Germany’s highest court clarifies that the ECJ’s decision in Achmea does not apply to extra-EU BITs

In its recently published decision, the German Federal Court of Justice allowed enforcement of the arbitral award rendered in Deutsche Telekom v India, an arbitration arising out of the Germany-India bilateral investment treaty (BIT). It rejected the proposition that the European Court of Justice (ECJ)’s reasoning in Achmea and Komstroy – which held that intra-EU investment arbitration violates EU law – should extend to extra-EU disputes.

The intra-EU saga started in 2018 with the ECJ’s judgement in Achmea. The ECJ had found that investor-State arbitration clauses in intra-EU BITs violate EU law. In 2021, with its Komstroy decision, the ECJ extended the scope of Achmea to the arbitration clause of the Energy Charter Treaty (ECT) when applied intra-EU. Earlier last year, the German Federal Court of Justice even extended the ECJ’s reasoning to ICSID arbitrations (which are not seated within the EU) and declared three intra-EU investor-State ICSID arbitrations arising out of the ECT (Mainstream v Germany, Uniper v Netherlands and RWE v Netherlands) inadmissible under German arbitration law due to their incompatibility with EU law. 

Background 

The dispute in Deutsche Telekom v India arose after an Indian state-owned entity cancelled a contract with Devas Multimedia Private Limited, an Indian company in which Deutsche Telekom had invested. Deutsche Telekom subsequently claimed compensation under the Germany-India BIT and was eventually awarded USD 93.3 million plus interest and costs. 

Deutsche Telekom sought to enforce the award in Germany and applied to the Berlin Higher Regional Court to that effect. The Berlin Higher Regional Court sided with Deutsche Telekom, prompting India to lodge an appeal with the German Federal Court of Justice.

Key findings of the German Federal Court of Justice

In its attempt to resist enforcement, India argued that extra-EU BITs, like intra-EU ones, may affect the autonomy of EU law, as they establish a separate dispute resolution mechanism – investment treaty arbitration – which escapes the ECJ’s supervision. Tribunals hearing these extra-EU cases would not be able to make preliminary references to the ECJ on the proper interpretation of EU law, should they be called to apply it. 

Equally, India relied on the ECJ’s opinion on the EU-Canada Comprehensive Economic and Trade Agreement (CETA). The ECJ had established that the CETA dispute resolution mechanism is compatible with EU law because the treaty explicitly provides that CETA tribunals could take into account EU law as a matter of fact. As this may not be the case with tribunals constituted under the Germany-India BIT, India argued that their awards would not be enforceable. 

The German Federal Court of Justice found these arguments unconvincing. It confirmed the ruling of the Berlin court, finding that no grounds for refusal of enforcement existed and thus declared the award enforceable. 

The court drew a clear distinction between intra- and extra-EU investment arbitration, explaining that such differentiation clearly emerges from the ECJ’s case law. In particular, the court did not find the Achmea reasoning applicable to extra-EU relations, given that in Achmea, the ECJ held that Member States establishing a dispute resolution mechanism system outside the EU legal order was contrary to the principle of mutual trust under EU law. This principle, however, does not apply to relations between a Member State, such as Germany, and a third State, such as India. 

Moreover, the court considered that the ECJ’s judgment in Komstroy demonstrates that different notions apply to intra- and extra-EU investment arbitration. In Komstroy, the ECJ stressed that the ECT – despite its multilateral nature – creates a series of bilateral obligations between Member States to arbitrate intra-EU investment disputes. As the ECJ specifically found that the ECT’s arbitration mechanism vis-à-vis investors from third countries is compliant with EU law, the German Federal Court of Justice held that the reasoning in Komstroy and Achmea could not apply to extra-EU investment arbitrations and extra-EU BITs. 

Reference to the CETA was also considered immaterial. First, the court held that – unlike the Germany-India BIT – the CETA is a treaty concluded by the EU itself, not by a Member State. Second, the court noted that in its CETA opinion, the ECJ merely considered the solution adopted therein – ie to consider EU law as a fact only – to be compliant with EU law. It did not establish that absent such provision an investment treaty would necessarily violate EU law. 

Implications and outlook

The decision of the highest German court in Deutsche Telekom v India strengthens legal certainty in Germany with respect to the enforcement of awards arising out of extra-EU investment arbitration proceedings. Investors holding such awards may be reassured that the ECJ’s judgments in Achmea and Komstroy would not preclude their enforcement in Germany. Moreover, this decision – based entirely on the court’s reading of the ECJ’s case law – may very well resonate with other EU jurisdictions, thus promoting legal certainty on these issues in the EU more generally.