by Agata Daszko[1]
In a recently surfaced judgment (I ZB 12/23), the German Federal Court of Justice (Bundesgerichtshof, BGH) has affirmed the partial enforcement of the Deutsche Telekom v. India UNCITRAL award, clarifying the boundaries of European Union law in relation to extra-EU investment treaty arbitrations. This ruling, dated 12 October 2023, addresses the interplay between EU law, the autonomy of the EU legal order, and bilateral investment treaties (BITs) with third countries, specifically focusing on the Germany-India BIT.
Background
The ISDS claim originated from a cancelled satellite leasing contract between Devas Multimedia and Antrix, an Indian state-owned entity. Deutsche Telekom, having invested in Devas Multimedia, sought compensation under the Germany-India BIT. In the final award of 24 May 2020, a Geneva-based tribunal of Kaufman-Kohler, Stern and Price found a breach of Article 3(2) of the BIT (Fair and Equitable Treatment) and awarded Deutsche Telekom USD 93.3 million plus interest.
The core of India’s appeal against enforcement in Germany revolved around the rulings of the Court of Justice of the EU (CJEU) in Achmea and Komstroy. These well-known decisions found that ISDS clauses in intra-EU BITs (Achmea) as well as in multilateral treaties, such as the ECT, when applied in an intra-EU setting (Komstroy), conflict with EU law. The CJEU based its decision in Achmea (later extended to Komstroy) on the principles of mutual trust, sincere cooperation and the autonomy of the EU legal order, as enshrined in Articles 2 and 4(3) TEU and Articles 267 and 344 TFEU.
The Legal Landscape and the BGH’s Rationale
India appears to have based its appeal on a specific reading of para. 65 of Komstroy,[2] assuming that the fact that “the ECT may require Member States to comply with the arbitral mechanisms for which it provides in their relations with investors from third States” implies a level of ambiguity in CJEU’s decision. In other words, India, citing some scholarly work, did not see “may require” as an obligation. The BGH was not convinced by India’s interpretation of the literature. It pointed out that the sources selected referred solely to the question of the conformity with Union law of the extra-EU application of the arbitration clause contained in the ECT, with the ECT being seen as an instrument of Union law (para. 16 BGH judgment).
The BGH also addressed the literature cited in the legal appeal regarding the applicability of the Achmea decision to extra-EU BITs, noting that some of the cited works predate the Komstroy decision and thus should not be considered. It also pointed out that some authors critical of the compatibility of extra-EU BITs with Union law have not engaged with the key explanations provided by the CJEU in the Komstroy case.
The BGH further analysed the CJEU’s Opinion 1/17 on the EU-Canada Comprehensive Economic and Trade Agreement (CETA) and its application to extra-EU BITs. The BGH noted that the approach in CETA – whereby the CETA Tribunal shall consider Union law only as a fact and not interpret it in a binding manner (Article 8.31(2)) – does not necessarily apply to all extra-EU arbitrations. Unlike CETA, a mixed agreement concluded by both the Member States and the EU, the Germany-India BIT is an agreement solely between a Member State and a third country, thus differing in its legal implications and standing within the EU legal order. Furthermore, the BGH noted that in the Komstroy judgment, one subsequent to Opinion 1/17, the CJEU did not make any corresponding restrictions on the interpretation of Union law for cases arising between an EU Member State and a third-country investor.
Finally, the BGH turned to commercial arbitration. Here a citation in full is warranted as it underlines the confusion still surrounding commercial arbitration in the EU legal order:
Finally, the treatment of commercial arbitration by the Court of Justice of the European Union also shows that the question of whether arbitration mechanisms comply with Union law does not (solely) depend on whether courts that are not part of the court system within the meaning of Art. 267 TFEU potentially have to interpret Union law. Although the Court of Justice of the European Union also rejects a power of referral for commercial arbitration courts pursuant to Art. 267 (3) TFEU, it nevertheless accepts the limited review of arbitral awards by state courts as being in conformity with Union law in view of party autonomy as a fundamental concept of commercial arbitration (cf. ECJ, judgment of 1 June 1999 – C-126/97, ECR 1999, I-3055 [juris para. 35] = GRUR Int. 1999, 737- Eco Swiss; judgment of 26 October 2006 – C-168/05, ECR 2006, I-10421 [juris para. 34] = SchiedsVZ 2007, 46- Mostaza Claro; ECJ, SchiedsVZ 2018, 186 [juris para. 54] – Achmea; see also Jaeger, EuR 2018, 611, 625).[3]
Conclusion and Outlook
Overall, the BGH rejected India’s arguments, drawing several distinctions between intra-EU (treaty) arbitration, found to be incompatible with EU law – and CETA, commercial arbitration and extra-EU investment arbitrations, found to be compatible with the Union’s legal order. It underscored that the CJEU’s reasoning in Achmea and Komstroy, do not extend to disputes involving EU Member States and third countries. More explicitly, the BGH highlighted that the CJEU’s decision in Komstroy “clearly shows that arbitration clauses in investment protection agreements between Member States and third countries (so-called extra-EU BITs) do not contradict Union law” (para. 12 BGH judgment). The BGH has moreover observed that the “principle of mutual trust does not apply in relations between the Union and a third country, especially regarding the respect for the right to an effective remedy before an independent court” (para. 24 BGH judgment; para. 129 Opinion 1/17), clearing the way for ad hoc tribunals under the ISDS system outside of the intra-EU setting.
The BGH’s decision has far-reaching implications for the legal certainty surrounding the enforcement of awards from extra-EU investment arbitration proceedings in Germany. It affirms the distinction between intra- and extra-EU investment arbitrations, reinforcing the notion that the principles underpinning the EU legal order, including mutual trust and the primacy of EU law, have specific applications that, as long as the EU law so guarantees, do not uniformly extend to external treaty obligations. After all, as decided by the BGH in a July 2023 judgment dealing with intra-EU arbitration, there exists “the primacy of application of Union law – also vis-à-vis public international law”.
Agata Daszko is a PhD candidate and Research Fellow at the University of Göttingen as well as Editor-in-Chief of the EFILA Blog. The views expressed in this post are of the author alone and do not reflect the views of the organisations the author represents. All translations are unofficial. ↑
“It follows that, although the 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.” ↑
Original German: Schließlich zeigt auch die Behandlung der Handelsschiedsgerichtsbarkeit durch den Gerichtshof der Europäischen Union, dass es für die Frage, ob schiedsgerichtliche Mechanismen unionsrechtskonform sind, nicht (allein) darauf ankommt, ob Gerichte, die nicht Teil des Gerichtsverbunds im Sinne des Art. 267 AEUV sind, potenziell Unionsrecht auslegen müssen. Der Gerichtshof der Europäischen Union lehnt für die Handelsschiedsgerichte eine Vorlagebefugnis nach Art. 267 Abs. 3 AEUV zwar ebenfalls ab, lässt aber mit Blick auf die Parteiautonomie als tragendem Gedanken der Handelsschiedsgerichtsbarkeit dennoch die beschränkte Überprüfung der Schiedssprüche durch staatliche Gerichte als unionsrechtskonform genügen (vgl. EuGH, Urteil vom 1. Juni 1999 – C-126/97, Slg. 1999, I-3055 [juris Rn. 35] = GRUR Int. 1999, 737 – Eco Swiss; Urteil vom 26. Oktober 2006 – C-168/05, Slg. 2006, I-10421 [juris Rn. 34] = SchiedsVZ 2007, 46 – Mostaza Claro; EuGH, SchiedsVZ 2018, 186 [juris Rn. 54] – Achmea; vgl. auch Jaeger, EuR 2018, 611, 625). ↑