Germany’s Top Civil Court Declares: “primacy of application of Union law – also vis-à-vis public international law” in intra-EU investment arbitration

By Agata Daszko[1]

On 27 July 2023, Germany’s Federal Court of Justice (Bundesgerichtshof or BGH) issued a long-awaited decision (I ZB 43/22, I ZB 74/22 and I ZB 75/22) pertaining to intra-EU arbitration on the basis of the Energy Charter Treaty (“ECT”). The decision? “Upstream national legal protection is possible against intra-EU investor-State ICSID arbitral proceedings on the basis of the Energy Charter Treaty.” But what does this actually mean?

Background: conflicting decisions of German courts

BGH’s decision stems from a set of highly contentious cases brought before two lower courts by EU Member States (by Germany in I ZB 43/22 and the Netherlands in I ZB 74/22 and I ZB 75/22), and the contradicting decisions of these courts.

First, on 28 April 2022, the Higher Regional Court in Berlin (Kammergericht or KG Berlin, Docket No 12 SchH 6/21), declined Germany’s request to declare inadmissible the ICSID claim brought by an Irish company and its subsidiaries (Mainstream et al) under the ECT.

The basis of Germany’s claim is laid in the German Code of Civil Procedure (“ZPO”). According to Section 1032(2) ZPO a party may, prior to the constitution of an arbitral tribunal, request a court to determine the admissibility of the arbitral proceedings. In the first step, the Berlin Court held that it had the competence to decide the request under the provision, seeing as the ICSID tribunal was constituted on 14 September 2021 and Germany’s claim was submitted in August of that year, and as there was sufficient link of the arbitral proceedings to Berlin. Subsequently, however, the Berlin Court held that Section 1032(2) ZPO was not applicable to ICSID arbitration proceedings. The ICSID Convention, the Berlin Court observed, gives tribunals exclusive competence to decide their jurisdiction and rule on any jurisdictional objections. Moreover, the Court held that prior decisions of the Court of Justice of the EU (CJEU) in Achmea, Komstroy and Micula, as well as subsequent domestic court rulings based on these decisions, were irrelevant to the proceedings under the ZPO.

Second, and au contraire, on 1 September 2022, the Higher Regional Court of Cologne (Oberlandesgericht or OLG Köln, Dockets Nos 19 SchH 15/21 and 14/21) granted the Netherlands’ request, also under Section 1032(2) ZPO, to declare inadmissible two ICSID arbitrations brought by German claimants (RWE and Uniper) under the ECT. In the largely identical decisions, the Cologne Court stated that, while it was true that the ICSID Convention grants tribunals rights to decide on their jurisdiction, the court’s task was “not to decide on the admissibility and merits of the arbitration claim under the ICSID Convention, which as such is not an integral part of Union law, but on the question of whether an effective arbitration agreement exists” (para. 34). Consequently, the Cologne Court cited the CJEU’s rulings in Achmea, Komstroy, PL Holdings, and the Micula appeal ruling, and agreed that the arbitration clause in Article 26 ECT was incompatible with EU law. Further, it held that any future intra-EU investment protection must be compatible with Union law, including the sole competence of the CJEU for the interpretation of the treaties. Interestingly, the Cologne Court did observe that, when it comes to the annulment of awards made under the ICSID Convention, German arbitration law does not apply and that “ICSID awards are subject to their own special enforcement regime which no longer allows national courts to review the arbitration agreement” (para. 59).

Consequently, facing these conflicting decisions on the availability of upstream national legal protection against intra-EU investment arbitration, the Federal Court of Justice scheduled a hearing on 17 May 2023 on the “admissibility of intra-EU investor-state arbitration before ICSID based on the Energy Charter Treaty.”

The Decision of the Federal Court of Justice: primacy of EU law over public international law

The decision of the BGH is not yet public but the press release (in English and German) sheds much light on the Court’s reasoning. The Court decided to set aside the decision of the Berlin Court but confirm those of the Cologne Court.

The Court’s reasoning merits full citation (emphasis added):

An application under § 1032 (2) ZPO for a declaration of the inadmissibility of the arbitral proceedings is in principle not admissible, at least from the registration of an ICSID arbitration, because of the primary competence of the arbitral tribunal under Article 41 (1) ICSID Convention to decide on its jurisdiction.

Exceptionally, however, this blocking effect of the ICSID arbitration proceedings with regard to proceedings before the state courts does not preclude the admissibility of an application under § 1032 (2) ZPO in the special constellation of intra-EU investor-state arbitration proceedings under the ICSID Convention at hand here because of the primacy of application of Union law – also vis-à-vis public international law – taking into account the principle of effectiveness.

In the intra-EU context, according to the case law of the Court of Justice of the European Union, a downstream state court review of an ICSID award is mandatory for reasons of Union law and contrary to the regulatory system of the ICSID Convention. In the intra-EU context, this control can be bindingly anticipated by the early state court control made possible by the German legislator with § 1032 (2) ZPO. A finding of inadmissibility of the arbitral proceedings under section 1032 (2) ZPO prevents the (later) declaration of enforceability of an ICSID award in Germany due to the binding effect of this decision.

Ultimately, the Court held that the respective arbitral proceedings are inadmissible for lack of an effective arbitration agreement. As, according to the Court, the arbitration clause contained in Article 26 ECT violates EU law, and due to its incompatibility with Articles 267 and 344 TFEU, there is no offer by the applicant EU Member States to conclude an arbitration agreement and thus no effective consent.

Future Implications: all, some or none?

The BGH decision comes at a highly critical time for international investment law and ISDS in the EU and beyond and amidst the uncertain future of the unmodernised ECT, the hard-line adopted by the European Commission, and the slough of contradicting enforcement decisions coming from the EU national courts as well as the US, UK and Australia.

Ever since Achmea or perhaps more precisely, the 2020 Termination Agreement of Intra-EU BITs, many have begun to speculate on the avenues available to both: investors and host State as well as the future roles of the CJEU and national courts in deciding on the issues of cross-border investment protection in the EU.

As for ongoing investment arbitration in the cases of RWE v. The Netherlands (claim by Uniper was discontinued in March 2023) and Mainstream et al v. Germany, we will need to wait and see but it is unlikely that the BGH ruling will bear much on the decision of the respective tribunals. Indeed, in the Decision on Provisional Measures, issued in August 2022, the RWE tribunal recommended that “the Respondent reconsider the necessity and appropriateness of continuing the proceedings before the Cologne Court, as the Parties do not dispute that the Court of Justice of the European Union has determined that Article 26 of the Energy Charter Treaty should be interpreted so as not to apply to intra-EU disputes”. However, as of now, the proceedings continue to be suspended.

Similarly, arguments concerning Komstroy and PL Holdings have been raised by Germany in its application to have the claim thrown out on the basis of manifest lack of merit under Rule 41(5) ICSID Rules arguing that on the basis of Article 5 VLCT, rules of international organisations such as the EU, are the lex specialis vis-à-vis other rules of conflict. In its Rule 41(5) Decision, regarding Article 5 VCLT but with phrasing easily applicable to other arguments, the majority of the tribunal held that it “recognises that from the Respondent’s perspective, the legal basis is clear and obvious pursuant to EU law, based on a series of CJEU decisions and instruments. However, to date none of those decisions or instruments has been adopted and applied outside the EU courts or government. The two most recent CJEU decisions in the Komstroy Judgment and the PL Holdings Judgment in particular have not been subject to consideration, interpretation or application by a judicial or quasi-judicial body applying public international law outside the CJEU or EU Member State courts” (para. 119, emphasis added).

As for any future investments made in the EU, for now we seem to still lack any evidence of EU investors moving abroad to be able to access ISDS in the highly hypothetical scenario of needing to do so in the future. On the side of enforcement, however, there is already quite some evidence suggesting that investors are indeed avoiding EU courts and going outside the Union borders – with mixed but interesting effects. Thus far, the European Commission does not appear to have a clear-cut answer regarding this issue either – while EU law may appear to it to offer “adequate and effective protection for cross-border investors in the single market” (2018 Communication), the issue of enforcement has not yet received as much attention as investment protection. Though most commentators would observe that here the Union’s Competition Policy will come to play. So far, the Commission issued a decision regarding an arbitral award constituting illegal State aid in one case (Micula v. Romania) and has recently initiated the formal investigation procedure regarding another (Antin v. Spain).

Perhaps the next ‘logical’ step in the Commission’s crusade against intra-EU ISDS is the exit (by the Member States) from the ICSID Convention and the New York Convention altogether because just how foreign courts will deal with declarations of inadmissibility under instruments such as ZPO vis-à-vis enforcement of awards remains to be seen but some may not be as quick to recognise the “primacy” of EU law over public international law in these (or most other) matters.

  1. Agata Daszko is a PhD candidate and Research Fellow at the University of ​Göttingen as well as Editor-in-Chief of the EFILA Blog. The views expressed in this post are of the author alone and do not reflect the views of the organisations the author represents.

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