German Supreme Court affirms compatibility of extra-EU BIT arbitrations with EU law

A recent ruling by the court confirms that the 2018 Achmea decision, in which the Court of Justice of the EU (CJEU) found that intra-EU BITs are incompatible with EU law, does not apply to bilateral investment treaties (BITs) between EU member states of the EU and third-party countries such as, as in this case, India. The BGH upheld enforcement of an arbitral award governed by the BIT between Germany and India.

The case, a ruling in which was handed down in October, involved a dispute that resulted from the termination of a satellite deal between Devas Multimedia and an Indian state-owned company. In 2005, Devas Multimedia, in which Deutsche Telekom had bought shares, made a satellite deal with Antrix, the business branch of the Indian governmental institution Space Research Organisation. However, the Indian government, citing national security concerns, terminated the agreement, sparking a legal battle. Deutsche Telekom then started arbitration against India under the clause for resolving disputes in the bilateral investment treaty (BIT) between Germany and India, seeking compensation for the cancelled deal. Following arbitration proceedings in Switzerland, an interim award in December 2017 affirmed jurisdiction and identified a breach of the BIT. The final award ordered India in May 2020 to compensate Deutsche Telekom with $92.3 million plus interest and costs. Post-award, Deutsche Telekom pursued enforcement in Germany, securing a (partial) enforcement title. India contested this decision, referring to the “fundamental significance” of the case.

The BGH's ruling confirms the enforcement and highlights the compatibility of extra-EU BIT arbitration with EU law.

Komstroy arguments are also applicable to BITs

The BGH based its reasoning on the Komstroy decision by the CJEU issued in 2021. In the decision, the CJEU held that: “Although the Energy Charter Treaty (ECT) may require Member States to comply with the arbitral mechanisms, for which it provides in their relations, with investors from third States - who are also Contracting Parties - to that treaty as regards investments made by the latter in those Member States, preservation of the autonomy and of the particular nature of EU law precludes the same obligations under the ECT from being imposed on Member States as between themselves.”

From this, the BGH concluded that the ECT, a multilateral investment treaty (MIT), was compatible with EU law in its application between a member state and a non-member state of the EU.

The BGH further noted that the CJEU itself considers that, despite the multilateral nature of the international agreement, the arbitration clause in the ECT is in fact intended to regulate bilateral relations between two of the contracting parties in a manner corresponding to the provisions of a BIT. Therefore, the BGH found no reason why the CJEU's ruling on an MIT should not also apply to a BIT, and consequently transferred the Komstroy argument also to the underlying BIT case here.

CETA decision cannot be drawn on as an argument

The BGH further maintained its position, stating that also the CJEU's 2019 CETA decision, on the application of the dispute resolution provisions in the Comprehensive Economic and Trade Agreement between Canada and the EU, does not alter its assessment. The CJEU found that the CETA Tribunal follows EU law as a fact and not subject to interpretation, but this doesn't automatically mean that agreements between member states and third countries, like extra EU BITs, must do the same. The BGH referred to previous CJEU rulings, indicating that also intra-EU commercial arbitration aligns with EU law, even though it involves interpreting EU law. The CJEU won't let commercial arbitration awards be sent to it directly, but it does allow state courts to review them to some extent, which it considers sufficient to comply with EU law.

The BGH also highlighted the principle of mutual trust, which means each member state should assume, unless there are exceptional circumstances, that all other member states will follow EU law. However, this principle of mutual trust does not apply to relations between the EU member states and third countries.

“The BGH’s decision warrants appreciation. Through this nuanced approach, the court has laid a solid groundwork for the currently uncertain future of investor-state dispute settlement (ISDS). In navigating the complexities of this legal landscape, the BGH's analysis sets a commendable precedent,” said international arbitration expert Franziska Graf of Pinsent Masons.

International arbitration expert Alexander Shchavelev added: “As a result, the decision has significant implications for other investment arbitrations between EU and non-EU member states. It provides confidence and legal certainty for investors in the ISDS universe, an area which is, at least with regard to EU law implications, currently fraught with considerable uncertainty following the Achmea decision.”

Notably, the BGH also deemed it unnecessary to refer the matter to the CJEU for a preliminary ruling, asserting that the fundamental question regarding the interpretation of EU law had already been definitively addressed in the Komstroy decision.