German Federal Supreme Court rules Intra-EU arbitration under the ICSID Convention inadmissible

On 27 July 2023, the German Federal Supreme Court (BGH) decided that intra-EU arbitral proceedings under the ICSID Convention may be declared inadmissible by German courts even before an award is rendered.

The BGH, the highest German civil court, deliberated on three legal appeals (cases I ZB 43/22, I ZB 74/22 and I ZB 75/22) in which the question arose whether ICSID arbitration proceedings between an EU member state and an investor of another EU member state on the basis of the Energy Charter Treaty (ECT) are contrary to EU law and can be declared inadmissible by German courts under section 1032 (2) of the German Civil Procedure Code (ZPO). The BGH’s final ruling resolves a conflict among two lower courts: in a decision of 28 April 2022, the Berlin Higher Regional Court declared Germany's section 1032 (2) ZPO application in an intra-EU arbitration under the ICSID Convention inadmissible. In contrast, the Cologne Higher Regional Court had declared the Netherlands' application admissible and well founded under section 1032 (2) ZPO in a decision of 1 September 2022.

ECJ declared arbitration clauses in the intra-EU context to be contrary to EU law

The admissibility of investment arbitrations between EU member states and investors from other EU member states (i.e. intra-EU arbitrations) has been a subject of dispute for several years. In 2018, the ECJ rendered the landmark decision in the Achmea case that arbitration clauses in bilateral investment protection agreements between EU member states violate EU law (ECJ, judgment of 6 March 2018 - C-284/16). In September 2021, the ECJ ruled in the Komstroy case in an obiter dictum that the arbitration clause contained in Article 26 of the ECT is also contrary to EU law insofar as it covers intra-EU arbitrations (ECJ, judgment of 2 September 2021 - C-741/19).

Despite these rulings, the large majority of arbitral tribunals have affirmed their jurisdiction in intra-EU arbitrations. In recent years, state courts (both in and outside the EU) have repeatedly decided in favour of the enforceability of intra-EU arbitral awards.

One relatively new phenomenon is the pursuit of legal protection by the respondent EU member state before the state courts during arbitration proceedings in order to obtain a declaration on the inadmissibility of intra-EU arbitration proceedings at an early stage of the proceedings.

Section 1032 (2) ZPO allows for the determination of the inadmissibility of arbitral proceedings before the constitution of the arbitral tribunal

Section 1032 (2) ZPO allows German courts to determine the admissibility or inadmissibility of arbitral proceedings at the request of a party, which must be filed before the arbitral tribunal has been constituted. The provision is a special feature of German arbitration law. As an exception to the principle that the arbitral tribunal first decides on its own jurisdiction, it allows for a review of the arbitration clause by a state court even before the arbitral tribunal is formed. Pursuant to section 1025 (2) ZPO, this even applies in cases where the place of arbitration is not in Germany or has not yet been determined.

On 17 November 2021, the BGH decided that this provision may serve as a mechanism to enforce the ECJ's rulings on the incompatibility of intra-EU investment arbitration proceedings with EU law. In that decision, the BGH upheld a decision of the Frankfurt Higher Regional Court in which the court had declared an UNCITRAL arbitration, based on an intra-EU bilateral investment treaty with the seat of arbitration in Frankfurt, inadmissible pursuant to section 1032 (2) ZPO (BGH, decision of 17 November 2021 - I ZB 16/21).

Until its ruling on 27 July 2023, the BGH had not yet decided whether section 1032 (2) ZPO can also be applied to arbitration proceedings under the ICSID Convention. ICSID arbitrations are fundamentally different from other arbitral proceedings in that they are governed by the comprehensive and autonomous rules on dispute settlement by arbitral tribunals and on the review (and annulment) of arbitral awards set forth in the ICSID Convention and ICSID Arbitration Rules. In return, the Convention’s contracting parties undertake to recognise ICSID arbitral awards directly and without further review by national courts and to enforce them as if they were a domestic judgment. ICSID arbitrations do not have a place of arbitration and are not subject to national arbitration laws. Due to the special features of the ICSID Convention, it was previously unclear whether an application under section 1032 (2) ZPO for a declaration of inadmissibility of an ICSID arbitration is admissible at all in the absence of a German place of arbitration.

Berlin and Cologne Higher Regional Courts reach different conclusions on the application of section 1032 (2) ZPO to ICSID arbitration proceedings

Both the lower courts and the BGH uniformly found that German courts have international jurisdiction for an application under section 1032 (2) ZPO.

However, the lower courts had reached contradictory results on the question of whether such an application is admissible for ICSID arbitrations. The Berlin Higher Regional Court had found the application to be inadmissible under section 1032 (2) ZPO, arguing that the procedural rules of the ICSID Convention establish a closed legal system and assign the arbitral tribunal the 'competence-competence' to decide on its own jurisdiction. The Berlin court held that the international treaty could not be circumvented by section 1032 (2) ZPO. In its decision, the Berlin court also dealt with the case law of the ECJ and reached the conclusion that the Achmea and Komstroy decisions did not contain any statements on the procedural rules of the ZPO and their applicability in the case of ICSID arbitrations.

The Cologne Higher Regional Court took the opposite view and held that section 1032(2) ZPO also applies to ICSID arbitrations. The Cologne court argued that section 1032 (2) ZPO served the purpose of procedural economy and was to be interpreted in conformity with EU law to the effect that the provision enabled the early determination of the invalidity of an arbitration agreement under EU law. In the opinion of the Cologne court, this meant that the arbitration proceedings already initiated in the dispute were inadmissible as well as any further arbitration proceedings that might be initiated between the parties on the basis of Art. 26 ECT.

BGH follows the view of the Cologne Higher Regional Court and affirms the inadmissibility of ICSID arbitration proceedings in the intra-EU context

In its (yet to be published) decision of 27 July 2023, the BGH followed the line of argument of the Cologne Higher Regional Court. The BGH acknowledged that an application pursuant to section 1032 (2) ZPO is in principle not admissible – from the registration of an ICSID arbitration – because the arbitral tribunal decides on its own jurisdiction pursuant to Art. 41(1) ICSID Convention (competence-competence). However, the BGH held that in the context of intra-EU arbitration proceedings, the ICSID Convention exceptionally cannot bar state court proceedings. The BGH saw the justification for this conclusion in the primacy of EU law, which also takes precedence over international law, and the principle of effectiveness.

According to the BGH, a subsequent state court review of ICSID arbitration proceedings is mandatory according to ECJ case law, even if this contradicts the regulatory system of the ICSID Convention. The BGH held that this review can be anticipated in the intra-EU context by an application under section 1032 (2) ZPO since a determination of the inadmissibility of the arbitral proceedings under section 1032 (2) ZPO is binding and prevents a (subsequent) recognition and enforcement of an ICSID award in Germany. The BGH did not consider it necessary to refer the matter to the ECJ, as it deemed the ECJ's case law clear in this regard.

The BGH deviated from the decision of the Cologne Higher Regional only in one point. According to the BGH, section 1032 (2) ZPO only allows for the declaration of inadmissibility of a specific arbitration agreement in pending proceedings, but not of an arbitration agreement in a potential future dispute.

Reaction of arbitration courts and foreign enforcement courts remains to be seen

With its decision, the BGH consistently implements the ECJ's case law on the inadmissibility of intra-EU arbitration proceedings and makes it clear that for Germany's highest civil court, EU law prevails over international law. In doing so, the BGH clearly indicates that it considers intra-EU arbitral awards based on the ICSID Convention to be unenforceable in Germany. This is not good news for the ICSID Convention whose contracting parties (currently 158 states worldwide, including all EU member states except for Poland) intended to remove dispute resolution from the influence of national courts by creating a comprehensive and autonomous dispute resolution mechanism (with its own annulment instance).

It remains to be seen how the arbitral tribunals in the two still ongoing arbitration proceedings will deal with the BGH decision. In one of the two arbitrations (Mainstream Renewable Power Ltd and Others v. Germany), the claimants requested the arbitral tribunal to issue an interim injunction shortly before the BGH decision, which would have prevented Germany from pursuing the claim under section 1032 (2) ZPO. The arbitral tribunal refused to issue such an order but held that such a request might violate the exclusive jurisdiction clause of the ICSID Convention. In the second pending arbitration (RWE v. Netherlands), the arbitral tribunal already refused to issue an interim injunction against the Netherlands in August 2022. At the request of the parties, the arbitration proceedings are currently suspended.

It also remains to be seen how third countries (e.g. US, UK, Australia) will deal with the enforcement of intra-EU arbitral awards under the ICSID Convention. Following the clear decisions of the ECJ and member state courts (e.g. in France and Sweden), investor enforcement attempts are likely to focus even more on jurisdictions outside the EU in the future.

For more information on this ruling and how it could affect your German-based arbitration, contact your CMS client partner or these CMS experts: