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Abstract<\/span><\/strong><\/p>\n\n\n\n \nThe German Federal Court of Justice has recently challenged the traditional self-contained nature of\nICSID arbitrations in intra-EU cases under the Energy Charter Treaty. This development is to be\ncontrasted with the approach of English courts, which take a pro-ICSID Convention stance in cases\nrelated to intra-EU investment disputes. The authors analyse the rationales behind the two\njudgments delivered in the initial months this year to comprehend the logical approaches utilised by\nthe judges that resulted in differing conclusions.\n<\/span><\/p>\n\n\n\n Introduction<\/span><\/strong><\/p>\n\n\n\n \nThe year of 2023 has marked a further shift of the EU member states from intra-EU investment\narbitration towards their own system compatible with EU law (Multilateral Investment Court\nproject<\/a>). National courts of the EU Member States align with this shift by refusing to enforce the\nintra-EU arbitral awards.\n<\/span><\/p>\n\n\n\n \nAt the same time, some courts outside of the EU demonstrate scepticism to this tendency and\nappear not to give effect to EU law. This results in the award being recognised and enforced in such\n\u201coverseas\u201d jurisdictions.\n<\/span><\/p>\n\n\n\n \nIn this context, arbitration under the ICSID Convention (<\/strong>the \u201cICSID arbitration\u201d<\/strong>)<\/strong> and the Energy\nCharter Treaty (<\/strong>the \u201cECT\u201d<\/strong>)<\/strong> within the EU is of particular interest. A natural question comes to\nmind: can the primacy of EU law shake the self-contained legal order of the ICSID Convention in\nan arbitration commenced under article 26(3) of the ECT?\n<\/span><\/p>\n\n\n\n \nThis blogpost analyses two opposing court reasonings on the matter. The first one was rendered by\nthe German Federal Court of Justice (<\/strong>Bundesgerichtshof<\/em>, the \u201cBGH\u201d<\/strong>)<\/strong> as a court development of\nMainstream et al. v. Germany<\/em><\/strong> case, with the judgement rendered in July 2023. The second, yet\ndistinct, reasoning is found in a recent decision of the High Court of Justice in England and Wales\n(<\/strong>the \u201cEnglish High Court\u201d<\/strong>)<\/strong> in a court development of arbitration case Infrastructure Services\n(Antin) v. Spain.<\/strong><\/em> Here, we analyse the rationales behind both judgments to understand what made\nthe judges reach different conclusions on the effect of the ICSID Convention self-contained system.\n<\/span><\/p>\n\n\n\n Immunity from Court Interference: Self-contained ICSID Convention Regime<\/span><\/strong><\/p>\n\n\n\n \nThe self-contained ICSID Convention regime makes ICSID awards immune from state court\ninterference. This is achieved through three principle features of the ICSID Convention: the non-\ninterference principle, exclusion of other remedies, and kompetence-kompetence<\/em> principle.\n<\/span><\/p>\n\n\n\n \nFirst, unlike most commercial and some investor-state arbitrations, ICSID arbitrations do not have a\nlegal seat. In other words, there is no seat where courts could annul or review an award rendered in\nan ICSID arbitration or interfere with any other court remedy<\/a>. This is known as the non-\ninterference principle.\n<\/span><\/p>\n\n\n\n \nSecond, under article 26 of the ICSID Convention, remedies not provided for in the ICSID\nConvention are excluded, which is also called the \u201cexclusive remedy rule\u201d. This means that after\ngiving a valid consent to an ICSID arbitration, the parties are barred from seeking relief in another\nforum. A common example of giving consent is when an investor accepts a state\u2019s offer of consent\nto arbitrate contained in an investment treaty by instituting arbitration proceedings. After this\nmoment, the ICSID arbitration proceeds on its own basis without any help from local courts.\n<\/span><\/p>\n\n\n\n \nThe exclusion of other remedies does not limit itself to the procedural stage. After an ICSID arbitral\naward is rendered, its external review is also excluded under article 53 of the ICSID Convention.\nThe ICSID Convention itself regulates the post-award remedies such as supplementation and\nrectification, interpretation, revision, as well as annulment (articles 49(2), 50, 51 and 52 ICSID\nConvention<\/a> respectively).\n<\/span><\/p>\n\n\n\n \nThird, the principle of kompetence-kompetence<\/em> enshrined in article 41 of the ICSID Convention also\nplays an important role in the self-contained regime framework. Under this principle, the tribunal is\nempowered to determine its own jurisdiction and is the first body to decide it. Coupled with the\nexclusive remedy rule, this principle bars any court from review of an ICSID tribunal\u2019s jurisdiction.\nSince the tribunal\u2019s jurisdiction is based on the arbitration agreement, the questions of its validity,\nexistence and scope are determined by the tribunal as jurisdictional issues.\n<\/span><\/p>\n\n\n\n \nThese three principles protect ICSID arbitrations and awards from recourse against them in state\ncourts. However, sometimes national courts rule in opposition to ICSID arbitrations.\n<\/span><\/p>\n\n\n\n \nA classic example is injunction proceedings in local courts that the government of New Zealand\nbrought against arbitration proceedings commenced by Mobil Oil. The investor, in turn, sought a\nstay of these injunction proceedings before the court, arguing that the court should give effect to the\nICSID Convention. In its judgement<\/a>, the court stayed the injunction proceedings until the tribunal\ndetermined its jurisdiction. Although the decision supported the ICSID arbitration, the court still did\nnot automatically decline the injunction application. Instead, the court issued a ruling, in which it\ndeliberated on the right of the investor to refer the dispute to an ICSID arbitration and on\nadmissibility of the claim. However, under article 26 of the ICSID Convention the court should\nhave dismissed or stayed the injunctions proceedings immediately.\n<\/span><\/p>\n\n\n\n \nThere are no apparent examples of successful recourses against ICSID awards in local courts,\nprimarily for two reasons. Firstly, because the parties frequently comply with ICSID awards\nvoluntarily (see analysis<\/a> on the states). Secondly, after an unsuccessful annulment stage with the\nICSID ad hoc<\/em> annulment committee, the parties tend to resist the recognition and enforcement of the\naward or ignore it, rather than try to annul the award in courts. In the latter scenario, the special\nenforcement mechanism of article 54 of the ICSID Convention comes into play, which does not\nform part of the self-contained system. One example of enforcement difficulties is worth\nmentioning: in obiter dictum<\/em> of the judgement<\/a> of Buenos Aires Commercial Court, the court referred\nto its power to ensure that an award complies with the state\u2019s public policy. However, even on the\npublic policy grounds, the courts cannot review the ICSID awards.\n<\/span><\/p>\n\n\n\n \nThus, the self-contained ICSID Convention system is designed to safeguard ICSID arbitrations\nfrom any court interference, be it an anti-suit injunction, a jurisdictional or procedural issue brought\nbefore the court, or a recourse against the award.\n<\/span><\/p>\n\n\n\n BGH\u2019s Decision: primacy of EU law against ICSID Convention paradigm<\/span><\/strong><\/p>\n\n\n\n \nThe above mentioned understanding of the ICSID Convention\u2019s self-contained regime has been\nrecently shattered by the BGH rulings.\n<\/span><\/p>\n\n\n\n \nOn 27 July 2023, the BGH issued three rulings on the admissibility of three intra-EU ICSID\narbitrations under the Energy Charter Treaty (BGH cases I ZB 43\/22, I ZB 74\/22 and I ZB 75\/22).\nThe court interfered with all three arbitration proceedings and found them inadmissible due to their\nincompatibility with EU law. A convenient summary of the decision\u2019s facts and findings is available\nin the official press release<\/a>.\n<\/span><\/p>\n\n\n\n \nHere, we analyse the BGH\u2019s reasoning in case I ZB 43\/22<\/a> that relates to the arbitration proceedings\nMainstream et al. v. Germany<\/em><\/strong><\/a>. In this case, the BGH reviewed the admissibility of arbitration\nproceedings under \u00a7 1032(2) of the German Code of Civil Procedure (Zivilprozessordnung<\/em>, the\n\u201cZPO\u201d<\/strong>).\n<\/span><\/p>\n\n\n\n \nThe BGH held, firstly, that German courts have international jurisdiction to rule on the admissibility\nof the ICSID arbitration proceedings. Secondly, the court held thatMainstream et al. v. Germany<\/a><\/strong><\/em>\narbitration proceedings were inadmissible in absence of a valid arbitration agreement as a result of\nthe application of EU law.\n<\/span><\/p>\n\n\n\n \nAlthough the ICSID Convention does not allow the courts to rule on the jurisdiction of an arbitral\ntribunal, the BGH found its powers to determine it in admissibility proceedings peculiar to German\nlaw under \u00a7 1032(2) ZPO.\n<\/span><\/p>\n\n\n\n \nIn our analysis of this decision, we first look into the mechanism of admissibility determination\nunder \u00a7 1032(2) ZPO and its typical application in practice. We then analyse the basis for the BGH\nto entertain this application. Afterwards, we move to the third question of why the BGH found the\nICSID arbitration inadmissible and how this result corresponds to the kompetenz-kompetenz<\/em> principle.\n<\/span><\/p>\n\n\n\n Determination of (in)admissibility of arbitration proceedings under \u00a7 1032(2) ZPO<\/span><\/strong><\/p>\n\n\n\n \nGerman courts may determine the \u201cadmissibility or inadmissibility of arbitral proceedings<\/em>\u201d before the\nformation of the arbitral tribunal upon a party\u2019s application (\u00a7 1032(2) ZPO)<\/a>. When German courts\nentertain such admissibility applications, they consider the validity, operability and scope of the\narbitration agreement. If the arbitration agreement is found invalid, the court holds the proceedings\ninadmissible and an award rendered in these proceedings is deemed unenforceable in Germany.\n<\/span><\/p>\n\n\n\n \nThis mechanism is a peculiarity German legislation. For instance, it is absent in the UNCITRAL\nModel Law on International Commercial Arbitration<\/a> (the \u201cModel Law<\/strong>\u201d), which is now adopted in\nany form in 88 states<\/a>. A similar provision, however, was discussed during the Model Law\u2019s drafting.\nThe draft Model Law article 17 was called the \u201cconcurrent court control\u201d in contrast with the\n\u201cultimate court control\u201d: the former is exercised before the award has been rendered, and the latter\n\u2013 after that. The draft concurrent court control provision was not included into the Model Law\nbecause the drafters perceived it as not compliant with the kompetenz-kompetenz<\/em> principle. One could\nsee some similarities between this mechanism and \u00a7 1032(2) ZPO, which implements a similar,\nalthough narrower, mechanism of court control into German legislation.\n<\/span><\/p>\n\n\n\n \nA use case for this mechanism normally arises when a claimant is not certain whether their claims\nare covered by an arbitration agreement in a commercial contract. The claimant would file an\napplication under \u00a7 1032(2) ZPO and the court would review the scope of the arbitration agreement.\nIf the court ruled on the admissibility of arbitration, the claimant could proceed with the arbitration,\nhaving increased their chance of subsequent enforceability of the award.\n<\/span><\/p>\n\n\n\n \nAll in all, \u00a7 1032(2) ZPO allows the German courts to rule, inter alia<\/em>, on the validity of arbitration\nagreements. This helps to address the risk of non-enforceability of an award due to an invalid\narbitration agreement at the outset of the proceedings without starting costly arbitration\nproceedings.\n<\/span><\/p>\n\n\n\n BGH\u2019s powers to entertain applications under \u00a7 1032(2) ZPO in relation to ICSID\narbitrations<\/span><\/strong><\/p>\n\n\n\n \nThe BGH found powers to entertain an application under \u00a7 1032(2) ZPO in relation to the\ndelocalized ICSID arbitration.\n<\/span><\/p>\n\n\n\n \n\u00a7 1025(2) ZPO<\/a> determines the scope of \u00a7 1032(2) ZPO. Under \u00a7 1025(2) ZPO, \u00a7 1032(2) ZPO\ncovers arbitrations seated in Germany and arbitrations in which \u201cthe place of the arbitration is abroad or\nhas not yet been determined<\/em>\u201d. A literal interpretation suggests that \u00a7 1025(2) ZPO does not specify the\nsituation when the arbitration is delocalized. At the same time, as the BGH concluded, \u00a7 1025(2)\nZPO covers delocalized ICSID arbitrations.\n<\/span><\/p>\n\n\n\n \nThe BGH started its analysis by stating that \u00a7 1025(2) ZPO grants German courts an international\njurisdiction in proceedings under \u00a7 1032(2) ZPO.\u00a0 It confirmed that \u00a7 1025(2) ZPO does not\nexpressly mention delocalized arbitration. At the same time, in the BGH\u2019s view, the gap does not\nexclude the delocalized arbitration either.\n<\/span><\/p>\n\n\n\n \nThe BGH subsequently relied on the \u201cdouble-functionality\u201d theory which applies when the specific\nrequirements for the international jurisdiction of German courts are absent. Accordingly, if a\nGerman court has local jurisdiction, it also has international jurisdiction. Thus, applying this concept\nto \u00a7 1025(2) ZPO by analogy, the BGH established that \u00a7 1025(2) ZPO also covers delocalized\nICSID arbitrations. The BGH also stated that the legislator\u2019s intent warranted such interpretation.\n<\/span><\/p>\n\n\n\n \nThus, the BGH found that courts may entertain applications under \u00a7 1032(2) ZPO in relation to\nICSID arbitrations. Although the ICSID Convention does not prohibit the parties from bringing\napplications before the state courts, the courts cannot, under the non-intervention principle,\nconsider such applications after ICSID arbitration proceedings have been instituted.\n<\/span><\/p>\n\n\n\n BGH\u2019s powers to rule on inadmissibility of ICSID arbitrations<\/span><\/strong><\/p>\n\n\n\n \nHaving found the jurisdiction to consider applications under \u00a7 1032(2) ZPO in relation to ICSID\narbitrations, the BGH proceeded with the substance of the application. The BGH held that the\nkompetenz-kompetenz<\/em> principle does not bar the court from ruling on the validity of the underlying\narbitration agreement.\n<\/span><\/p>\n\n\n\n \nAs we have discussed above, the kompetenz-kompetenz<\/em> principle generally blocks any court\ninterference with the jurisdiction of the tribunal after the initiation of an ICSID arbitration (article\n41(1), ICSID Convention). This applies to ruling on the validity of an arbitration agreement as well.\nAlthough the BGH agreed with this approach, it held that the blocking effect exceptionally does not\napply in the intra-EU context. The court based its reasoning on the primacy of EU law over the\nICSID Convention, EU law\u2019s autonomy and the prohibition of intra-EU investment arbitrations. In\nterms of primacy, if a national law provision implementing a treaty conflicts with EU law, courts will\nnot apply the national provision. As for autonomy, EU law has its own sources independent from\ninternational law and national law of its member states.\n<\/span><\/p>\n\n\n\n \nThe BGH subsequently identified the conflict between EU law and intra-EU investment\narbitrations. Under the CJEU case-law<\/a>, articles 267 and 344 of the Treaty on the Functioning of the\nEuropean Union (TFEU) contradict any intra-EU investment arbitration agreement. As a result, the\ncourts of EU member states must exercise a court\u2019s control over awards rendered in intra-EU\narbitrations and not give effect to such awards.\n<\/span><\/p>\n\n\n\n \nICSID arbitrations are not an exception, in the eyes of the BGH. The ICSID Convention was\nimplemented into German law by ratification and forms its part. Accordingly, as a part of German\nlaw (the law of an EU member state), it is subject to the primacy of EU Law. Hence, Article 41(1)\nOf the ICSID Convention cannot prevent the court from exercising its control mechanism required\nunder EU law.\n<\/span><\/p>\n\n\n\n \nTechnically, the BGH was faced with the issue that the CJEU case practice mainly dealt with the\nenforcement proceedings and did not address the specific mechanism of \u00a7 1032(2) ZPO. In order to\nuse this practice in relation to the application at hand, the BGH relied on the principle of effet utile<\/em>,\nwhich means that EU law must always be interpreted so as to achieve the practical outcomes\nintended by the legislators. In the BGH\u2019s view, the ultimate control at the enforcement stage would\nrender the same results as the preliminary control under \u00a7 1032(2) ZPO. Hence, this type of court\ncontrol was in line with EU law.\n<\/span><\/p>\n\n\n\n \nThus, the BGH exceptionally disapplied the principle of kompetence-kompetence<\/em> in view of its own\nobligations to primarily give effect to EU law.\n<\/span><\/p>\n\n\n\n \nAt the same time, this approach is at odds with the ICSID Convention that does not provide for\nany, even exceptional, court interference. Even if the interference was possible, the tribunal would\nstill be the first body to rule on its own jurisdiction after the ICSID arbitration proceedings have\nbeen instituted. The kompetenz-kompetenz<\/em> principle does not predict that the tribunal would find\njurisdiction or, particularly, that the arbitration agreement would be deemed valid. Instead, it\nallocates the power to decide this issue to the arbitral tribunal in order to protect the proceedings\nfrom parallel review of the state court.\n<\/span><\/p>\n\n\n\n \nTherefore, the BGH\u2019s reasoning not only clashes with the ICSID self-contained system and\nGermany\u2019s prior consent to arbitration in ECT. It also arms respondent-states with an opportunity\nto submit to the German courts and oppose intra-EU ICSID arbitrations without waiting for the\naward, given the minimum jurisdictional requirements of the dispute\u2019s links to Germany are met.\n<\/span><\/p>\n\n\n\n Which path to take?: The diverging path of the Infrastructure Services<\/em> case<\/span><\/strong><\/p>\n\n\n\n \nThe BGH\u2019s decision comes in the backdrop of a growing, divergent body of jurisprudence outside\nthe EU. The case of Infrastructure Services (Antin) v. Spain<\/a><\/em><\/strong>, decided by the English High Court in\nAugust this year exemplifies this trend, as it strongly downplayed the scope for domestic\nintervention, and recognized the self-contained regime of ICSID.\n<\/span><\/p>\n\n\n\n \nThis case involved similar questions of compatibility of EU law with the ICSID regime. In 2018, an\nICSID tribunal rendered an award in case Antin v. Spain<\/em><\/strong>, ICSID Case No. ARB\/13\/31 under the\nECT. The award concerned ECT breaches by Spain such as the state\u2019s removal of incentives for the\ngeneration of solar energy, entitling the investor to a \u20ac120 million compensation.\n<\/span><\/p>\n\n\n\n \nThe claimants obtained an order for registration of the award in the English High Court. Seeking to\nhave the order set aside, Spain raised objections to the English High Court\u2019s power to issue this\norder. Spain\u2019s application raised two main questions on jurisdiction: firstly, whether Spain was\nimmune from the court proceedings under the State Immunity Act 1978, and secondly, whether EU\nlaw effect on the award would bar the registration of the award in the UK. Implicit within these\nissues was the conflict of EU law with international obligations of the state, which the BGH had\nalso addressed.\n<\/span><\/p>\n\n\n\n Which law rules: The Intra-EU Objection<\/span><\/strong><\/p>\n\n\n\n \nThe validity of the arbitration agreement was central to both jurisdictional issues. This was, in its\nturn, contingent on the English High Court\u2019s determination on Spain\u2019s intra-EU objection. The\nEnglish High Court dealt with the intra-EU objection first. It admitted that the international law\ncharacter of EU law and that the EU treaty obligations can have primacy over domestic law in some\naspects. But more importantly, the English High Court emphasised that pre-existing obligations\nunder multilateral treaties such as the ICSID Convention stem from international law. EU law\ntherefore, cannot and does not override the effect of the ICSID Convention, the ECT, or the\ndomestic law of the UK implementing them.\n<\/span><\/p>\n\n\n\n \nIn order to come to this conclusion, the English High Court relied on the decision of the UK\nSupreme Court in Micula & Ors v Romania (European Commission intervening)<\/em> [2020] UKSC 5 as a direct\nand binding authority on the operation of the ICSID Convention in the UK. The Micula<\/em> case had\nheld that, in any case, it is the principles of international law that give a proper interpretation to the\nICSID Convention and this interpretation cannot be affected by EU law. Moreover, a similar\nreasoning has been mirrored by some courts within the EU, along with courts in the US and\nAustralia.\n<\/span><\/p>\n\n\n\n \nConsidering this logic, the BGH\u2019s reading of the inapplicability of section 41(1) of the ICSID\nConvention as an exceptional condition becomes questionable. More instances of divergence are\nuncovered when the decision on the objections raised by Spain is further analysed. The English\nHigh Court\u2019s reasoning in relation to the intra-EU objection runs as a common thread in the court\u2019s\ndetermination\u00a0 raised by Spain.\n<\/span><\/p>\n\n\n\n Spain\u2019s Contentions: Fertile Ground for More Conflict<\/span><\/strong><\/p>\n\n\n\n \nOn the first issue, Spain contended that the exceptions to state immunity under the State Immunity\nAct 1978 (the \u201cImmunity Act<\/strong>\u201d) did not apply to Spain. The exception in section 2(2) of the\nImmunity Act provides that a \u201cprior written agreement\u201d may give effect to the Court\u2019s jurisdiction.\nIt was Spain\u2019s contention that article 54 of the ICSID Convention, which provides for the\nrecognition and enforcement of an ICSID award by courts, does not fulfil the requirement of a\n\u201cprior written agreement\u201d. This contention was based on the fact that article 54 of the ICSID\nConvention was traditionally not considered as a \u201cwaiver\u201d of jurisdiction of domestic courts. Spain\nsupported this claim with the lack of parliamentary discussion on the issue during the ratification of\nthe ICSID Convention.\n<\/span><\/p>\n\n\n\n \nWhile rejecting this argument, the English High Court reasoned that the terms of the Arbitration\n(International Investment Disputes) Act 1966, in light of Micula<\/em>, clearly qualify article 54 of the\nICSID Convention and article 26 of the ECT as a prior written agreement, and that there was no\nneed to look at discussions of the Parliament during the ratification of the ICSID Convention.\n<\/span><\/p>\n\n\n\n \nOn the second issue, Spain contended that since its offer to arbitrate in article 26 of the ECT did\nnot extend to intra-EU claims, there was no valid agreement to arbitrate. Hence, in Spain\u2019s view, the\naward rendered by the tribunal was not valid as well. The English High Court relied on the primacy\nof pre-existing international obligations of Spain over EU law and dismissed the contention. The\nEnglish High Court also clarified that the CJEU cases do not elevate to a general prohibition under\ninternational law and cannot be treated as such.\n<\/span><\/p>\n\n\n\n \nAlthough the BGH did not address the questions of state immunity, and the English High Court did\nnot deal with the admissibility review mechanism, the validity of the arbitration agreement was a\ncommon consideration for both courts. The BGH found that the validity of the agreement was\nprecluded by EU law, which the BGH was obliged to give effect due to the principles of primacy\nand autonomy. The English High Court, however, did not recognise a foothold to prioritise EU law,\nespecially in view of the UK\u2019s own separate international treaty obligations in the ICSID\nConvention. The result is another conflict: whether the arbitration agreement should pass the\nmuster of EU law, or whether the force of the obligations under the ICSID Convention prevails.\n<\/span><\/p>\n\n\n\n Conclusion<\/span><\/strong><\/p>\n\n\n\n \nDespite the BGH\u2019s reliance on CJEU to show the inadmissibility of intra-EU arbitrations, its\ndecision departs from objectives of the contracting parties drafting the ICSID Convention. The\nintention of the parties was to remove investment disputes from the ambit of state courts and create\nan autonomous resolution mechanism with a self-contained regime.\n<\/span><\/p>\n\n\n\n