GER: National Legal Protection: Intra-EU Investor/State ICSID Arbitrations

Sept 1, 2023 Benn-Ibler Rechtsanwälte

In principle, national courts cannot subject ICSID arbitration proceedings to a preliminary review. However, the German Federal Court of Justice (Bundesgerichtshof, hereinafter BGH) has now ruled that EU Member States can claim upstream national legal protection against arbitration proceedings brought by investors from other Member States before the ICSID (International Centre for Settlement of Investment Disputes) on the basis of the Energy Charter Treaty.

When investors invest large sums of money in state projects, such as large offshore wind farms, the states concerned enter into investment protection agreements with the investors, such as the Energy Charter Treaty. This treaty aims to protect investments in the energy sector and provides for arbitration as a neutral dispute resolution mechanism that is independent of states’ legal systems. Some countries have now changed their laws in the wind and solar energy sectors as part of the energy transition. As a result, investors in various energy projects have lost hundreds of millions of dollars. The agreement now allows investors to seek investor/state arbitration under the arbitration clause of the Energy Charter Treaty. The companies have turned to the ICSID, which is regarded as the premier investment arbitration institution.

In the case at hand, the claimant, an EU Member State, had applied to a German court for a declaration that their arbitration is inadmissible. The court of appeal dismissed the application. It held that the standard was not applicable in arbitration proceedings under the ICSID Convention, which is a closed legal system. The BGH disagreed. According to the BGH, European Union law takes precedence and has already rendered the arbitration clause of the closed Energy Charter Treaty ineffective.

In arbitral proceedings without a seat, German courts generally have international jurisdiction to hear an application for a declaration of inadmissibility. However, once an ICSID arbitration has been registered, this is generally inadmissible due to the primary jurisdiction of the arbitral tribunal. However, in the special constellation of an intra-EU investor/state arbitration, this blocking effect does not exceptionally prevent the application of EU law from being admissible.

Within an intra-EU context, according to the case law of the ECJ, a review of an ICSID award by a downstream state court is mandatory for reasons of EU law and contrary to the regulatory scheme of the ICSID Convention.

The conclusion of an effective arbitration agreement is prevented by the fact that the arbitration clause of the Energy Charter Treaty violates EU law according to the case law of the ECJ for intra-EU investor-state arbitration. An EU Member State cannot agree to such an arbitration agreement.

A finding of inadmissibility of arbitral proceedings precludes a subsequent declaration of enforceability of an ICSID award in Germany due to its binding effect.

Press Release No. 126/2023 on BGH I ZB 43/22