The CJEU finds that the UK violated its European Law obligations when it complied with pre-existing ICSID Convention obligations without waiting for CJEU to first rule on the issue

On 14 March 2024, in the case of European Commission v United Kingdom of Great Britain and Northern Ireland, the Court of Justice of the European Union (“CJEU”) found that the UK “seriously compromised the EU legal order” and violated its obligations under the Treaty on the Functioning of the European Union (“TFEU”). This finding concerned a decision by the UK Supreme Court (“UKSC”) to enforce an “intra-EU” ICSID arbitral award on the grounds that the UK’s international obligations under the ICSID Convention pre-dated and were not changed by the UK’s obligations under the TFEU. In the CJEU’s view, the UKSC not only misinterpreted the TFEU, but it should never have decided the issue; rather, the CJEU opined that the UKSC should have awaited the CJEU’s interpretation of the treaties in question.

Factual Background to the CJEU Ruling

In December 2013, an ICSID Arbitral Tribunal sitting in a dispute under the Romania-Sweden bilateral investment treaty issued an award against Romania and in favour of two Swedish investors (the “Micula Award”).

Shortly thereafter, the European Commission (“EC”) ordered Romania not to pay the amounts due under the Micula Award, on the grounds that in the EC’s view, the Award comprised illegal state aid in breach of the TFEU. This order then worked its way through the EU courts.

In the meantime, the Swedish investors sought to enforce their award in various European courts, including in the UK.

In 2017, the English High Court suspended the Micula Award’s enforcement pending the decision by the European courts on its enforceability as a matter of European law. The English Court of Appeal upheld the stay decision.

In February 2020, however, the UKSC removed the stay and ordered the Award’s enforcement. In the UKSC’s view, because the UK acceded to the multilateral ICSID Convention prior joining to the EU, its obligation to enforce the Micula Award would not be impacted by the pending EU law issues, and no stay was necessary. In its ruling, the UKSC relied upon Article 351 of the TFEU, which provides that “[t]he rights and obligations arising from agreements concluded before . . . the date of their accession [to the EU], 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.”

The CJEU’s Latest Decision

In its March 14 ruling, the CJEU called into question the UKSC’s reliance on Article 351 of the TFEU. In the CJEU’s view, the fact that the ICSID Convention imposes obligations on and grants rights to non-Member States is insufficient to trigger Article 351. Rather, the CJEU asserted that the UKSC should have considered the applicability of Article 351 within “the particular case under consideration”, i.e., the enforcement of an intra-EU BIT award within an EU Member State. In that scenario, because a “third country does not appear entitled” to require the UK to enforce the Micula Award, Article 351 did not apply.

The CJEU further found that the UKSC should have stayed its decision on the interpretation of Article 351 until the CJEU had ruled on the issue and referred any unresolved issue on the interpretation of Article 351 to the CJEU, rather than deciding the interpretation issue on its own. The CJEU also found that by enforcing the Micula Award, the UKSC in essence ordered Romania to breach its TFEU obligations, as paying the Award constituted unlawful state aid. The CJEU found each of these issues—failure to stay, failure to refer, and the enforcement order, constituted a separate violation of the UK’s TFEU obligations.

Takeaways

The CJEU’s most recent decision is the latest in a long saga of decisions in which it has sought to steadily erode the ability of EU Member States to comply with pre-existing treaty obligations relating to arbitration due to the CJEU’s concern that it alone should have the final say on all issues of EU Law.

This saga has included decisions striking down intra-EU bilateral investment treaties, applying the intra-EU objection to the multilateral Energy Charter Treaty (“ECT”) (in a case which did not even involve EU parties), and the EU-wide withdrawal from the ECT.

Given this set of decisions, European investors seeking to invest within the EU should obtain advice about how to structure (or re-structure) their investments to gain protection from non-EU bilateral and/or multilateral investment treaties, while taking into account any tax and corporate governance concerns.

Further, while the CJEU has not yet found that an intra-EU New York Convention award would conflict with EU Law, the rationale it employed to ICSID Awards could conceivably be transferred into the commercial arbitration space. Accordingly, parties negotiating contracts today should consider seating any intra-EU arbitration, including commercial arbitrations between two EU parties, outside of the EU, such as in London or Geneva.