German Federal Court of Justice declares intra-EU arbitration proceedings under the ICSID Convention to be inadmissible

On 27 July 2023, the German Federal Court of Justice (FCJ) ruled that EU member states may rely on proceedings under § 1032 (2) of the German Code of Civil Procedure (ZPO) to determine the admissibility of intra-EU ICSID arbitration proceedings initiated under Article 26 of the Energy Charter Treaty (ECT) (FCJ, case No. I ZB 43/22, I ZB 74/22 and I ZB 75/22).

Diverging decisions of the lower courts

The FCJ decided on appeals in three parallel cases in which the two lower courts had reached opposite conclusions. The three cases concerned arbitration proceedings initiated by companies based in member states of the European Union (EU) against other member states. The member states had changed their legislation on renewable energies (case No. I ZB 43/22) or had decided on a future ban of coal-fired power plants respectively (case No. I ZB 74/22 and I ZB 75/22). The companies claimed that the new legislation led to an unlawful expropriation of their investments and initiated ICSID arbitration proceedings in accordance with article 26 ECT. Relying on the case law of the European Court of Justice (ECJ) in the Achmea (case no. C-284/16) and Komstroy (case no. C-741/19) cases, the member states argued that the ICSID arbitration was inadmissible due to the lack of a valid arbitration agreement. The member states initiated proceedings under § 1032 (2) ZPO at the Berlin Appellate Court and the Cologne Higher Regional Court. The special mechanism of § 1032 (2) ZPO allows a party to a pending arbitration until the arbitral tribunal has been constituted to apply for a declaration that the arbitration proceedings are inadmissible.

The Berlin Appellate Court dismissed the application as inadmissible (case no. 12 SchH 6/21). It held that according to article 41 (1) ICSID Convention, only the arbitral tribunal is competent to decide on its own jurisdiction and the validity of the arbitration agreement. Article 41 (1) ICSID Convention therefore excluded any review of the admissibility of the arbitration proceedings by national courts.

The Cologne Higher Regional Court reached the opposite conclusion (case no. 19 SchH 14/21 and 15/21). It found the respective applications under § 1032 (2) ZPO to be admissible and declared the arbitration proceedings to be incompatible with EU law.

As an exception, the FCJ finds applications under § 1032 (2) ZPO regarding ICSID arbitrations to be admissible in intra-EU disputes

The FCJ sided with the Cologne Higher Regional Court. It ruled that intra-EU arbitrations under the ICSID Convention can be declared inadmissible by national courts in proceedings under § 1032 (2) ZPO.

Although the ICSID Convention generally provides for an exclusive competence of the arbitral tribunal to decide upon its own competence to hear a case, in intra-EU disputes the primacy of EU law forces to deviate from this principle. As a result, ICSID awards in the intra-EU context must be reviewable by state courts. According to the ruling of the FCJ, this review must also be possible at the beginning of the proceedings under § 1032 (2) ZPO.

The FCJ also held that intra-EU ICSID arbitrations based on article 26 ECT are inadmissible. It relied on the case law of the ECJ to conclude that the underlying arbitration clauses violate articles 267, 344 TFEU and are, therefore, invalid.

Primacy of EU law forces FCJ to recognize an exception from the self-contained regime of the ICSID Convention

In the decisions, the FCJ applied the Achmea case law of the ECJ to find ICSID arbitrations between member states and EU investors are incompatible with EU law. It allowed member states to block arbitrations proceedings at an early stage of the proceedings based on the procedure under § 1032 (2) ZPO.

In the Komstroy case, the ECJ had clarified that intra-EU arbitrations based on the ECT were inadmissible. Other decisions of the ECJ (European Food (C-638/19 P) and Romatsa (C-333/19)) indicated that this also applied to arbitration proceedings under the ICSID Convention. The majority of arbitral tribunals, however, assumed that arbitration agreements between EU member states and investors from other member states were valid due to the self-contained regime of the ICSID Convention. The FCJ had no doubts that the Achmea case law renders also ICSID proceedings inadmissible and refrained from referring the case to the ECJ. According to the FCJ, EU law prevails over a member state's obligations under the ICSID Convention.

From the perspective of EU law, this is consistent. With its decision, the FCJ follows the case law of ECJ putting an end to investor-state arbitration proceedings based on international investment protection agreements between EU member states. The conclusions drawn for German procedural law are consistent. If arbitration proceedings are not compatible with EU law, member states must be able to challenge awards before German courts. It is efficient to allow such review at the beginning of the arbitration proceedings under § 1032 (2) ZPO.

However, the ruling is a setback for the dispute resolution system of the ICSID Convention. The system is exclusively rooted in public international law and the strictly limited review by state courts is one of its cornerstones. Being aware of the implications for the ICSID system, the BGH emphasizes that its ruling applies exclusively to intra-EU disputes.