Intra-EU investor-State ICSID arbitration: the German Federal Court of Justice’s new inadmissibility ruling

On 27 July 2023, the German Federal Court of Justice (German FCJ) declared three intra-EU investor-State ICSID arbitrations inadmissible under German arbitration law given their incompatibility with EU law. The German FCJ applied a procedural mechanism peculiar to the German legal framework. This mechanism allows parties to arbitration proceedings to file a motion, before the tribunal is constituted, to have German courts determine the admissibility or inadmissibility of arbitral proceedings. Section 1032(2) German Code of Civil Procedure (CCP) was first (successfully) invoked in the context of an intra-EU investor-State arbitration in Raiffeisen II v Croatia, an UNCITRAL arbitration seated in Frankfurt brought under the Austria-Croatia BIT. Since then, Respondent States attempted to use the same tool to block ICSID arbitrations brought under the Energy Charter Treaty (ECT) as well. ICSID arbitrations operate as a self-contained regime with no seat of arbitration and are therefore, in principle, outside of the jurisdiction of domestic courts. This gave rise to two diverging approaches by German courts: the Higher Regional Court of Berlin found the mechanism inapplicable to ICSID, due to its self-contained nature, while the Higher Regional Court of Cologne held otherwise. The German FCJ now sided with the Cologne Court, finding that Section 1032(2) CCP is in fact applicable also to ICSID arbitrations.  

It remains to be seen what practical consequences the decision of the German FCJ will have with respect to:

• Jurisdiction of intra-EU ICSID arbitrations: it is reasonable to believe that – as with the European Court of Justice’s (ECJ) judgments in Achmea, Komstroy and PL Holdings – ICSID tribunals will continue to uphold their jurisdiction over intra-EU disputes.
• Enforcement of intra-EU ICSID awards: the German FCJ’s decision confirms that it is very unlikely that intra-EU ICSID awards will be enforceable in Germany (although this could already be expected by virtue of the ECJ’s decision in Romatsa). Yet, it currently seems unlikely that the German FCJ’s decision will have any impact on the enforcement of intra-EU ICSID awards outside the EU.
• Potential further legal avenues: investors may consider constitutional law complains or claims before the European Court of Human Rights against the German FCJ’s decision with a view to uphold their right to access to justice under the ECT and the ICSID Convention.  
  

The legal background to the German Federal Court of Justice’s decision

With its well-known judgments in Achmea (2018) and Komstroy (2021), the ECJ held that both BIT and ECT intra-EU disputes are incompatible with EU law. Applying the same reasoning in PL Holdings (2021), the ECJ then extended this finding also to ad hoc arbitration agreements between EU investors and EU Member States.

Relying on this case law, in 2022 Germany and the Netherlands, facing ECT ICSID arbitrations brought by Irish and German investors, respectively, turned to the Higher Regional Courts of Berlin and Cologne seeking a declaration of inadmissibly of such arbitrations under Section 1032(2) CCP. The first case – Mainstream v Germany – involved claims in relation to Germany’s regulatory changes affecting offshore wind projects. The two subsequent cases – Uniper v Netherlands and RWE v Netherlands – concerned the Netherlands’ decision to phase out coal-fired power plants by 2030. 

The applications before the two Higher Regional Courts produced opposite results. In Mainstream, the Higher Regional Court of Berlin rejected Germany’s application ruling that Section 1032(2) CCP does not apply to ICSID arbitrations as the ICSID Convention establishes a “closed” system. The Higher Regional Court of Cologne thought otherwise. It granted the Netherlands’ motions holding that Section 1032(2) CCP is applicable based on the ECJ’s case law that arbitration agreements in intra-EU investor-State arbitrations are invalid, which according to the Higher Regional Court of Cologne, takes precedence over international law. Appeals were then lodged before the German FCJ in all three cases.

The decision of the German Federal Court of Justice

On 27 July 2023, the German FCJ sided with the Higher Regional Court of Cologne. It held that German courts are competent to decide on applications under Section 1032(2) CCP to declare intra-EU investor-State arbitrations inadmissible, even in case of ICSID arbitrations. The German FCJ then declared the arbitration proceedings inadmissible because – in line with the ECJ case law – no valid arbitration agreement existed between the EU investors and the EU Member States.

The German FCJ stressed the exceptional nature of its decision. It acknowledged that ICSID arbitrations and ICSID awards are not, as a rule, subject to review by State courts in accordance with the competence-competence principle enshrined in Article 41 of the ICSID Convention. The court however considered that in the specific circumstance of intra-EU investor-State arbitration, EU law takes precedence, warranting an exception to the rule. In other words, according to the German FCJ, a State court review mechanism – such as the one under Section 1032(2) CCP – was necessary in this case. The Court further clarified that a successful application under Section 1032(2) CCP effectively prevents the subsequent enforcement in Germany of any ICSID awards rendered in these proceedings.

The German FCJ did therefore not follow the reasoning of the Higher Regional Court of Berlin in Mainstream that the self-contained nature of the ICSID regime renders the mechanism under Section 1032(2) CCP inoperable. The court also did not address the issue that one of the very key features of the ICSID Convention is to detach investor-State arbitrations from any jurisdiction, precisely to avoid undue interference by States (and their courts), particularly by the State involved in a given proceeding, such as Germany in Mainstream.

Potential consequences on pending and concluded intra-EU arbitrations

As a matter of German law, the German FCJ’s decision has no general legal effects. The court itself specifically emphasised that the decision only relates to the specific arbitration agreements in the cases at hand. However, given that the arbitration agreement in question is similarly included in many other investment treaties, the practical effect of this decision may be more widespread.

As for the impact of this decision on the jurisdiction of ICSID arbitral tribunals, it remains to be seen what consequences these tribunals will draw from it. It is likely that – having to apply international law to determine their own jurisdiction – ICSID tribunals will not rely on this domestic decision, just as they did not so far rely on the ECJ’s decisions in Achmea, Komstroy and PL Holdings. With respect to the specific arbitrations at stake, the Mainstream, RWE and Uniper tribunals’ decision on the investors’ application for provisional measures requesting Germany and the Netherlands to refrain from pursuing their Section 1032(2) CCP applications provide some indications in this regard. In the RWE and Uniper decisions, the tribunals placed particular emphasis on the Netherlands’ assurances that it only sought a declaratory judgment by German courts limited to EU law and that this will not in and of itself affect the ability of the respective investors to participate in the ICSID proceedings. In its decision on provisional measures, the tribunal in Mainstream also highlighted similar assurances provided by Germany. It also criticised the German court proceedings for potentially violating the tribunal’s exclusive jurisdiction under Article 26 of the ICSID Convention. It is therefore reasonable to believe that the ICSID tribunals involved will continue hearing their respective cases.  

As far as enforcement is concerned, the German FCJ’s decision is likely to have adverse effects on the enforceability of intra-EU ICSID awards before German and EU courts (although this could already be expected by virtue of the ECJ’s decision in Romatsa). To what extent this will also have an impact on enforcement proceedings of ICSID awards in extra-EU jurisdictions remains to be seen – although it seems unlikely.

It also remains to be seen whether – in light of the recent decision of the German FCJ – Respondent EU Member States will increasingly resort to German courts to seek declaratory judgments of invalidity of the underlying arbitration agreements under Section 1032(2) CCP. Extra-EU enforcement options of intra-EU ICSID awards should nevertheless remain unaffected. Moreover, it is reasonable to assume that affected investors will continue to carefully evaluate what options they have to remedy adverse impacts on their ability to fully pursue their investment rights under the ECT and ICSID Convention, such as e.g. constitutional complaints before the German Constitutional Court or applications before the European Court of Human Rights for violation of Article 6 of the European Convention on Human Rights, which safeguards the right to a fair trial and access to justice.