The German Federal Court of Justice (FCJ) has found that German courts have jurisdiction for determining that ICSID arbitral proceedings based on the Energy Charter Treaty (ECT) are inadmissible in the intra-EU context. The FCJ held that the arbitration agreement contained in the ECT is invalid. While the decision merits criticism as a violation of international law, it must be taken into account when structuring foreign investments in the future.
Summary
- FCJ decisions in three parallel proceedings of 27 July 2023 (I ZB 43/22; I ZB 74/22 and I ZB 75/22)
- Although the ICSID Convention, which is binding under international law, excludes a jurisdiction review by national courts, the FCJ affirms the jurisdiction of German courts for such reviews pursuant to section 1032(2) Code of Civil Procedure (Zivilprozessordnung, “ZPO”).
- It holds that the arbitration agreement in Article 26(2)(c) ECT is incompatible with EU law, in particular because it runs counter to the jurisdiction of the ECJ.
- In the case of disputes relating to their investments in EU Member States, therefore, European investors will have to rely on legal protection before national courts of the host country
The FCJ’s Decisions of 27 July 2023
The FCJ’s decisions were based on investments by Irish companies in Germany and by two German companies in the Netherlands. The respective investors had initiated ICSID arbitral proceedings based on states’ standing offer contained in Article 26(2)(c) ECT. The defendant States filed applications with the Berlin Court of Appeal and Cologne Higher Regional Court to determine the inadmissibility of the arbitral proceedings under section 1032(2) ZPO. Cologne Higher Regional Court ruled in favour of the Netherlands, whereas the Berlin Court of Appeal dismissed the application on the grounds that German courts lacked international jurisdiction.
International Jurisdiction
The FCJ found that German courts had international jurisdiction. It acknowledged that the requirements of section 1025(2) ZPO were not directly met because ICSID arbitral proceedings are “anational”, i.e., not embedded in any national jurisdiction. The place of arbitration is therefore neither abroad nor is it still undetermined. However, the FCJ considered an analogous application of section 1025(2) ZPO to be required, claiming that there was a regulatory gap in this respect and that the interests were similar. In doing so, the FCJ disregarded the fact that Article 41(1) ICSID Convention – which itself is part of German law based on the Consent Act of 1969 pursuant to Article 59(2), sentence 1 Basic Law – does indeed contain a provision on the (lack of) jurisdiction of national courts and that, consequently, there is no regulatory gap.
The FCJ also failed to justify its assumption of similar interests, i.e., equal treatment of ICSID arbitral proceedings and other arbitral proceedings that are embedded in national legal systems. There was certainly a need to justify why there should be an interest in German courts having jurisdiction at all with respect to ICSID arbitral proceedings even though binding international law precludes this and the legislator considered it obvious that agreements under international law take precedence over section 1025 ZPO. The New York Convention of 1958 (“NYC”), with which German arbitration law seeks to align on recognition and enforcement issues, also undoubtedly does not apply to ICSID arbitral proceedings.
Admissibility In Spite of the Blocking Effect of the ICSID Convention
Only in its comments on the admissibility of an application pursuant to section 1032(2) ZPO does the FCJ take a closer look at the blocking effect of Article 41(1) of the ICSID Convention. In this respect, it explains in detail that the ICSID Convention contains a closed system for jurisdiction review which in principle excludes review by national courts. The FCJ maintains, however, that the effet utile under European law calls for a different decision in the intra-EU context. It asserts that, in Achmea, Komstroy and other cases, the ECJ decided that national courts needed to review the terms of intra-EU investor-state arbitral awards. But the FCJ claims that the principle of effectiveness requires that such a review also be possible for the matter of determining jurisdiction.
In any case, this conclusion does not seem inevitable either. The FCJ postulated that EU law takes absolute precedence over national law of EU Member States and international treaty law. Instead of this, the question should have been raised as to whether, on the contrary, an interpretation of EU law that aligns with international law and thus also with the ICSID Convention is required for the simple reason that almost all EU Member States are bound by the ICSID Convention under international law, thereby taking into account the requirement of mutual consideration. In any case, it is doubtful whether applying the effet utile can also justify a prior review based on section 1032(2) ZPO. The principle of effectiveness primarily serves to enforce individual EU rights and not, in an abstract manner, to make EU law fully valid as early as possible. Moreover, most EU Member States do not have an instrument corresponding to the procedure under section 1032(2) ZPO, by means of which such a prior review would be possible; one cannot make a sweeping assumption here that the principle of effectiveness has been violated.
Need for Legal Protection
The decisions of German courts are not binding on ICSID arbitral tribunals. In view of this, the need for legal protection for an application pursuant to section 1032(2) ZPO follows – according to the FCJ – from the fact that a successful application does three things. Firstly, it prevents a subsequent declaration of enforceability in Germany (but this would not require a determination pursuant to section 1032(2) ZPO). Secondly, it also has a de facto indirect effect on the arbitral tribunal, which would possibly also declare that it lacks jurisdiction. And thirdly, it could send a strong message to third-country enforcement states.
In this respect, it is true that the arbitral awards issued since the Achmea case indicate that most arbitral tribunals are not impressed by ECJ case law on intra-EU investor-state arbitral proceedings. Enforcing such arbitral awards, at least outside the EU, remains possible. However, one cannot deny that the decision has de facto implications and diminishes the value of an arbitral award, if one is issued. In any case, the two German investors and the claimant have declared their respective arbitral proceedings concluded.
Merits of the Applications – Invalidity of the Arbitration Agreement
The FCJ found that the arbitration agreement based on Article 26(2)(c) ECT violates EU law and is therefore invalid. To this end, the FCJ was largely guided by its earlier decisions on the effects of Achmea and Komstroy and others.
Assessment and Conclusion
The FCJ’s rejection of the universal applicability of international law is regrettable. From a practical standpoint, the decisions further limit the legal protection afforded to foreign investors in the EU. Even if, in some situations, it might be possible to conduct investment arbitral proceedings despite a finding of inadmissibility by a German court, and a corresponding arbitral award can be enforced outside the EU, many investors will de facto have to seek legal protection before the national courts of the host country.
However, the lack of an independent ruling body – that is also perceived as neutral – is poison for the investment climate. It would be a good thing if a supranational investment court could be established. Until then, special attention will need to be paid to structuring the contractual bases for foreign investments.
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