Ruling allows national judicial protection against intra-EU arbitral proceedings

International arbitration expert Franziska Graf of Pinsent Masons said the decision was “quite remarkable”, as it directly challenges the “self-contained system of the convention of the International Centre for Settlement of Investment Disputes (ICSID).”

Investor-state dispute resolution expert Sylvia Tonova of Pinsent Masons, said: "The decision of the BGH serves to underscore the eroding protection to intra-EU ICSID arbitration proceedings in the EU and the diverging jurisprudence outside the EU.”

The ruling came after one EU member state reformed its domestic energy production legislation. As a result, a group of companies in another member state initiated investor-state arbitral proceedings with the ICSID, as is permitted under Article 26 of the Energy Charter Treaty.

The companies argued that the legislative reforms damaged their investments in the host state – costing them hundreds of millions of euros collectively. The host state sought to have the various arbitral proceedings blocked under section 1032 of the German Code of Civil Procedure (ZPO), which contains an anti-arbitration declaration mechanism, even before the arbitral tribunal has been constituted.

Different German courts initially handed down conflicting decisions on whether the application under section1032 of the ZPO was admissible, before the BGH ruled that German courts do have international jurisdiction for arbitral proceedings that do not yet have a place of arbitration – as is the case with the relevant ICSID proceedings.

The court held that the anti-arbitration declaration mechanism contained in section 1032 of the ZPO is in principle not admissible in intra-EU ICSID arbitral proceedings, at least from the time of registration of ICSID arbitral proceedings. It said this was because the ICSID tribunal is able to be the judge of its own competence according to ICSID’s own self-contained system of rules.

Exceptionally, however, the court ruled that, in this “special constellation” of intra-EU investor-state arbitral proceedings, the primacy of application of EU law – taking into account the principle of effectiveness – meant that section1032 of the ZPO was admissible after all.

Tonova said: “In an intra-EU context, a downstream review of an ICSID award by a national court is mandatory according to the case law of the Court of Justice of the European Union (CJEU) for reasons provided by EU law and contrary to the system of rules of the ICSID Convention.”

“In an intra-EU context, such a review may be bindingly pre-empted by a prior review by a national court, which the German legislature has facilitated in section 1032(2) of the ZPO. A finding of inadmissibility of the arbitral proceedings under section 1032(2) of the ZPO prevents the subsequent declaration of enforceability of the ICSID arbitral proceedings in Germany due to the binding effect of this decision,” Graf said.

She added: "The decision of the BGH does not at all come as a surprise. It had already become apparent that the court, in line with the views of the European Commission and the decisions of the CJEU, would ultimately leave no stone unturned to create further barriers to intra-EU arbitration."