Energy Charter Treaty Case

Summary:1The facts:—The defendants were investors in wind and solar energy with registered offices in Ireland. They claimed that a change in legislation in Germany had harmed their planned investments. On 30 April 2021, they filed a request for arbitration against Germany before the International Centre for Settlement of Investment Disputes (“ICSID”) under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 1965 (“ICSID Convention”) for alleged violations of the Energy Charter Treaty, 1994 (“ECT”).

In August 2021, Germany filed an application before the Berlin Higher Regional Court for a declaration of inadmissibility for the arbitration proceedings initiated by the defendants. The Berlin Higher Regional Court dismissed Germany's application declaring that it was inadmissible. The application was dismissed on the basis that the ICSID Convention was a closed legal system with its own procedural rules, meaning that no other legal remedies were admissible and that it was for the ICSID arbitral tribunal to decide on its own jurisdiction. The Regional Court further held that it was for the ICSID arbitral tribunal to decide whether Germany's consent under Article 26 of the ECT was valid in an intra-European Union (“EU”) investment dispute.

Germany appealed this decision, with the Federal Court of Justice (“the Court”) considering whether pursuant to Section 1025(2) of the German Code of Civil Procedure, Germany's application under Section 1032(2) of the Code was admissible. In considering the admissibility of Germany's application, the Court considered whether a review of arbitral proceedings initiated under the ICSID Convention was required by EU law, and compatible with Article 41 of the ICSID Convention. Similarly, the Court considered the compatibility of the ECT, and ICSID Convention, to arbitration proceedings between an EU Member State and an entity registered within the jurisdiction of another EU Member. Of concern was whether these conventions preserved the primacy of EU law within an intra-EU arbitral proceeding.

Held:—The order of the Berlin Higher Regional Court was set aside. The arbitration proceedings instituted by the defendants were inadmissible.

(1) Pursuant to Section 1025(2) of the German Code of Civil Procedure, German courts had international jurisdiction. The intention of the German legislature in adopting the German Code of Civil Procedure was to ensure that it was possible to seise the German courts in cases listed in Section 1025(2) of the Code, which included arbitration cases which took place abroad. The intention that the German courts should have global jurisdiction applied equally in delocalized arbitration proceedings under the ICSID Convention and in arbitration proceedings that took place abroad (paras. 24–48).

(2) Pursuant to an application under Section 1032(2) of the German Code of Civil Procedure, an ordinary court could review arbitral proceedings to determine whether an effective arbitration agreement existed, whether it was practicable, and whether the subject matter of the arbitration proceedings fell within the scope of the agreement. The Court could carry out this review even where arbitration proceedings had been initiated under the ICSID Convention. The blocking effect of Article 41 of the ICSID Convention with respect to proceedings before ordinary courts exceptionally did not apply in the present case due to the primacy of EU law (para. 52).

(3) The ICSID Convention ranked as a simple federal law in the German legal order. Where domestic laws with the same status were in conflict, the principles of lex posterior and lex specialis applied. The principle of the German Constitution's openness to international law required that domestic laws should be interpreted, where possible, to avoid conflict with Germany's obligations under international law. However, this did not result in a constitutional obligation to comply with every provision of international law without limitation (para. 55).

(4) Under domestic German arbitration law, and the UNCITRAL Model Law on International Commercial Arbitration, 1985, ordinary courts could be called upon to review and support arbitration proceedings. The ICSID Convention deliberately deviated from involving ordinary courts in that manner. In ICSID arbitration proceedings, there was generally no subsequent review of the decision on jurisdiction by ordinary courts and thus no final decision-making competence for such courts. According to the ICSID Convention, the examination of jurisdictional competence was to be carried out exclusively within the framework of the arbitration proceedings themselves. If the ICSID Convention was looked at in isolation, it would therefore preclude the present proceedings initiated under Section 1032(2) of the German Code of Civil Procedure (paras. 56–65).

(5) However, due to the primacy of EU law, intra-EU investor-State arbitration proceedings initiated under the ICSID Convention on the basis of Article 26 of the ECT were a special case where, exceptionally, the blocking effect of Article 41(1) of the ICSID Convention did not prevent an application under Section 1032(2) of the German Code of Civil Procedure from being admissible. The supremacy of EU law required domestic courts to ensure the full effect of the provisions of EU law. They were therefore obliged to exercise their own decision-making power to disapply any conflicting domestic provision (paras. 66–8).

(6) An ICSID award would be incompatible with EU law if the arbitration clause underlying the arbitration proceedings called into question the respect of EU law. An arbitral award that was incompatible with EU law in this way could not have any effect and could not be enforced. A court of a Member State involved in the compulsory enforcement of such an ICSID award was under an obligation not to apply the award and consequently could not have enforced it under any circumstances. In the intra-EU context, a review of an ICSID award by an ordinary court was required, contrary to the provisions of the ICSID Convention (paras. 69–81).

(7) The primacy of EU law over Article 41 of the ICSID Convention was not excluded by Article 351(1) of the Treaty on the Functioning of the European Union, 2007 (“TFEU”). Article 351(1) TFEU, which permitted derogations from EU law in specific circumstances, had to be interpreted narrowly as it permitted, if certain requirements were met, derogations from EU law. It only covered agreements concluded before 1 January 1958 or, in the case of States that acceded thereafter, agreements concluded before the date of their accession. In the present case, the relevant agreements were concluded after these dates and therefore the exceptions in Article 351(1) were not applicable (paras. 83–6).

(8) The arbitral proceedings initiated by the defendants were inadmissible due to a lack of an effective arbitration agreement. Pursuant to Articles 267 and 344 of the TFEU, the arbitral clause contained within Article 26 of the ECT was not applicable to intra-EU investor-State arbitration, nor could an arbitration agreement be based on Article 25 of the ICSID Convention. According to the case law of the Court of Justice of the European Union (“the CJEU”), because the EU was a Party itself to the ECT, the ECT had a dual nature as an agreement under international law and as a legal act of the EU. According to these principles, in an intra-EU investor-State arbitration the dispute resolution mechanism in Article 26 of the ECT violated EU law (paras. 95–100 and 103–6).

(9) Whether it was compatible with EU law for an investor to bring an action before an arbitral tribunal depended on whether the dispute on which the arbitral tribunal had to rule related to the interpretation or application of EU law. If it did, then its compatibility depended on whether the arbitral tribunal could be regarded as a court or tribunal entitled to request a preliminary ruling from the...