German Federal Court of Justice holds that arbitration clause in extra-EU BIT is compatible with EU law

Following its pivotal decisions on the validity of arbitration clauses in intra-EU relations last summer, the German Federal Court of Justice (Bundesgerichtshof, BGB) once again addressed the issue of the validity of arbitration clauses in October. However, this case did not involve arbitration proceedings between EU legal entities, but rather German telecommunications company Deutsche Telekom’s application for the recognition and enforcement of an arbitration award that it had obtained against the Republic of India. The arbitration award had been issued on the basis of the bilateral investment protection agreement concluded between the Republic of India and the Federal Republic of Germany and the proceedings had been conducted under the UNCITRAL rules. In the recognition and enforcement proceedings, the Republic of India invoked EU law to defend itself against enforcement.

In its decision of 12 October 2023, the Federal Court of Justice ruled that the arbitration award could not be refused recognition and enforcement, especially not on the basis of EU law. According to the Federal Court of Justice, arbitration clauses in investment protection agreements between EU Member States and third countries do not contravene EU law.

Decision of the Federal Court of Justice

The Federal Court of Justice made a clear distinction between arbitration clauses with an “intra-EU dimension” and those with an “extra-EU dimension” and thus followed the approach taken in the ECJ’s Komstroy decision. In the Komstroy decision, the ECJ explicitly stated that an underlying multilateral investment protection treaty can require EU Member States to settle disputes before arbitration tribunals if invoked by investors from third countries. Thus, EU law does not inherently prohibit investment arbitration proceedings. The ECJ emphasised in the Komstroy decision that only the specific intra-EU arbitration clause violated EU law.

In the opinion of the Federal Court of Justice, the reasoning in the Komstroy decision could be applied to the case before it even though the case involved a bilateral (BIT) rather than a multilateral investment treaty. The Federal Court of Justice reasoned that after all both instruments govern the reciprocal relationship between two contracting parties.

The Federal Court of Justice did, however, refuse to apply the line of reasoning used in the CJEU’s Achmea decision, as requested by the Republic of India. This was because the Achmea decision was based, in part, on the principle of loyal cooperation between EU Member States, a principle enshrined in EU law to ensure the application and respect of EU law. This obligation does not apply to third countries. The trust that exists between EU Member States that effective legal protection on the basis of a set of common values and the duty to apply EU law will be available in all Member States, including before state courts, does not apply to third countries. Accordingly, what is referred to as the intra-EU defence, which was raised for the first time in the Achmea decision, cannot be invoked with regard to arbitration clauses in agreements between EU Member States and third countries.

Conclusion and practical implications

This decision once again confirms not only the Federal Court of Justice’s commitment to EU law, but also its pro-arbitration stance. The Federal Court of Justice has once again successfully harmonised the two areas of law by confirming that EU law does not preclude an obligation to arbitrate disputes involving third countries. The principle of loyalty under EU law only applies in relations between EU Member States.