The New Micula Judgment and the Overreach of the ECJ

This article was first published in the Thomson Reuters Blog, here.

On 25 January 2022, the Court of Justice of the European Union (ECJ) handed down its judgment in the appeal procedure in the well-known Micula case.

The purpose of this blog post is to zoom into some systemic aspects of the judgment, which illustrate the overreach of the ECJ in relation to international arbitration initiated under international investment agreements (IIAs).

However, before doing so, it seems appropriate to first summarise the facts of the case.

Summary of the Micula case

In the 1990s, the Micula brothers, originally from Romania but having Swedish nationality had invested millions in Romania in various food processing and packaging factories. As the area in Romania was one of the least economically developed areas, the Miculas benefited from a tax incentives scheme in support of their investments.

In 2005, in the context of the negotiations for Romania’s accession to the European Union, which eventually took place in 2007, Romania repealed the tax incentives scheme. Considering that, by repealing the tax incentives scheme, Romania had breached its obligation to ensure fair and equitable treatment of the investments in accordance with the bilateral investment treaty (BIT) that had been signed in 2002 between Sweden and Romania, the Miculas initiated ICSID arbitration proceedings and obtained in 2013 an award of EUR178 million as compensation for the repeal of the tax incentives scheme.

In accordance with the ICSID Convention and on the basis of the self-contained regime of ICSID, which provides for quasi automatic recognition and enforcement of ICSID awards in more than 150 ICSID contracting parties, the Miculas proceeded in the recognition and enforcement of the award.

Accordingly, and as required by the ICSID Convention, Romania paid the compensation awarded by the arbitral tribunal, notwithstanding warnings by the European Commission that the payment of the award would constitute state aid that is incompatible with EU law. Indeed, by decision of 30 March 2015 the European Commission classified the payment of that compensation as state aid incompatible with the internal market, prohibited its implementation and ordered Romania to recover the sums already paid.

The Miculas initiated annulment proceedings against the decision of the European Commission, which the General Court of the EU granted. The General Court, rightly so, ruled that the European Commission had retroactively applied its competences to facts pre-dating the accession of Romania to the European Union on 1 January 2007.

The Micula judgment of the ECJ in the appeal procedure

Disagreeing with the General Court’s judgment, the European Commission appealed against it before the ECJ.

In contrast to the General Court, the ECJ ruled that state aid must be regarded as being granted, within the meaning of article 107(1) Treaty on the Functioning of the European Union (TFEU), on the date on which the right to receive it is conferred on the beneficiary under the applicable national legislation.

The decisive factor for establishing that date is acquisition by those beneficiaries of a definitive right to receive the aid in question and the corresponding commitment, by the state, to grant that aid. It is at that date that such a measure is liable to distort the competition and affect trade between member states, within the meaning of article 107(1) TFEU.

In the present case, the ECJ found that the right to compensation for the damage was only granted by the arbitral award of 11 December 2013. According to the ECJ, it was only upon the conclusion of that arbitration procedure that the Miculas were able to obtain actual payment of compensation, even if it was intended to make good, in part, the damage that they alleged they had suffered in a period before the accession of Romania to the European Union.

Thus, having regard to the fact that the award, which the ECJ treated as state aid, was granted after Romania’s accession to the European Union, for example, in 2013, the General Court according to the ECJ erred in law in holding that the Commission lacked competence ratione temporis to adopt the decision at issue under article 108 TFEU.

Accordingly, the ECJ set aside the General Court’s judgment and referred it back to rule on the pleas and arguments raised before it.

The overreach of the ECJ

However, the more important systemic issues raised by this judgment concern the overreach of the ECJ in relation to the jurisdiction of arbitral tribunals and in regard to international obligations arising out of international agreements entered into by the EU member states.

The first systemic issue concerns the general application of the Achmea judgment.

In this judgment, the ECJ explicitly found that the General Court erred in law in finding that the Achmea judgment is irrelevant in this case.

More specifically, the ECJ found that Romania is retroactively bound by the Achmea judgment, even though the incentives tax scheme was applied and repealed before Romania acceded to the European Union.

The second, even more astonishing, systemic issue concerns the ECJ’s remark:

“145. […] with effect from Romania’s accession to the European Union, the system of judicial remedies provided for by the EU and FEU Treaties replaced that arbitration procedure, the consent given to that effect by Romania, from that time onwards, lacked any force.”

From a public international law and treaty law perspective, such a conclusion is simply incomprehensible. The accession by a state to the EU can never have the effect of simply “replacing” the obligations of a state entered into through another international agreement.

In the case of the Swedish-Romania BIT in question, that international agreement would need to be either modified or terminated in accordance with the provisions of the BIT and between the state parties concerned and in line with the Vienna Convention on the Law of Treaties.

Indeed, this is also confirmed by the conclusion of the termination agreement in which most EU member states agreed to terminate their intra-EU BIT. However, this termination agreement was only signed in 2020 and explicitly does not affect concluded arbitration proceedings such as the Micula case.

Moreover, also from the perspective of EU law, such an “automatic replacement” of international obligations entered into before accession to the EU, is expressly rejected in article 351 TFEU, which recognizes in its first sentence that:

“The rights and obligations arising from agreements concluded before 1 January 1958 or, for acceding States, before the date of their accession, between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of the Treaties.”

Subsequently, the second sentence of article 351 TFEU provides that:

“To the extent that such agreements are not compatible with the Treaties, the Member State or States concerned shall take all appropriate steps to eliminate the incompatibilities established. Member States shall, where necessary, assist each other to this end and shall, where appropriate, adopt a common attitude.”

Accordingly, if an incompatibility between a pre-accession treaty and EU Treaties is established, the member states need to take the necessary action, which could be either suspension, renegotiation or termination of the agreement. This is exactly what happened with the termination agreement regarding intra-EU BITs. Thus, article 351 TFEU clearly does not prescribe any kind of “automatic replacement” as the ECJ stated in this judgment.

The overreach of the ECJ spills over to ICSID and ECT

This “automatic replacement” remark by the ECJ essentially boils down to extending its jurisdiction into other international treaties signed by the EU member states, in particular, the ICSID Convention and the Energy Charter Treaty (ECT).

As to the ICSID Convention, it should be recalled that unlike the Achmea case, which was arbitrated under the UNCITRAL Arbitration Rules, the Micula case resulted in an ICSID award. Indeed, both Sweden and Romania have been Contracting Parties to the ICSID Convention long before they acceded to the European Union. Accordingly, the ICSID Convention should be shielded from EU law and from the ECJ’s jurisdiction, even more so because the EU itself is not even a Contracting Party to the ICSID Convention.

By extending its jurisdiction and effectively replacing the jurisdiction of ICSID arbitral tribunals by its own jurisdiction, the ECJ is clearly overreaching its competence. Essentially, this means that ICSID arbitration which involves an EU member state will potentially be overridden by the EU and the ECJ.

As to the ECT, in another recent Komstroy judgment, the ECJ also extended Achmea to ECT disputes. In the particular case, the only connection with an EU member state and thus potentially by extension with EU law, was the fact that Paris was the seat of arbitration in the Komstroy dispute, whereas both disputing parties had non-EU nationality, a Ukrainian company versus Moldova.

Nonetheless, the ECJ simply applied its Achmea judgment and thereby invalidated the Komstroy award by inter alia replacing the arbitral tribunal’s jurisdiction with its own.

Obviously, the overreach of the ECJ does not come as a surprise. In fact, it is perfectly understandable from the ECJ point of view, which apparently aims to eradicate international arbitration involving EU member states and by extension also EU investors, in one way or another and superimpose its jurisdiction.

This approach is in complete ignorance of public international law and the existing obligations which EU member states willingly and validly have entered into with other states, whether before or after accession to the EU.

Public international law and treaty law simply do not work on the basis of accepting the claimed supremacy of EU law and “automatic replacement” approach of the ECJ.

Indeed, at the public international law level, all subjects of international law and all treaties are, or at least should be treated equally, with good reason.

author

Nikos Lavranos

Nikos is an expert in investment law & arbitration who has expertise in advising, litigating, negotiating, drafting legislation and providing expert witness reports. His clients are both investors and States. He combines his experience as arbitrator, mediator, legal consultant, academic and former policy maker and chief negotiator for Bilateral Investment…

Featured Arbitrators

ad
View all

Read these next

Category

Arbitration Conversation No. 13: Prof. S.I. Strong of the University of Sydney

In this episode of the Arbitration Conversation Amy interviews Prof. S.I. Strong of the University of Sydney about trust arbitration and new laws in New Zealand. https://youtu.be/QhMxassqMvY

By Stacie Strong, Amy Schmitz
Category

Arbitration Conversation No. 17: Arbitrator Bill McGrath of Davis McGrath in Chicago

In this episode of The Arbitration Conversation Amy interviews Arbitrator Bill McGrath about motions in arbitration. https://youtu.be/FooF0hRtjLk

By Bill McGrath, Amy Schmitz
Category

Canada – Motion to “Compel” Participation in Arbitration Dismissed, Despite Arbitration Clause

This article was first published on the Arbitration Matters blog, here. In Black & McDonald v. Eiffage Innovative Canada Inc., 2022 ONSC 1855, Justice Dow was faced with two motions: (1)...

By Lisa C. Munro

Find an Arbitrator

X
X
X