GERMAN FEDERAL COURT OF JUSTICE RULES ON APPLICATIONS TO DECLARE TWO PENDING INTRA-EU ICSID ARBITRATIONS INADMISSIBLE

 INTRODUCTION

On 27 July 2023, the German Federal Court of Justice ("BGH") ruled on applications by Germany and the Netherlands to declare two pending ICSID arbitrations inadmissible. The investor-State arbitrations of Mainstream Renewable v. Germany and RWE v. the Netherlands were initiated by an Irish investor against Germany and by a German investor against the Netherlands, in each case under the Energy Charter Treaty ("ECT") and the ICSID Convention. The cases concern claims over legal changes with respect to solar and wind power generation in Germany, and the Netherlands' plan to phase out coal-fired power generation by 2030.

Both Germany and the Netherlands applied to German courts to have the ICSID arbitrations declared inadmissible. Both States relied on German procedural law and rulings of the Court of Justice of the European Union ("CJEU") wherein it held that investor-State arbitrations between investors from the EU and EU Member States ("intra-EU investment arbitrations") are incompatible with EU law ("intra-EU objection"). Germany applied to the Higher Regional Court of Berlin. The Netherlands submitted its request to the Higher Regional Court of Cologne. The Higher Regional Court of Berlin found that Germany's application is not admissible in arbitral proceedings under the ICSID Convention and dismissed the request. The Higher Regional Court of Cologne, on the other hand, held that the Netherlands' application was admissible and founded in law. Both decisions were appealed and referred to the BGH for a final ruling on the issue by a civil court. In its landmark decision of last week, the BGH declared the two pending ICSID arbitrations inadmissible under EU and German procedural law.

BACKGROUND

The legal basis for Germany's and the Netherlands' applications is twofold.

Firstly, Germany and the Netherlands relied on Section 1032(2) of the German Code of Civil Procedure ("CCP") as a procedural legal basis for their applications. This is a provision which is unique to German arbitration law. Parties to arbitral proceedings with place of residence or business in Germany may ask a competent German court for declaratory relief regarding the admissibility of arbitration proceedings. Section 1032(2) CCP requires that admissibility applications must be made prior to the constitution of the arbitral tribunal.

Secondly, on substance both States referred to the Achmea and Komstroy rulings of the CJEU in which the Court found that intra-EU investment arbitrations were contrary to EU law. The reasoning of the CJEU is well known. The Court takes the view that arbitration clauses in international investment treaties between EU Member States, such as the ECT, are incompatible with EU law. Unlike arbitral tribunals in intra-EU investment arbitrations, under Art. 267 of the Treaty on the Functioning of the European Union, national courts of EU Member States may ask the CJEU questions about how EU law operates and are then required to follow a ruling given by the CJEU. This preliminary reference mechanism is deemed essential by the CJEU as it seeks to ensures that EU law operates uniformly throughout the EU and to preserve the EU legal order.

KEY FINDINGS AND RULING OF THE BGH

On this basis, the BGH decided that arbitration proceedings initiated under the ICSID Convention may be declared inadmissible by a German court prior to the constitution of an arbitral tribunal. The BGH accepted Germany's and the Netherlands' intra-EU objection and put its focus on issues of its jurisdiction and the admissibility of the requests.

• The application of German arbitration law generally requires that an arbitration is seated in Germany (Section 1025(1) CCP). The BGH accepted jurisdiction over the applications under Section 1032 CCP despite the fact that arbitral proceedings under the ICSID Convention have no seat and are fully 'internationalized' (e., detached from the German lex arbitri and legal system). Section 1025(2) CCP provides an exception to its paragraph 1. Under this rule, Section 1032 CCP may be applied by German courts even if an arbitration is seated in a foreign State or if the seat of arbitration has not yet been determined. The BGH expressed the view that German courts derive jurisdiction from an application of Section 1025(2) CCP by analogy. The Court argued that the German legislator intended to confer jurisdiction under Section 1032 CCP upon German courts for all arbitration proceedings, including international proceedings under the ICSID Convention.
• Secondly, referring to the doctrine on the primacy of EU law and its legal effect within the German legal system, the BGH concluded that the applications were admissible under Section 1032(2) CCP. The Court acknowledged the international law nature of ICSID proceedings, the general lack of jurisdiction of national courts as a result thereof and that ICSID tribunals have the power to decide whether a dispute brought before them is within their competence (Art. 41 ICSID Convention). However, the BGH took the view that Art. 41 ICSID Convention does not apply to intra-EU investment arbitrations. According to the BGH, EU law prevails over international treaties given its supranational nature and legal effect. The BGH relied on the EU law principle of the duty of cooperation of EU Member States. It held that EU law requires German courts to intervene as early as possible in intra-EU investment arbitrations and prior to the arbitral award enforcement stage.
• On substance, the BGH relied on the decisions of the CJEU in Achmea Slovak Republic, Komstroy v. Republic of Moldova, European Food v. European Commission, and PL Holdings v. Republic of Poland. The BGH expressed the view that ICSID arbitrations may be declared inadmissible as a result of EU law for lack of valid consent to intra-EU investment arbitrations by EU Member States. It reiterated the CJEU's rulings that arbitral tribunals in intra-EU investment arbitrations may be required to consider EU law but have no right to submit a question on EU law to the CJEU for a preliminary ruling. The BGH further noted the limited scope of judicial review of EU Member State courts of arbitral awards rendered in intra-EU ICSID investment arbitrations. Finally, the Court did not consider it an issue that the intra-EU investment arbitrations in Achmea and Komstroy were resolved under the UNCITRAL Arbitration Rules and not under the ICSID Convention. The BGH referred to the CJEU's recent decision in European Food in which it applied the same reasoning to arbitration proceedings commenced under the ICSID Convention.

The BGH found the applications of Germany and the Netherlands admissible and legally founded. It declared the two pending ICSID arbitrations inadmissible under German procedural and EU law. However, the BGH rejected as inadmissible an additional application by the Netherlands seeking a declaration of inadmissibility of any future arbitral proceedings between the parties. The BGH reasoned that Section 1032(2) CCP only applies to arbitration proceedings that have been initiated.

COMMENT

Although based on German procedural law, the BGH ruling is primarily a result of the CJEU decisions on the incompatibility of intra-EU investment arbitrations with EU law. The ruling follows the EU doctrine on the supranational law character of EU law and the consideration of EU Member State courts of a prevailing effect of EU law over international law. The ruling allows German courts to decide on the admissibility of intra-EU investment arbitrations, including ICSID arbitrations, at an early stage.

The application of the CJEU's decisions in Achmea and later cases has met a mixed response from investment treaty tribunals, with some continuing to confirm their jurisdiction over intra-EU investment arbitrations on the basis of valid and applicable international investment treaties. Arbitral awards rendered in ICSID arbitrations are internationally enforceable and, if enforcement in such cases is then sought outside the EU, beyond the jurisdiction of the CJEU and EU Member State courts. Given the BGH ruling, it is likely that State parties will make similar applications of this nature in the future in relation to intra-EU investment arbitrations, both in Germany and across the EU.  It remains to be seen how ICSID tribunals will respond.

For more information, please contact Dr. Patricia Nacimiento, Partner, Dr. Bajar Scharaw, Of Counsel, Dr. Alessandro Covi, Senior Associate, Dr. Lara Panosch, Associate, or your usual Herbert Smith Freehills contact.