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UK ruling referred to CJEU in post-Brexit first

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The European Commission has accused the UK of breaching EU law during the Brexit transition period by virtue of a UK Supreme Court judgment handed down in February 2020.

The Commission has now referred the UK to the Court of Justice of the EU (CJEU) over the issue.

Kotsonis Totis

Dr. Totis Kotsonis

Partner, Head of Subsidies, Procurement, Trade Agreements and Trade Remedies

Some have questioned the need for the Commission to be pursuing this ‘historic’ issue and even wondered whether this action has more to do with the politics of Brexit rather than the rule of law. Easy as it might be to view this action in those terms, the truth is perhaps much more mundane

In its judgment, the Supreme Court had lifted the stay of enforcement of an arbitral award in favour of Swedish-Romanian investors. The Micula brothers had sought the UK courts’ intervention in a bid to obtain the compensation that an arbitral tribunal had ordered Romania to pay to them as a result of the early termination of a Romanian investment incentive scheme on the basis of which they had invested in the country. The scheme had been withdrawn four years earlier than its scheduled expiry date, as part of the country’s preparation for EU accession, as it was deemed inconsistent with EU state aid rules.

The implementation of the arbitral award is a complex and contentious issue.

Although in 2013 an International Centre for Settlement of Investment Disputes arbitral tribunal had found in favour of the Micula brothers and ordered compensation, in 2015 the European Commission adopted a decision finding that Romania’s implementation of the arbitral award breached EU state aid rules.

On an application by the investors, the EU General Court annulled the Commission’s 2015 state aid decision.  The Commission appealed the judgment and in January 2022, the CJEU – the EU’s highest court – granted the Commission’s appeal, reinstating the original state aid decision and referring the case back to the General Court for it to consider the investors’ remaining pleas against the Commission. 

In a statement, the Commission said the Supreme Court’s intervention breached EU law in four separate ways. It said the UK court was wrong to adjudicate on a legal question that was already put before the EU courts, that it had misinterpreted and misapplied the relevant EU law in question, should have referred the matter to the CJEU for guidance on the application of EU law to the case, and that it had failed to respect the “suspensive effect” of the Commission’s decision to open a formal state aid investigation in the case in 2014.

The Commission said it has the right under the Withdrawal Agreement - the agreement that sets out the terms of the UK’s withdrawal from the EU - to refer the UK to the CJEU over the matter. The Commission said that under the terms of that Agreement, CJEU rulings in such matters “have binding force in their entirety on and in the UK”.

“The Commission considers that the UK Supreme Court judgment has significant implications for the application of EU law to investment disputes, in particular for (i) arbitral awards rendered on the basis on an intra-EU bilateral investment treaty or (ii) the intra-EU application of the Energy Charter Treaty,” the Commission said in its statement.

“The Commission considers that UK courts' recognition and enforcement of such awards is incompatible with EU law and would circumvent and undermine the Commission's efforts to ensure the effective implementation of judgments reiterating the primacy of EU law over arbitral awards in the context of intra-EU investment disputes, which are incompatible with EU law and thus unenforceable,” it said.

According to state aid and trade law specialist Dr. Totis Kotsonis of Pinsent Masons,this  case raises a number of interesting points.

“It is the first against the UK for breaches of EU law since the end of the Brexit transition period on 31 December 2020. That this action is possible, is not in dispute,” Kotsonis said. “Under the terms of the Withdrawal Agreement, the Commission has the right, within four years after the end of the transition period, to take action against the UK for alleged breaches of EU law that occurred before the end of that period.” 

“At the same time, some have questioned the need for the Commission to be pursuing this ‘historic’ issue and even wondered whether this action has more to do with the politics of Brexit rather than the rule of law. Easy as it might be to view this action in those terms, the truth is perhaps much more mundane, namely, genuine concerns not to set a precedent or be seen to be taking a soft approach in relation to any course of action that might undermine the fundamental legal order of the EU,” he said. 

“In recent times, there have been other instances, whether in Germany, Poland or Hungary, where the primacy of EU law and the obligations of member states and their institutions, in that regard, have been questioned. It is not surprising that, as the guardian of the EU Treaties, the Commission is keen to ensure that these instances are not allowed to set a precent that could ultimately have longer-term and detrimental effects on the cohesion and functioning of the EU. It is through this prism that this action is best understood rather than the prism of Brexit,” said Kotsonis.

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