The German Federal Court of Justice has recently challenged the traditional self-contained nature of ICSID arbitrations in intra-EU cases under the Energy Charter Treaty. This development is to be contrasted with the approach of English courts, which take a pro-ICSID Convention stance in cases related to intra-EU investment disputes. The authors analyse the rationales behind the two judgments delivered in the initial months this year to comprehend the logical approaches utilised by the judges that resulted in differing conclusions.
The year of 2023 has marked a further shift of the EU member states from intra-EU investment arbitration towards their own system compatible with EU law (Multilateral Investment Court project). National courts of the EU Member States align with this shift by refusing to enforce the intra-EU arbitral awards.
At the same time, some courts outside of the EU demonstrate scepticism to this tendency and appear not to give effect to EU law. This results in the award being recognised and enforced in such “overseas” jurisdictions.
In this context, arbitration under the ICSID Convention (the “ICSID arbitration”) and the Energy Charter Treaty (the “ECT”) within the EU is of particular interest. A natural question comes to mind: can the primacy of EU law shake the self-contained legal order of the ICSID Convention in an arbitration commenced under article 26(3) of the ECT?
This blogpost analyses two opposing court reasonings on the matter. The first one was rendered by the German Federal Court of Justice (Bundesgerichtshof, the “BGH”) as a court development of Mainstream et al. v. Germany case, with the judgement rendered in July 2023. The second, yet distinct, reasoning is found in a recent decision of the High Court of Justice in England and Wales (the “English High Court”) in a court development of arbitration case Infrastructure Services (Antin) v. Spain. Here, we analyse the rationales behind both judgments to understand what made the judges reach different conclusions on the effect of the ICSID Convention self-contained system.
Immunity from Court Interference: Self-contained ICSID Convention Regime
The self-contained ICSID Convention regime makes ICSID awards immune from state court interference. This is achieved through three principle features of the ICSID Convention: the non- interference principle, exclusion of other remedies, and kompetence-kompetence principle.
First, unlike most commercial and some investor-state arbitrations, ICSID arbitrations do not have a legal seat. In other words, there is no seat where courts could annul or review an award rendered in an ICSID arbitration or interfere with any other court remedy. This is known as the non- interference principle.
Second, under article 26 of the ICSID Convention, remedies not provided for in the ICSID Convention are excluded, which is also called the “exclusive remedy rule”. This means that after giving a valid consent to an ICSID arbitration, the parties are barred from seeking relief in another forum. A common example of giving consent is when an investor accepts a state’s offer of consent to arbitrate contained in an investment treaty by instituting arbitration proceedings. After this moment, the ICSID arbitration proceeds on its own basis without any help from local courts.
The exclusion of other remedies does not limit itself to the procedural stage. After an ICSID arbitral award is rendered, its external review is also excluded under article 53 of the ICSID Convention. The ICSID Convention itself regulates the post-award remedies such as supplementation and rectification, interpretation, revision, as well as annulment (articles 49(2), 50, 51 and 52 ICSID Convention respectively).
Third, the principle of kompetence-kompetence enshrined in article 41 of the ICSID Convention also plays an important role in the self-contained regime framework. Under this principle, the tribunal is empowered to determine its own jurisdiction and is the first body to decide it. Coupled with the exclusive remedy rule, this principle bars any court from review of an ICSID tribunal’s jurisdiction. Since the tribunal’s jurisdiction is based on the arbitration agreement, the questions of its validity, existence and scope are determined by the tribunal as jurisdictional issues.
These three principles protect ICSID arbitrations and awards from recourse against them in state courts. However, sometimes national courts rule in opposition to ICSID arbitrations.
A classic example is injunction proceedings in local courts that the government of New Zealand brought against arbitration proceedings commenced by Mobil Oil. The investor, in turn, sought a stay of these injunction proceedings before the court, arguing that the court should give effect to the ICSID Convention. In its judgement, the court stayed the injunction proceedings until the tribunal determined its jurisdiction. Although the decision supported the ICSID arbitration, the court still did not automatically decline the injunction application. Instead, the court issued a ruling, in which it deliberated on the right of the investor to refer the dispute to an ICSID arbitration and on admissibility of the claim. However, under article 26 of the ICSID Convention the court should have dismissed or stayed the injunctions proceedings immediately.
There are no apparent examples of successful recourses against ICSID awards in local courts, primarily for two reasons. Firstly, because the parties frequently comply with ICSID awards voluntarily (see analysis on the states). Secondly, after an unsuccessful annulment stage with the ICSID ad hoc annulment committee, the parties tend to resist the recognition and enforcement of the award or ignore it, rather than try to annul the award in courts. In the latter scenario, the special enforcement mechanism of article 54 of the ICSID Convention comes into play, which does not form part of the self-contained system. One example of enforcement difficulties is worth mentioning: in obiter dictum of the judgement of Buenos Aires Commercial Court, the court referred to its power to ensure that an award complies with the state’s public policy. However, even on the public policy grounds, the courts cannot review the ICSID awards.
Thus, the self-contained ICSID Convention system is designed to safeguard ICSID arbitrations from any court interference, be it an anti-suit injunction, a jurisdictional or procedural issue brought before the court, or a recourse against the award.
BGH’s Decision: primacy of EU law against ICSID Convention paradigm
The above mentioned understanding of the ICSID Convention’s self-contained regime has been recently shattered by the BGH rulings.
On 27 July 2023, the BGH issued three rulings on the admissibility of three intra-EU ICSID arbitrations under the Energy Charter Treaty (BGH cases I ZB 43/22, I ZB 74/22 and I ZB 75/22). The court interfered with all three arbitration proceedings and found them inadmissible due to their incompatibility with EU law. A convenient summary of the decision’s facts and findings is available in the official press release.
Here, we analyse the BGH’s reasoning in case I ZB 43/22 that relates to the arbitration proceedings Mainstream et al. v. Germany. In this case, the BGH reviewed the admissibility of arbitration proceedings under § 1032(2) of the German Code of Civil Procedure (Zivilprozessordnung, the “ZPO”).
The BGH held, firstly, that German courts have international jurisdiction to rule on the admissibility of the ICSID arbitration proceedings. Secondly, the court held thatMainstream et al. v. Germany arbitration proceedings were inadmissible in absence of a valid arbitration agreement as a result of the application of EU law.
Although the ICSID Convention does not allow the courts to rule on the jurisdiction of an arbitral tribunal, the BGH found its powers to determine it in admissibility proceedings peculiar to German law under § 1032(2) ZPO.
In our analysis of this decision, we first look into the mechanism of admissibility determination under § 1032(2) ZPO and its typical application in practice. We then analyse the basis for the BGH to entertain this application. Afterwards, we move to the third question of why the BGH found the ICSID arbitration inadmissible and how this result corresponds to the kompetenz-kompetenz principle.
Determination of (in)admissibility of arbitration proceedings under § 1032(2) ZPO
German courts may determine the “admissibility or inadmissibility of arbitral proceedings” before the formation of the arbitral tribunal upon a party’s application (§ 1032(2) ZPO). When German courts entertain such admissibility applications, they consider the validity, operability and scope of the arbitration agreement. If the arbitration agreement is found invalid, the court holds the proceedings inadmissible and an award rendered in these proceedings is deemed unenforceable in Germany.
This mechanism is a peculiarity German legislation. For instance, it is absent in the UNCITRAL Model Law on International Commercial Arbitration (the “Model Law”), which is now adopted in any form in 88 states. A similar provision, however, was discussed during the Model Law’s drafting. The draft Model Law article 17 was called the “concurrent court control” in contrast with the “ultimate court control”: the former is exercised before the award has been rendered, and the latter – after that. The draft concurrent court control provision was not included into the Model Law because the drafters perceived it as not compliant with the kompetenz-kompetenz principle. One could see some similarities between this mechanism and § 1032(2) ZPO, which implements a similar, although narrower, mechanism of court control into German legislation.
A use case for this mechanism normally arises when a claimant is not certain whether their claims are covered by an arbitration agreement in a commercial contract. The claimant would file an application under § 1032(2) ZPO and the court would review the scope of the arbitration agreement. If the court ruled on the admissibility of arbitration, the claimant could proceed with the arbitration, having increased their chance of subsequent enforceability of the award.
All in all, § 1032(2) ZPO allows the German courts to rule, inter alia, on the validity of arbitration agreements. This helps to address the risk of non-enforceability of an award due to an invalid arbitration agreement at the outset of the proceedings without starting costly arbitration proceedings.
BGH’s powers to entertain applications under § 1032(2) ZPO in relation to ICSID arbitrations
The BGH found powers to entertain an application under § 1032(2) ZPO in relation to the delocalized ICSID arbitration.
§ 1025(2) ZPO determines the scope of § 1032(2) ZPO. Under § 1025(2) ZPO, § 1032(2) ZPO covers arbitrations seated in Germany and arbitrations in which “the place of the arbitration is abroad or has not yet been determined”. A literal interpretation suggests that § 1025(2) ZPO does not specify the situation when the arbitration is delocalized. At the same time, as the BGH concluded, § 1025(2) ZPO covers delocalized ICSID arbitrations.
The BGH started its analysis by stating that § 1025(2) ZPO grants German courts an international jurisdiction in proceedings under § 1032(2) ZPO. It confirmed that § 1025(2) ZPO does not expressly mention delocalized arbitration. At the same time, in the BGH’s view, the gap does not exclude the delocalized arbitration either.
The BGH subsequently relied on the “double-functionality” theory which applies when the specific requirements for the international jurisdiction of German courts are absent. Accordingly, if a German court has local jurisdiction, it also has international jurisdiction. Thus, applying this concept to § 1025(2) ZPO by analogy, the BGH established that § 1025(2) ZPO also covers delocalized ICSID arbitrations. The BGH also stated that the legislator’s intent warranted such interpretation.
Thus, the BGH found that courts may entertain applications under § 1032(2) ZPO in relation to ICSID arbitrations. Although the ICSID Convention does not prohibit the parties from bringing applications before the state courts, the courts cannot, under the non-intervention principle, consider such applications after ICSID arbitration proceedings have been instituted.
BGH’s powers to rule on inadmissibility of ICSID arbitrations
Having found the jurisdiction to consider applications under § 1032(2) ZPO in relation to ICSID arbitrations, the BGH proceeded with the substance of the application. The BGH held that the kompetenz-kompetenz principle does not bar the court from ruling on the validity of the underlying arbitration agreement.
As we have discussed above, the kompetenz-kompetenz principle generally blocks any court interference with the jurisdiction of the tribunal after the initiation of an ICSID arbitration (article 41(1), ICSID Convention). This applies to ruling on the validity of an arbitration agreement as well. Although the BGH agreed with this approach, it held that the blocking effect exceptionally does not apply in the intra-EU context. The court based its reasoning on the primacy of EU law over the ICSID Convention, EU law’s autonomy and the prohibition of intra-EU investment arbitrations. In terms of primacy, if a national law provision implementing a treaty conflicts with EU law, courts will not apply the national provision. As for autonomy, EU law has its own sources independent from international law and national law of its member states.
The BGH subsequently identified the conflict between EU law and intra-EU investment arbitrations. Under the CJEU case-law, articles 267 and 344 of the Treaty on the Functioning of the European Union (TFEU) contradict any intra-EU investment arbitration agreement. As a result, the courts of EU member states must exercise a court’s control over awards rendered in intra-EU arbitrations and not give effect to such awards.
ICSID arbitrations are not an exception, in the eyes of the BGH. The ICSID Convention was implemented into German law by ratification and forms its part. Accordingly, as a part of German law (the law of an EU member state), it is subject to the primacy of EU Law. Hence, Article 41(1) Of the ICSID Convention cannot prevent the court from exercising its control mechanism required under EU law.
Technically, the BGH was faced with the issue that the CJEU case practice mainly dealt with the enforcement proceedings and did not address the specific mechanism of § 1032(2) ZPO. In order to use this practice in relation to the application at hand, the BGH relied on the principle of effet utile, which means that EU law must always be interpreted so as to achieve the practical outcomes intended by the legislators. In the BGH’s view, the ultimate control at the enforcement stage would render the same results as the preliminary control under § 1032(2) ZPO. Hence, this type of court control was in line with EU law.
Thus, the BGH exceptionally disapplied the principle of kompetence-kompetence in view of its own obligations to primarily give effect to EU law.
At the same time, this approach is at odds with the ICSID Convention that does not provide for any, even exceptional, court interference. Even if the interference was possible, the tribunal would still be the first body to rule on its own jurisdiction after the ICSID arbitration proceedings have been instituted. The kompetenz-kompetenz principle does not predict that the tribunal would find jurisdiction or, particularly, that the arbitration agreement would be deemed valid. Instead, it allocates the power to decide this issue to the arbitral tribunal in order to protect the proceedings from parallel review of the state court.
Therefore, the BGH’s reasoning not only clashes with the ICSID self-contained system and Germany’s prior consent to arbitration in ECT. It also arms respondent-states with an opportunity to submit to the German courts and oppose intra-EU ICSID arbitrations without waiting for the award, given the minimum jurisdictional requirements of the dispute’s links to Germany are met.
Which path to take?: The diverging path of the Infrastructure Services case
The BGH’s decision comes in the backdrop of a growing, divergent body of jurisprudence outside the EU. The case of Infrastructure Services (Antin) v. Spain, decided by the English High Court in August this year exemplifies this trend, as it strongly downplayed the scope for domestic intervention, and recognized the self-contained regime of ICSID.
This case involved similar questions of compatibility of EU law with the ICSID regime. In 2018, an ICSID tribunal rendered an award in case Antin v. Spain, ICSID Case No. ARB/13/31 under the ECT. The award concerned ECT breaches by Spain such as the state’s removal of incentives for the generation of solar energy, entitling the investor to a €120 million compensation.
The claimants obtained an order for registration of the award in the English High Court. Seeking to have the order set aside, Spain raised objections to the English High Court’s power to issue this order. Spain’s application raised two main questions on jurisdiction: firstly, whether Spain was immune from the court proceedings under the State Immunity Act 1978, and secondly, whether EU law effect on the award would bar the registration of the award in the UK. Implicit within these issues was the conflict of EU law with international obligations of the state, which the BGH had also addressed.
Which law rules: The Intra-EU Objection
The validity of the arbitration agreement was central to both jurisdictional issues. This was, in its turn, contingent on the English High Court’s determination on Spain’s intra-EU objection. The English High Court dealt with the intra-EU objection first. It admitted that the international law character of EU law and that the EU treaty obligations can have primacy over domestic law in some aspects. But more importantly, the English High Court emphasised that pre-existing obligations under multilateral treaties such as the ICSID Convention stem from international law. EU law therefore, cannot and does not override the effect of the ICSID Convention, the ECT, or the domestic law of the UK implementing them.
In order to come to this conclusion, the English High Court relied on the decision of the UK Supreme Court in Micula & Ors v Romania (European Commission intervening)  UKSC 5 as a direct and binding authority on the operation of the ICSID Convention in the UK. The Micula case had held that, in any case, it is the principles of international law that give a proper interpretation to the ICSID Convention and this interpretation cannot be affected by EU law. Moreover, a similar reasoning has been mirrored by some courts within the EU, along with courts in the US and Australia.
Considering this logic, the BGH’s reading of the inapplicability of section 41(1) of the ICSID Convention as an exceptional condition becomes questionable. More instances of divergence are uncovered when the decision on the objections raised by Spain is further analysed. The English High Court’s reasoning in relation to the intra-EU objection runs as a common thread in the court’s determination raised by Spain.
Spain’s Contentions: Fertile Ground for More Conflict
On the first issue, Spain contended that the exceptions to state immunity under the State Immunity Act 1978 (the “Immunity Act”) did not apply to Spain. The exception in section 2(2) of the Immunity Act provides that a “prior written agreement” may give effect to the Court’s jurisdiction. It was Spain’s contention that article 54 of the ICSID Convention, which provides for the recognition and enforcement of an ICSID award by courts, does not fulfil the requirement of a “prior written agreement”. This contention was based on the fact that article 54 of the ICSID Convention was traditionally not considered as a “waiver” of jurisdiction of domestic courts. Spain supported this claim with the lack of parliamentary discussion on the issue during the ratification of the ICSID Convention.
While rejecting this argument, the English High Court reasoned that the terms of the Arbitration (International Investment Disputes) Act 1966, in light of Micula, clearly qualify article 54 of the ICSID Convention and article 26 of the ECT as a prior written agreement, and that there was no need to look at discussions of the Parliament during the ratification of the ICSID Convention.
On the second issue, Spain contended that since its offer to arbitrate in article 26 of the ECT did not extend to intra-EU claims, there was no valid agreement to arbitrate. Hence, in Spain’s view, the award rendered by the tribunal was not valid as well. The English High Court relied on the primacy of pre-existing international obligations of Spain over EU law and dismissed the contention. The English High Court also clarified that the CJEU cases do not elevate to a general prohibition under international law and cannot be treated as such.
Although the BGH did not address the questions of state immunity, and the English High Court did not deal with the admissibility review mechanism, the validity of the arbitration agreement was a common consideration for both courts. The BGH found that the validity of the agreement was precluded by EU law, which the BGH was obliged to give effect due to the principles of primacy and autonomy. The English High Court, however, did not recognise a foothold to prioritise EU law, especially in view of the UK’s own separate international treaty obligations in the ICSID Convention. The result is another conflict: whether the arbitration agreement should pass the muster of EU law, or whether the force of the obligations under the ICSID Convention prevails.
Despite the BGH’s reliance on CJEU to show the inadmissibility of intra-EU arbitrations, its decision departs from objectives of the contracting parties drafting the ICSID Convention. The intention of the parties was to remove investment disputes from the ambit of state courts and create an autonomous resolution mechanism with a self-contained regime.
This divergence created in the BGH ruling and the Infrastructure case can act as a potential deterrent to the investors in the EU energy market, especially in the light of the uncertain future of the ECT. There is already some evidence suggesting that, for enforcement, investors are avoiding the EU national courts as much as possible. In the added context of the European Commission proposing coordinated withdrawal from the ECT, it remains to be seen how the EU investors in the energy market deal with the possibility of moving beyond the EU courts to access investor-state dispute settlements.
The views expressed in this article are the exclusive opinions of the authors and do not necessarily reflect the views of Resolut or National Law University, Delhi.
About the Authors
Mr. Roman Smetanin, Associate at Resolut
Ayush Mhatre, Second Year Student at National Law University, Delhi.
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