In May 2024, the US Court of Appeals for the District of Columbia upheld the decision of the District Court to deny Romania's motion to set aside judgments that enforced the Micula brothers' 2013 ICSID award against Romania. This is the latest chapter in the long-running saga of the Micula brothers' attempts to enforce the award in different jurisdictions and demonstrates both the pro-arbitration and pro-enforcement stance of the US Courts.
Background
This case has a rather long and complicated history, with the dispute now entering its 19th year. Proceedings have taken place all over the world in a number of different jurisdictions and forums.
The below is a summary of the events that have taken place to date:
- In 1993 (prior to its accession to the EU), Romania entered into an association agreement with the European Community (“EC”) and its member states which required Romania to introduce state aid rules similar to the EC rules on state aid. The agreement also encouraged Romania to establish a legal framework to favour and protect investment and to conclude agreements for the promotion and protection of investment.
- In 1998, in the context of attempting to develop its regional policy, Romania set up a state aid scheme to attract investments in disadvantaged regions assuring tax breaks and exemptions or refunds of custom duties on raw materials. The scheme was to remain in place for 10 years from the date a region was officially designated as disadvantaged.
- During the early 2000s, in reliance on the incentives, the Micula brothers invested in large, highly integrated food production operations in one of the disadvantaged regions.
- In 2002, Romania and Sweden negotiated the Sweden-Romania Bilateral Investment Treaty (the “BIT”) which provided for reciprocal protection of investments and included a provision for investor-State dispute resolution under the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the “ICSID Convention”).
- However, as part of the process of accession to the EU and to align its incompatible state aid schemes with EU state aid rules, Romania abolished the scheme in 2005. Romania subsequently acceded to the EU in 2007.
- The Micula brothers commenced ICSID arbitration proceedings against Romania in 2005 under the BIT seeking compensation for Romania's premature abolishment of the scheme.
- In 2013, the ICSID tribunal found that the withdrawal of the incentives four years prior to their expiry constituted a breach of the “fair and equitable treatment standard” imposed by the BIT and ordered Romania to pay €178 million in compensation.
- Shortly after this, in 2014, the European Commission issued an injunction preventing Romania from paying the award whilst it conducted a state aid investigation. The injunction was granted the injunction and, in 2015, the Commission issued its decision that the payment of compensation was equivalent to the compensation provided for by the abolished aid scheme and, therefore, also constituted illegal state aid (the “EC Decision”).
- The Micula brothers then appealed to the General Court of the European Union (“GCEU”) in 2015 in an attempt to annul the EC Decision. They were successful; the GCEU issued its decision in June 2019 ruling in favour of the Miculas on the basis that all the relevant events leading to the award had predated Romania's accession to the EU and the Commission had no authority to retrospectively apply its powers to the events that took place before January 2007 (the “GCEU Decision”). The GCEU also decided that complying with the award would not constitute illegal state aid because the award only compensated the Miculas for Romania's pre-accession actions and, as such, could not constitute illegal state aid within the meaning of the EU regulations. The EC Decision was, therefore, annulled.
- It is also worth noting that, in 2014, the Micula brothers made an application to enforce the award in the UK. The outcome of this application was that a stay of enforcement was granted pending the outcome of the GCEU Decision. Ultimately, the stay was lifted by the Supreme Court in 2019 on the basis that the English Courts only have the power to stay execution of an ICSID award in limited circumstances, those being for procedural reasons (rather than substantive) and only in circumstances where no inconsistency arises with the ICSID Convention duty on national courts to recognise and enforce the award.
Enforcement in the US District Court
On 6 November 2017, the Micula brothers sought to enforce the award before the US District Court in Colombia. Unsurprisingly, the enforcement was opposed by both Romania and the Commission who made a number of objections:
- They relied on the earlier Achmea judgment1 (which found the investment arbitration provisions of an intra-EU investment treaty were contrary to EC law), arguing that this had the effect of rendering the arbitration agreement in the BIT invalid and unenforceable and, therefore, the US District Court lacked jurisdiction under the US Foreign Sovereign Immunities Act 1976 (the “FSIA”).
- They also relied on the “act of state” and the “foreign sovereign compulsion” doctrines of US law which prevents a US court from questioning the validity of public acts performed by a foreign sovereign state within its own borders and bars the review of actions carrying out the mandate of a foreign government.
- Finally, Romania argued that it had already paid the award in full through a series of tax setoffs and forced executions against various accounts held by Romania's Ministry of Finance.
The US District Court handed down its decision on 11 September 2019 entering judgment for US$330 million and rejecting all the objections:
- Based on the “arbitration exception” in the FSIA, Romania could not claim immunity from jurisdiction of the US Courts because it had consented to the underlying arbitration by entering into the BIT. Also, the ruling in Achmea was not applicable to these enforcement proceedings because the US District Court did not have to interpret or apply EU law to reach a decision.
- A former GCEU judge had provided a declaration which stated that the state aid investigation and EC Decision were no longer effective in light of the decision of the GCEU.
- The court disagreed that the award had been paid in full and noted that a significant portion of the award remained unsatisfied.
In January 2021, following an appeal from the Commission, the European Court of Justice (“ECJ”) reversed the 2015 GCEU decision which had annulled the original award against Romania. The ECJ decided that because the ICSID tribunal issued its award after Romania joined the EU in 2007, the EC could decide whether Romania's payment of the award would constitute unlawful state aid. The ECJ also issued a second ruling in September 2022 that the award could not be enforced in the courts of EU member states (“the ECJ Decisions”).
Following on from the ECJ Decisions, Romania made an application under the Federal Rules of Civil Procedure (“FRCP”) which govern civil procedure in the US District Courts to set aside the US judgment. It argued that the ECJ Decisions meant that the agreement to arbitrate in the BIT was void the moment that Romania entered the EU and, therefore, sought relief under FCRP 60(b) which enables a party to seek corrections or alterations to a judgment. The US District Court did not agree and held that the ECJ Decisions did not alter the US Court's prior finding on jurisdiction because they did not invalidate or nullify Romania's consent to arbitrate.
US Court of Appeals
Romania subsequently appealed to the US Court of Appeals (being the most recent decision handed down in May) arguing that:
- The ECJ Decisions should elicit a finding that the award against Romania is not enforceable.
- That the US District Court failed to take account of the conflict between Romania's EU obligations and the US District Court's enforcement of the award.
In an important decision, the US Court of Appeals rejected both of these arguments and, in doing so, held that once the US Courts have jurisdiction under FSIA's arbitration exception, US law implementing the ICSID Convention obliges the US Courts to enforce the award.
Conclusion
This decision is the latest chapter in the Micula brothers' extensive attempts to enforce their ICSID award against Romania which has involved proceedings across many different jurisdictions. The recent decision of the US Court of Appeals illustrates both the pro-arbitration and pro-enforcement stance of the US Courts, despite the apparent conflict with Romania's obligations to the EU. Both this and the decision of the Supreme Court in the UK is positive news for those looking to enforce ICSID awards in the UK and the US.
Footnote
1. Slowakische Republik v Achmea BV [2018] C-284/16
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.