Introduction
A perennial question by aggrieved investors who feel cheated by u-turns in public policy is: “May I claim compensation for damage that I have suffered as a result of non-payment of the State aid that was promised to me?”
As a result of recent case law, it is now clear that there are several answers to this question:
First, governments may amend or abolish public policies.
Second, payment of part or all of State aid previously promised is still State aid.
Third, compensation for damage suffered [e.g. loss of revenue] as a result of discontinuation of a State aid measure is State aid.
Fourth, awards decided by international arbitration tribunals for compensation of investors from Member States may not be enforced by national courts.
Fifth, compensation for damage is not State aid only if it is caused by the unlawful action of a public authority and only if it is unrelated to any non-paid amount of State aid.
On 2 October 2024, the General Court, in joined cases T-624/15 RENV, T-694/15 RENV and T-704/15 RENV, European Food and Others v Commission, revisited the issue of compensation.
European Food and Others sought the annulment of Commission decision 2015/1470 by which the Commission found that an arbitral award that had been decided against Romania in the case of Micula v Romania constituted incompatible State aid that had to be recovered.
Before Romania acceded to the EU and in preparation for compliance with EU law, it repealed earlier than initially planned certain tax privileges it had granted to foreign investors some of whom were from EU Member States. Two investors from Sweden – the Micula brothers who owned European Food and several other companies in Romania – subsequently claimed compensation for damage they had suffered as a result of the early termination of the favourable tax treatment they enjoyed. An arbitration tribunal set up in the context of the bilateral Romania-Sweden investment treaty decided that they had suffered damage and awarded compensation.
The General Court annulled the Commission decision on the ground that the aid had been granted before the accession of Romania to the EU. On appeal, the Court of Justice, in case C-638/19 P, Commission v European Food and Others, agreed with the Commission that the General Court committed an error of law. The aid was granted at the moment the arbitration tribunal decided on the award, which was after the accession of Romania to the EU. The Court of Justice returned the case back to the General Court which rendered its revised judgment on 2 October 2024.
These judgments together with related cases C-333/19, Romatsa and Others and C-516/22, Commission v UK are important because they clarify the application of the “Achmea” case law [C-284/16, Achmea] to claims for compensation. In a nutshell, arbitral awards in favour of intra-EU investors are invalid because decisions of arbitration tribunals infringe the principle of supremacy of EU law and because the awards constitute unlawful State aid. Consequently, as the General Court starkly put it, “(51) a court of a Member State cannot under any circumstances, […], enforce the arbitral award”.
Misuse of Commission’s powers?
The applicants claimed that the Commission had misused its powers because it chose to apply Article 108 TFEU instead of initiating infringement proceedings against Romania under Article 258 TFEU. Misuse or abuse of powers is an issue that is rarely adjudicated by EU courts in the context of State aid cases. Misuse or abuse occurs when the Commission exercises its State aid powers outside the field of State aid.
The General Court, first, recalled that “(60) the concept of ‘misuse of powers’, of which abuse of process is an expression, has a very precise scope and refers to the use of powers by an administrative authority for a purpose other than that for which they were conferred on it. A decision is only vitiated by misuse of powers if it appears, on the basis of objective, relevant and consistent evidence, to have been taken with the purpose of achieving an end other than that stated […] or with the aim of evading a procedure specifically prescribed by the Treaties for dealing with the circumstances of the case”.
Then the General Court noted that “(61) in the present case, […] the fact that the Commission did not bring, on the basis of Article 258 TFEU, an action for failure to fulfil obligations against Romania, even though it was free to choose the legal remedy that it considered to be the most relevant, subject to compliance with the applicable provisions, has no bearing on the legality of the contested decision.”
Consequently, the Court rejected the plea and went on to examine a related plea concerning infringement of Article 351 TFEU, which it also rejected. Article 351 TFEU states that agreements between third countries and Member States that were entered into before the latter’s membership of the EU remain valid. This implies that investor protection clauses in agreements between Member States cannot supersede EU law.
Next the General Court examined the argument that the Commission had not proven that all four criteria of Article 107(1) TFEU were satisfied in the case of the arbitral award.
Identification of the aid measure and the date on which the aid was granted
The applicants claimed that the aid measure was not the actual payment of the sums at issue but the arbitral award.
The General Court, first, noted that “(125) in the present case, the aid measure at issue is […]: ‘[…] the payment of the [sums at issue] by virtue of the Award, whether by implementation or execution of that [arbitral] Award, plus the interest that has accrued since the Award was issued’.”
The General Court stressed that the measure at issue was “(126) the payment of the sums at issue and not the arbitral award.”
However, it seems that the Court of Justice had reached a different conclusion when it held that the aid was granted the moment the arbitration tribunal decided in favour of the claim. Yet, the General Court held that “(128) that finding cannot be called into question by the applicants’ argument based on paragraph 124 of the judgment on appeal [i.e. C-638/19 P, European Food v Commission], in which it is stated that ‘the right to compensation for the loss which the arbitration applicants allege to have suffered as a result of the repeal, allegedly in breach of the BIT, of the tax incentives scheme at issue was granted only by the arbitration award’.”
“(129) It must be pointed out that, by making that statement, the Court of Justice ruled only on the Commission’s competence ratione temporis to adopt the contested decision under Article 108 TFEU. It thus made a ruling, in paragraph 124 of the judgment on appeal, solely concerning the date on which the right to compensation was granted to the applicants and not on the classification as State aid within the meaning of Article 107(1) TFEU of the payment of the sums at issue, as examined in that decision.”
It must be said, however, that the Court of Justice a paragraph earlier in its own judgment made the following statement: “(123) the decisive factor for establishing the date on which the right to receive State aid was conferred on its beneficiaries by a particular measure is the acquisition by those beneficiaries of a definitive right to receive that aid and to the corresponding commitment, by the State, to grant that aid.” Then it went on to confirm that “(124) the right to compensation […] was granted only by the arbitration award. It was only upon the conclusion of the arbitral proceedings […] that the arbitration applicants were able to obtain actual payment of that compensation.” In other words, the payment was inextricably followed the award.
Nonetheless, the General Court insisted that “(130) the question whether, irrespective of the payments examined, the arbitral award constitutes in itself an advantage capable of being classified as State aid within the meaning of Article 107(1) TFEU has no bearing on the identification of the aid measure at issue as being the payment of the sums at issue.”
Next, the applicants claimed that the payment of damages was only the “automatic consequence” of the arbitral award.
In response, the General Court held that “(135) even supposing that the arbitral award could not be separated from its execution, the fact remains that the payment of the sums at issue, in execution or implementation of that award, was the measure assessed by the Commission in the contested decision.”
After that clarification the General Court continued with an assessment of whether, as claimed by the applicants, the aid measure at issue could not constitute an advantage that was paid as compensation for the consequences of the repeal of the tax incentives scheme.
Presence of economic advantage
The applicants submitted that the measure at issue did not confer any economic advantage to them.
The General Court, first, recalled that “(122) in order to assess whether a Member State has conferred an advantage on a given undertaking, the financial situation of the undertaking following the measure should be compared with its financial situation if the measure had not been taken. […] There is therefore an advantage where, as a result of the measure and without that being justified by the nature or general scheme of the system concerned, the net financial situation of the beneficiary is improved”.
Then, the General Court agreed with the Commission “(141) that the arbitral tribunal had compensated the damage resulting from the premature repeal of the tax incentives scheme at issue.”
“(142) The Commission therefore classified, […], the payment of the sums at issue as an economic advantage which the arbitration applicants would not have been able to obtain under normal market conditions, on the ground that that payment was intended to compensate them for the damage they had incurred as a result of the repeal of the tax incentives scheme at issue.”
The General Court also pointed out that “(154) the compensation granted by the arbitral award, since it was intended to compensate for the damage which the arbitration applicants claimed to have suffered as a result of the repeal by Romania of the tax incentives scheme at issue, allegedly in breach of the BIT, has its origin in that repeal, which constitutes the event giving rise to the damage for which that compensation was granted by the arbitral tribunal.”
The applicants counter-argued that the compensation for the consequences of the repeal of the tax incentives could not be classified as an advantage within the meaning of Article 107(1) TFEU.
In response, the General Court held, first, that “(164) the advantage enjoyed by the applicants in the present case is the payment of the compensation granted pursuant to the arbitral award.”
Then, it reiterated established case law that “(165) an action for damages, such as that brought by the arbitration applicants before the arbitral tribunal, cannot lead to circumvention of the effective application of the rules on State aid […] Damages paid as compensation for loss of market shares or as compensation for losses related to the stockpiling of raw materials, or, ultimately, for any loss resulting from the repeal of an aid scheme cannot therefore escape classification as State aid where those damages meet the definition of an economic advantage for the purposes of those rules.”
“(166) In that regard, the Commission stated, in recital 96 of the contested decision, as follows: ‘[…] Granting the [arbitration applicants] compensation for lost profits because they had to bear their own operating expenses themselves likewise constitutes an economic advantage not available under normal market conditions and in absence of the Award; under normal market conditions, the undertaking would have had to bear itself the costs inherent in its economic activity and would therefore not have generated these profits.”
The General Court considered that “(167) the applicants have not put forward any argument such as to call into question the Commission’s findings, […], that the compensation granted by the arbitral tribunal constituted an economic advantage for the purposes of Article 107(1) TFEU, following its analysis of the advantages alleged to have been granted to the applicants under the tax incentives scheme at issue for the period between its repeal and the scheduled date of its expiry.”
Consequently, the General Court rejected the plea that the compensation did not constitute an economic advantage in the meaning of Article 107(1) TFEU.
The applicants in fact argued here that the Romanian government did not keep its promises. They did not expect preferential treatment. Rather they expected policy continuity. This is why I think the General Court did not address the core issue which is whether investors can expect public policy not to change. By contrast, the Commission did refer to this issue in its decision and provided a more convincing explanation. Market operators have no legal right to demand that public policies remain constant. A government that vacillates from one policy to another can be “punished” by the market by not investing in such an unstable economic environment. But, still it cannot be presumed that such a government must necessarily be held legally liable.
Compensation for unlawful action?
The General Court also examined another argument put forth by the applicants. They claimed that the award could not be classified as State aid pursuant to the judgment in case C-106/87, Asteris and Others. The Court of Justice had found in that judgment that compensation for damage caused by a public authority was not State aid.
The General Court noted that “(172) a distinction must […] be drawn between claims for compensation for damage resulting from unlawfulness and an action for the payment of amounts due under legislation”.
“(173) Where sums claimed before the courts, even formally as compensation, correspond to the payment of an advantage which the applicant is seeking pursuant to legislation, the action does not seek compensation for harm distinct from that consisting of the complete non-payment of the advantage to which the applicant considered he or she was entitled under that legislation”.
“(174) Therefore, where national legislation has established ‘State aid’ within the meaning of Article 107(1) TFEU, the payment of a sum claimed before the courts in accordance with that legislation also constitutes such aid”.
“(177) The payment of the sums at issue pursuant to that award cannot therefore be classified, in law, as damages for the purposes of EU law on the sole ground that such a classification follows from that award.”
“(179) The Commission concluded, without the applicants having succeeded in calling that assessment into question, that the aid measure at issue constituted an economic advantage provided to the arbitration applicants as compensation for the consequences of the repeal of the tax incentives scheme at issue and not for the damage which they allegedly suffered as a result of Romania’s conduct consisting in, first, keeping in place, despite the repeal of the scheme, the obligations corresponding to the advantages established by that scheme, and second, failing to inform them in a timely manner of that repeal.”
“(180) Since it has not been established that the payment of the sums at issue had the effect of providing compensation for damage resulting from Romania’s allegedly wrongful conduct, […], the applicants cannot effectively claim that the aid measure at issue cannot be classified as State aid pursuant to the judgment of […] Asteris and Others”.
“(182) It must be recalled, […], that the case-law arising from the judgment of 27 September 1988, Asteris and Others […], concerns only the classification of State aid, since it provides only that State aid is fundamentally different in its legal nature from damages.”
“(183) The Commission was entitled to conclude that the advantage obtained by the arbitration applicants did not constitute compensation for damage resulting from unlawfulness for the purposes of the judgment of 27 September 1988, Asteris and Others”.
For the sake of completeness, the General Court added that, under its association agreement with the EU, Romania was bound to comply with State aid rules. Therefore, since the tax incentives had the effect of granting unlawful State aid, the compensation granted to the applicants, the amount of which corresponded to the tax incentives of which they had been deprived following the repeal of that scheme, itself constituted unlawful State aid.
Selectivity
The applicants claimed that the advantage conferred the payment at issue was not selective, on the ground that it was awarded in the context of arbitration, i.e. the Romania-Sweden bilateral investment treaty [BIT], which was a general rule of liability.
The Commission had found the presence of a selective advantage because i) the applicants were the only beneficiaries of the payment at issue, ii) the BIT conferred a right to compensation only to a particular group of investors and iii) the aid measure at issue compensated the applicants for the revocation of the investment incentives which were themselves selective in nature.
The General Court, first, explained that “(195) in order to determine whether a measure is selective, it is appropriate to examine whether, within the context of a particular legal system, that measure constitutes an advantage for certain undertakings in comparison with others which are in a comparable legal and factual situation”.
“(196) In the present case, it must be stated, as the Commission correctly observed […], that the BIT confers a right to compensation, in the event of a dispute before an arbitral tribunal, only on investors of the signatory countries rather than all EU investors, that is to say, on a limited number of investors. The BIT cannot therefore constitute a general rule of compensation on which any person may rely, so as to rule out that compensation paid on the basis of the BIT confers a selective advantage on certain categories of economic stakeholders.”
“(198) The applicants’ argument that any other investor ‘could have’ claimed payment of compensation is, moreover, purely hypothetical and it is not apparent from the case file that such a scenario would have materialised. In any event, it concerns only Swedish investors and not any other investor.”
Imputability to Romania
For a measure to constitute State aid, it must be imputed or attributed to a decision of a public authority. The applicants claimed that the implementation or execution of the arbitral award by Romania was an unintended and automatic consequence of its legal obligations. Indeed, as noted earlier, the Court of Justice held that the aid was awarded the moment the arbitration tribunal decided against Romania.
The General Court clarified that “(206) where an advantage is granted by a public authority, that advantage is, by definition, attributable to the State”.
The Commission had considered that the decision to grant the advantage was imputable to Romania, regardless of whether it executed the arbitral award voluntarily or on the order of a tribunal. Romania’s voluntary agreement to enter into the BIT created the favourable conditions for the selective advantage. The payment of the compensation was imputable to Romania who acted voluntarily to implement the award. Furthermore, the enforcement of the award by national courts petitioned by the applicants was also imputable to Romania as national courts are Romanian public authorities.
The General Court observed that “(213) since Romania’s accession to the European Union, the system of judicial remedies provided for by the EU and FEU Treaties has replaced the arbitration procedure provided for by the BIT […], with the result that the arbitral award, made after that accession, has not produced any effects vis-à-vis Romania and cannot be executed”.
“(214) Romania was required to set aside the arbitral award. […] the applicants are not justified in claiming that Romania was under an obligation to implement or execute that award”.
The General Court also responded directly to the argument of the applicants that a measure which stems from obligations outside a Member State’s internal legal order cannot be regarded as a decision imputable to that State for the purposes of the application of Article 107(1) TFEU. “(217) To accept the applicants’ reasoning would effectively allow all Member States to escape State aid scrutiny, as long as they enter into an international obligation to grant a certain State aid measure.”
“(218) In addition, the fact that Romania attempted to oppose the execution of the arbitral award or that the Commission should not have based its assessment of the imputability of the measure on the voluntary nature of Romania’s accession to the BIT, as the applicants maintain, cannot mean that the implementation or execution of that award was not imputable to Romania”.
“(220) Lastly, the fact that the arbitral award was made by an independent tribunal has no bearing on the assessment of the imputability of the aid measure at issue. […] the measure which is the subject of the contested decision does not consist in that award but in the payment of the sums at issue in execution or implementation of that award.”
Concept of undertaking
The Micula brothers themselves had also received a monetary amount from Romania. The question arose whether they were undertakings and therefore had to repay that amount. It was undisputed that Ioan Micula and Viorel Micula held shares in the undertakings that had received compensation. However, they argued that they were not active in those undertakings beyond the exercise of their rights as shareholders.
“(309) It must be recalled that EU competition law and, in particular, the prohibition laid down in Article 107(1) TFEU apply to the activities of undertakings”.
“(310) In the field of competition law, the concept of ‘undertaking’ covers any entity engaged in an economic activity, regardless of its legal status and the way in which it is financed”.
“(311) Any activity consisting in offering goods or services on a given market is an economic activity”.
“(312) In so doing, EU competition law, by targeting the activities of undertakings, enshrines as the decisive criterion the existence of unity of conduct on the market, without allowing the formal separation between various companies that results from their separate legal personalities to preclude such unity for the purposes of the application of the competition rules”.
“(313) Therefore, where legally distinct natural or legal persons constitute an economic unit, they should be treated as a single undertaking for the purposes of EU competition law. In the area of State aid, the question as to whether an economic unit exists arises where the beneficiary of the aid needs to be identified”.
“(314) Among the factors taken into account by the case-law in order to determine the presence or absence of an economic unit in the field of State aid are, inter alia, the company concerned being part of a group of companies which is directly or indirectly controlled by one of those companies, the pursuit of identical or parallel economic activities, the companies concerned having no economic autonomy, the formation of a single group controlled by a single entity, the possibility for an entity owning a controlling shareholding in another company to exercise functions relating to control, direction and financial support in relation to that company, and the existence of organic and functional links between those companies”.
“(315) Although, usually, the economic activity is carried on directly on the market, that may be the case both of an operator in direct contact with the market and, indirectly, of another entity controlling that operator as part of an economic unit which they together form”.
“(316) It must, however, be pointed out that the mere fact of holding shares, even controlling shareholdings, is insufficient to characterise as economic an activity of the entity holding those shares, when it gives rise only to the exercise of the rights attached to the status of shareholder or member as well as, if appropriate, the receipt of dividends, which are merely the fruits of the ownership of an asset”.
“(317) On the other hand, an entity which, owning controlling shareholdings in a company, actually exercises that control by involving itself directly or indirectly in the management thereof must be regarded as taking part in the economic activity carried on by the controlled undertaking and must therefore itself, in that respect, be regarded as an undertaking within the meaning of Article 107(1) TFEU”.
First, the General Court responded to the argument that the Micula brothers had not actually received any money because it was in a blocked account. “(322) An actual transfer of State resources is not required where the right is conferred on the beneficiaries”.
Then the General Court noted that the documents submitted to the arbitration tribunal, when compensation was claimed, showed that “(329) Mr Ioan Micula and Mr Viorel Micula were involved in the economic activities of the applicant undertakings which were parties to those proceedings, intervening directly or indirectly in their management.”
“(330) The collective compensation granted by the arbitral award and the fact that the arbitration applicant undertakings asked, during the arbitration proceedings, for the sums at issue to be paid to Mr Ioan Micula and Mr Viorel Micula, which those brothers do not dispute, support the finding that there was no functional and organisational autonomy on the part of the arbitration applicant undertakings vis-à-vis those brothers.”
The General Court also clarified that “(333) the fact, first of all, that neither Mr Ioan Micula nor Mr Viorel Micula, on his own, has a majority stake in any of the undertakings in the EFDG has no bearing on the existence of a single economic unit consisting of them and those undertakings since they are, together, majority shareholders of those undertakings.”
Conclusion
None of the pleas were upheld and, therefore, the appeal was dismissed in its entirety.
