the Achmea tribunal, was not bound to apply EU law, as EU law could not be applicable to the measures.

After further review of the judgment, we may update this report further. The General Court’s judgment may be appealed to the European Court of Justice.

[UPDATE, June 18, 2019: the paragraphs below have been added to this story following our full review of the judgment.]

EU law can only apply to Romania post-accession

In November 2015, the Micula applicants asked the General Court to annul the Commission’s decision of March 2015, relying on EU law procedures for judicial review of European Commission conduct. Hearings were held in March 2018.

In its latest judgment, the General Court began its analysis by confirming that EU law applied to Romania only from its accession date of January 1, 2007 onwards, and that the European Commission had no power to apply EU law to situations predating accession.

Notably, the court said, Romania’s adoption of the incentive scheme underlying the Micula claimants’ ICSID case, the applicable investment treaty’s entry into force, the withdrawal of the incentive scheme, and the commencement of the ICSID proceedings all occurred before Romania’s EU accession.

Arbitral award is not new state aid, but simply recognised right to compensation arising earlier

In its 2015 decision, the Commission had maintained that the Miculas’ right to receive compensation for withdrawal of the incentives arose on the date of the arbitral award in December 2013 – after Romania’s accession to the EU, and thus within the Commission’s competence to examine.

However, the court instead viewed the arbitral award as ‘simply the recognition of that right’ to compensation, which was – in the court’s view – in existence since 2005 when the incentives were actually withdrawn. Furthermore, the actual payments made in various steps by Romania to satisfy the Micula award (which we’ve discussed here) ‘merely represent the enforcement of that right which arose in 2005’.

Since the award was ‘merely an ancillary element of the compensation at issue and is not, as such, severable from the earlier tax incentives’, it did not itself amount to new state aid granted by Romania in 2013, the court held.

Court finds that Commission had no power to treat ICSID award as state aid because it related to pre-accession conduct

Furthermore, the court noted that the Commission had concluded that paying the compensation ordered would amount to state aid because it would effectively re-establish the incentives that were (in the Commission’s view) unlawful.

Spain, which intervened in the case together with Hungary in support of the Commission, also contended that the arbitral award’s compensation constituted state aid because it was calculated in a manner very similar to the incentives themselves, and because ‘the early revocation of [the incentive] scheme’ was ‘the fundamental reason for the whole dispute’.

For the court, however, the Commission’s conclusion hinged on the view that the incentives were indeed unlawful under EU law. In the court’s opinion, the compensation amounts ordered by the tribunal that related to time periods prior to Romania’s EU accession (i.e. from 2005 when the incentives were withdrawn until January 1, 2007) could not constitute state aid, since the Commission had no power to review Romanian conduct prior to EU accession.

While other compensation amounts ordered by the tribunal related to time periods after accession (from 2007 to 2009, when the incentives would have otherwise ended), the court held that the Commission had failed to distinguish between these amounts and the pre-accession amounts. For the court, this failure in itself constituted an excess of the Commission’s powers of state aid review.

Thus, the court held that the Commission had no power to classify Romania’s payment of the tribunal’s award as state aid.

Compensation for damage is not state aid

The court then addressed the Micula applicants’ argument that the arbitral award was not state aid because it did not grant any economic advantage, but simply compensated for damage suffered.

Agreeing with this, the court observed that, under its case-law, compensation for damage suffered did not constitute state aid unless it represented compensation for the withdrawal of aid that was unlawful. Since the court had concluded that EU law was not applicable to the aid in question here, ‘at least in respect of the period predating the entry into force of EU law in Romania’, the compensation ordered by the tribunal could not be characterised as state aid.

Moreover, the court recalled again that the Commission had failed to distinguish between amounts ordered by the tribunal for periods before accession and periods after accession.

As a result, ‘the decision by which [the Commission] classified the entirety of the compensation as aid is necessarily unlawful’ and ‘must be annulled in its entirety’, the court held.

The Commission was ordered to pay the claimants’ costs, while the interveners Spain and Hungary were ordered to bear their own costs.

It remains to be seen whether this judgment will have any effect on the Commission’s broader position that compensation ordered in other investment treaty cases involving EU member state incentive schemes – particularly in relation to renewable energy – would constitute state aid. As we’ve discussed (see here), the Commission has taken the view that it would be unlawful for Spain to make payments, without approval from the Commission, to comply with arbitral awards relating to its removal of solar power incentives.

The court’s reasoning in the latest case, however, appears to be closely connected to measures taken by Romania prior to its EU accession in 2007 – whereas other comparable cases appear to relate only to incentive schemes implemented after EU accession, thus giving the Commission a clearer path to intervene.

UK court hearing on enforcement also underway

Meanwhile, just as the General Court gave its judgment, hearings before the UK Supreme Court commenced in relation to the Micula claimants’ continued efforts to enforce the arbitral award against Romania. In those proceedings, the Supreme Court will determine whether a stay of enforcement on the ICSID award should continue, and whether a lower UK court order against Romania to provide GBP 150 million in security should be lifted. (We’ve reviewed the lower court rulings here.)