28 May, 2020

The Micula saga – what were the lessons learned?

One learns early on – if you want to sit at the cool kids’ table, you must do the work and engage in tedious diplomatic battles and quid pro quo bargains. Yet, does the accession to the EU automatically erase ghosts of times past? If one looks at the love-hate triangle between the EU, Romania and the Micula brothers, the answer is not necessarily positive.

The Micula phenomenon

No international lawyer is likely to ever ask: “Micula – who?”

On the contrary, the Micula case(s) have by now generated such notoriety that they represent household terms in law offices around Europe and beyond. In fact, this saga stretched for so many years that it turned into a franchise of legal debates, issues and controversies, wreaking havoc on the EU judiciary, national courts and international investment tribunals.

As Micula is pending an appeal at the EU’s highest court, the resolution of problems that left lawyers shuddering is still not in sight and it may be some time before practitioners and scholars alike can breathe a sigh of relief. However, the decade-and-a-half-long turmoil sparked issues that are of interest to the states vying for EU membership, specifically regarding the exact moment when they finally become bound by the EU law and accountable to the European Commission (“EC”).

How did it come to this?

The story began in 1998 Romania with the introduction of economic incentives for investors. Ioan and Viorel Micula, brothers who possessed Swedish citizenship, grasped the opportunity and incorporated several companies for investment-related purposes.

Fast-forward to 2005: Romania, in the midst of the EU accession process, repealed the incentives to eliminate domestic measures that could constitute State aid incompatible with the acquis communautaire, leaving the Micula brothers crying foul. Aggrieved, they commenced an ICSID arbitration in summer 2005 claiming breaches of the 2002 Sweden-Romania BIT.

On January 1, 2007, however, while the ICSID arbitration was ongoing, Romania became an EU member state. The curtain came down on December 11, 2013 when the ICSID tribunal delivered its award in favor of the Micula brothers: the Swedish siblings were to walk away with EUR 178 million plus interest in their pockets.

The case should have been put to rest then. Romania failed to facilitate the annulment of the ICSID award and the ICSID Convention is clear – awards rendered by its tribunals are final and binding on the parties. All ICSID Contracting States must recognize them as such, equate them with final domestic court judgments and ensure their enforcement upon the awardee’s request. 

However, the EC begged to differ as it wasn’t going to take the ICSID tribunal’s insolence quietly.

The EC goes to war

The EC had been vocal on its views on the case even before the ICSID award was delivered. In fact, since 2009, it had participated as amicus curiae in the ICSID arbitration, claiming that any compensation awarded to the Micula brothers for the loss of privileges they had had under the (revoked) incentives would amount to State aid incompatible with EU law. Any payment thereof would force its hand into action.

And the EC was not making idle threats.

After Romania effected a partial payment under the ICSID award, the EC donned its war goggles and upped the ante. On March 30, 2015 it passed a decision ruling that any payment to the Miculas pursuant to the ICSID award constitutes illegal State aid and that Romania, an EU Member State, was prohibited from making any additional payments and was moreover obliged to recover the amounts already paid.

The EC’s decision did not go down well with the Micula brothers. They addressed the General Court of the Court of Justice of the EU (“GC”) asking for annulment of the EC’s decision. Simultaneously, they applied for recognition and enforcement of the ICSID award in Romania, Belgium, France, Luxembourg, Sweden, the UK and the US – all of whom were ICSID Contracting States and all of whom were, by virtue of the ICSID Convention, obliged to enforce the award without question.

However, the case yielded another surprise – most of the courts stayed the enforcement proceedings the GC’s decision on the case, and, more stunningly still, the Swedish courts outright declined enforcement, considering themselves bound to implement the EC decision.

Naturally, all eyes were fixed on the GC. But did it deliver? In a nutshell: not quite.

What did the GC (omit to) say?

In the much-anticipated judgment delivered on June 18, 2019, the GC sided with the Miculas and annulled the EC decision, as it found that the EC had overstepped its competences regarding the provisions of the Treaty on the Functioning of the EU (“TFEU”).

The GC argued that, since all relevant events (i.e. introduction of incentives, investors’ acquisition of right to benefit from such incentives, the BIT’s entry into force, revocation of incentives and commencement of the ICSID arbitration) occurred prior to Romania’s accession to the EU, the damages awarded in the 2013 ICSID award were nothing more than compensation for harm definitely done to the Micula brothers by the pre-EU Romania. As a result, payment of the ICSID award by Romania could not qualify as prohibited State aid in the sense of the EU rules, as EU law applied to Romania only as of January 1, 2007, while the Miculas were entitled to compensation already in 2005. Disregarding these facts – the GC concluded – the EC overreached in exerting its powers from the TFEU, as it had only acquired relevant review competences vis-à-vis Romania in 2007.

Following this logic, the GC had no trouble to annul the EC decision and reprimand the EC for stepping out of line.

But the fact remains that the GC failed to substantively and directly address the issues presented to it. It missed the opportunity to resolve the “chicken or the egg” dilemma – which source of law should take the front seat in case of an EU Member State’s conflicting international obligations stemming, from EU law, on one hand,  and from international investment treaties, on the other, an issue which had brought the European Court of Justice (“ECJ”) under serious backlash only a year earlier for its decision in the Achmea case.

Instead, the GC eluded complicated debates by relying on a (fortunate) technicality that all relevant events happened before Romania’s accession to the EU. Consequently, one is left wondering what the outcome would have been if, say, the arbitration had been initiated after Romania’s accession to the EU or if the damages sought in such arbitration encompassed both the pre- and post-accession periods? However, due to the GC’s evasiveness, answering these questions is an impossible task.

What next?

The GC’s judgment was appealed by the EC and is currently pending at the ECJ. In the meantime, certain national courts which had previously stayed enforcement proceedings, such as those in the UK and the US, allowed lifting of the stay and have continued enforcement of the Miculas’ claims.

On their way to EU membership, the WB countries should be mindful of the potential issues that could arise after their eventual accession to EU, which could be the product of their pre-accession investment policies. The WB countries are, by default, importers of foreign investments, which renders the potential for investment disputes virtually limitless, especially in the process of transformation – or, better put, conformation – to the acquis communautaire.

Moreover, should the ECJ’s eventual decision be at odds with that of the GC, or with that of the ECJ itself in Achmea, the European and international law arenas run the risk of going off the rails, producing even more uncertainties for prospective EU members and resulting in inevitable clashes over supremacy between the EU system and the international investment dispute resolution mechanisms. 

Author: Predrag Spasić