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The German Federal Court of Justice (“BGH”) recently issued a notable ruling (I ZB 64/24) in the ongoing aftermath of the CJEU’s Achmea decision. While much has been written about Achmea’s impact on the compatibility of intra-EU BITs with EU law (previous coverage here and here), the BGH’s latest decision extends those principles to cost awards, sharply reinforcing Achmea’s reach in intra-EU treaty arbitration.
Background
The Achmea decision (C-284/16) found that arbitration clauses in intra-EU BITs violate EU law, as they undermine the EU legal system’s autonomy. Since then, questions have swirled over the enforceability of arbitral decisions issued under such clauses.
The dispute underlying the BGH’s ruling began in 2013, when German investors invoked the BIT between Germany and the Czech Republic and Article 26 of the Energy Charter Treaty (ECT) to initiate arbitration against the Czech Republic. They alleged that legislative changes in the energy sector had harmed their renewable energy investments, violating treaty protections.
The arbitration, conducted under the UNCITRAL Rules, led to a May 2018 award. The tribunal dismissed the investors’ claims and ordered them to pay most of the Czech Republic’s costs. (Although the Achmea judgment was handed down during the arbitration proceedings, the tribunal had rejected a challenge to its jurisdiction based on it by the Czech Republic, ruling its submission was belated and that it had waived its right to object)
When the Czech Republic sought enforcement of the cost award in Germany, the investors objected, citing Achmea. The Bavarian Supreme Court agreed and denied enforcement. The BGH upheld this decision, adding significant legal reasoning.
Achmea applies to pure cost decisions
The BGH ruled that the Achmea principles extend not only to decisions on the merits but also to standalone cost awards. An invalid arbitration agreement, the court stressed, undermines all aspects of a tribunal’s authority, including its ability to decide costs.
The court dismissed arguments seeking to separate procedural rulings like cost decisions from substantive ones. Enforcing cost awards, it reasoned, would allow otherwise invalid arbitration agreements to have partial legal effect, contravening EU law. This would undermine the "coherence and effectiveness" (effet utile) of EU principles.
This expansive reading reinforces the CJEU’s clear stance: intra-EU BIT arbitration is fundamentally at odds with EU law. Even if a tribunal rejects an investor’s claims, its jurisdiction – whether on costs or otherwise – is undermined.
Notably, the BGH left open whether a cost award tied to a tribunal rejecting its jurisdiction could be enforceable. This unresolved question signals an area for future judicial clarification.
Inherent powers dismissed
The Czech Republic had argued that the tribunal retained inherent powers to allocate costs, independent of its jurisdiction to resolve the merits. The BGH flatly rejected this. It held that inherent powers are not free-standing. They depend entirely on a valid arbitration agreement. Without such an agreement, a tribunal has no authority over procedural or financial matters.
The court further clarified that procedural rules like the UNCITRAL Arbitration Rules cannot have independent force outside of a valid arbitration agreement, which was absent due to Achmea. Thus, the tribunal’s reliance on the UNCITRAL Rules for its cost decision added no legitimacy.
Investors not barred from challenging validity
The BGH dismissed claims that the investors had lost the right to challenge the validity of the arbitration agreement, even though they themselves had initiated proceedings. Under German law, a party ordinarily cannot attack a process it voluntarily pursued to its own detriment.
However, the BGH ruled that such good faith principles cannot override EU law. The court held that allowing the arbitration agreement to retain “factual effect” through doctrines like good faith would undermine the broader application of Achmea. Investors challenging enforcement of arbitration awards hence retain the ability to invoke EU law principles, regardless of their prior actions.
Broader implications
The decision represents another blow to the diminishing viability of intra-EU arbitration under BITs and similar treaties and continues in the vein of decisions across Europe refusing enforcement of decisions based on intra-EU treaty arbitration. With the EU recently withdrawing from the ECT, the pressure to develop new EU law-compatible mechanisms for resolving investor-state disputes intensifies.
Furthermore, its strict approach might also be seen to be part of a wider trend of increasing assertiveness of EU law principles insofar as they come into contact with arbitration.
This ruling may also affect investor behaviour. The BGH affirmed that investors challenging cost awards under EU law were not acting in bad faith, even though they had relied on the invalid clause when initiating arbitration. This could embolden investors elsewhere to block enforcement of cost awards in similar settings.
Conclusion
The BGH’s ruling adds another chapter to the Achmea saga, pushing its principles into the realm of standalone cost decisions. By confirming that all aspects of a tribunal’s jurisdiction derive from a valid arbitration agreement, the court solidifies the incompatibility of intra-EU BIT arbitration with EU law.
This uncompromising stance shores up the EU’s legal framework but leaves investors grappling with even more uncertainty. Until new, EU-compliant dispute resolution systems emerge, tensions will remain between investor protection and the autonomy of EU law.
Click here for the BGH’s ruling.
20 May 2025
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