Lexology | 19 September 2019
Intra-EU arbitral award enforced in the US - Achmea objection dismissed by DC District Court for the first time
by Arif H. Ali, Alexandre de Gramont, Dennis H. Hranitzky and Dániel Dózsa - Dechert LLP
A federal court in Washington, D.C. has recognized and enforced a US$331 million arbitral award against Romania under an intra-EU BIT—notwithstanding the objection of the European Commission that the award is incompatible with EU law.
In an opinion dated September 11, 2019, the U.S. District Court for the District of Columbia granted the petition for recognition and enforcement of an arbitration award rendered under the Swedish-Romania bilateral investment treaty (“BIT”) and the International Convention on the Settlement of Investment Disputes (the “ICSID Convention”). Micula v. Romania, Case No. 17-cv-02332 (D.D.C. Sept. 11, 2019).
The Micula decision represents the first time that a U.S. court has addressed the EC’s position that arbitration agreements in BITs entered into between member States of the European Union (“EU”) are unenforceable as a matter of EU law, and therefore should not be enforced in the U.S. courts. The Micula decision may impact a number of other recognition and enforcement actions that have been brought (and others that are anticipated to be brought) in the U.S. courts, where investors are seeking to recognize and enforce arbitration awards rendered in intra-EU disputes over the objections of the EC.
The Micula case has a long, winding, and complex history. The arbitration was commenced in August 2005 by Swedish nationals Viorel and Ioan Micula along with three companies they controlled. The Micula brothers claimed that they and their companies had invested in Romania in reliance on incentives enacted by the Romanian Government after the overthrow of the communist regime in 1989. The Government had offered the incentives to promote investment in “disfavored” regions of Romania.
According to the Micula brothers, they started investing in Romania in reliance on the incentives in 1998. However, the Romanian Government repealed the incentives in 2004. At the time, Romania was planning its accession to the EU. The EC had advised Romania that the incentives constituted “state aid” that was incompatible with EU law—leading the Government to repeal them.
The Micula brothers, along with their companies, commenced the arbitration under the Swedish-Romania BIT, which had entered into force in 2003, and the ICSID Convention, which had entered into force for Sweden in 1967 and for Romania in 1975.
In an award rendered in December 2013, the ICSID tribunal agreed with the Micula claimants that Romania had breached the protections of the BIT by revoking the incentives that had led them to invest in the country. The ICSID tribunal awarded the claimants damages equating to US$116,317,868 – plus interest at a rate of 5%, compounded on a quarterly basis.
Developments in the EU
After the commencement of the arbitration in August 2005 – and with the arbitration still pending before the ICSID tribunal – Romania acceded to the EU on January 1, 2007. Following the ICSID tribunal’s award in December 2013, the EC advised Romania that implementing the award would constitute state aid incompatible with EU law. In March 2015, the EC issued a decision ordering Romania not to pay any further amounts under the ICSID award, and to recover any amounts already paid as incompatible state aid under EU law.
However, in June 2019, the General Court of the European Union (the “General Court”) annulled the EC’s decision. The General Court ruled that EU law became applicable to Romania only after its accession to the EU in January 2007. Therefore, according to the General Court, the EC lacked “competence” to declare that investment incentives offered by Romania before its accession violated EU rules on state aid. The General Court also concluded that, because the ICSID tribunal awarded compensation for Romania’s pre-accession repeal of the incentives, Romania’s satisfaction of the award would not constitute illegal state aid, even though the award was rendered after EU accession. The EC’s appeal of the General Court’s decision is currently pending before the Court of Justice of the European Union (the “CJEU”)—the EU’s highest court.
In the meantime, in March 2018, the CJEU rendered its highly-publicized decision in Slovak Republic v. Achmea. In Achmea, the CJEU held that EU law precludes international arbitration provisions in intra-EU BITs – in significant part because such provisions, according to the CJEU, improperly allow arbitral tribunals to interpret or apply EU law that should only be within the competence of EU courts. In Achmea, the arbitration had been commenced after the Slovak Republic’s accession to the EU. Moreover, the measures at issue in Achmea post-dated Slovakia’s EU accession.
The D.C. Court’s Decision Recognizing and Enforcing the ICSID Award
Following several years of unsuccessful efforts to recognize and enforce in the U.S. the ICSID award on an ex parte basis (i.e., without serving Romania under the requirements of the Foreign Sovereign Immunities Act), the Micula claimants submitted a petition to recognize and enforce the award in the U.S. District Court for the District of Columbia on November 17, 2017. Romania was served and participated in the case. The EC appeared as amicus curiae – as it has done in a number of other pending cases in which investors are seeking to enforce awards rendered in intra-EU disputes in the U.S. Courts. Both Romania and the EC relied heavily on the CJEU’s decision in Achmea. The District Court rejected the “Achmea objection.”
The District Court concluded that the principal concern underlying the Achmea decision was that the dispute in that case “called upon the arbitral tribunal to interpret or apply EU law,” outside the EU’s judicial system. In distinguishing Micula from Achmea, the District Court rested on the following key points:
- First, according to the District Court, all of the key events in Micula had occurred before Romania acceded to the EU, and, moreover, the claimants had commenced the arbitration prior to Romania’s EU accession.
- Second, the District Court concluded that Micula was distinguishable from Achmea because “the dispute before the [Micula] tribunal did not ‘relate to the interpretation or application of EU law’ in the sense that concerned the Achmea court.” In Micula, the claimants and Romania had agreed that the claims put forward were based on the Sweden-Romania BIT and that the BIT’s “substantive rules” supplied the “applicable law.” Because EU law was not directly applicable to Romania at the time, EU law formed part of the “factual matrix” of the case, but was not a source of controlling law.
- Third, the District Court reasoned that its previous conclusions were supported by the General Court’s ruling that overturned the EC’s state aid decision in Micula. According to the District Court, the General Court’s ruling “confirms that the ICSID arbitral tribunal [in Micula] did not tread upon substantive EU law,” and that Achmea therefore “does not affect the Award’s validity.”
The District Court rejected the other arguments offered by Romania and the EC, entering judgment for the Micula claimants in the amount of US$331,557,687 (reflecting the face value of the Award and the interest that had accrued under it).
Under applicable U.S. law, Romania may appeal the District Court’s decision in Micula to the U.S. Court of Appeals for District of Columbia Circuit.