Netherlands launches litigation in German Court to preclude investor-State arbitrations

On 17 May 2021, the Dutch Government announced that it has initiated proceedings before a German Court to determine whether the ICSID claims bought by RWE and Uniper are inadmissible in light of the judgment in Slovak Republic v Achmea BV (“Achmea”).

The outcome of the court proceedings initiated by the Dutch Government could be of significance to other investors in the energy sector who are or will be facing similar threats to their investments in light of States’ renewed and vigorous pro-environmental policies.

 

Background

In December 2019, the Netherlands adopted legislation seeking to phase out the use of coal in the production of electricity by 2030.  This was in line with the Dutch Government’s commitment to reduce greenhouse gas emissions by 49%, compared to 1990 levels, by 2030.  The relevance of such measures was further emphasised in a decision of the Dutch Supreme Court in 2019 which recognised climate change as a human rights issue.

RWE and Uniper, two German energy companies operating coal-fired power plants in the Netherlands, lodged ICSID arbitration claims challenging the coal ban and invoking their rights under the ECT.  According to RWE and Uniper, the impugned law failed to provide adequate compensation for their stranded investments in coal-fired production facilities.

In response, the Netherlands initiated anti-arbitration proceedings in a German court against RWE and Uniper (“German proceedings”) claiming that the investor-State dispute settlement (“ISDS”) provisions in the Energy Charter Treaty (“ECT”), with respect to intra-EU investment disputes, are not compatible with EU law.

 

The Achmea decision

On 6 March 2018, the Court of Justice of the European Union (“CJEU”) ruled in the Achmea case that the ISDS provisions in treaties between EU member States are incompatible with EU law and hence precluded by Articles 267 and 344 of the Treaty on the Functioning of the European Union.  The applicability of this ruling to the provisions of the ECT has been a bone of contention ever since.  In December 2020, Belgium sought legal clarification from the CJEU on whether the ISDS mechanism of the draft modernised ECT is compliant with the Achmea judgment.

 

Legal basis for the German proceedings

The Dutch Government appears to have taken advantage of a unique provision under German law, which empowers domestic courts to determine whether or not arbitral proceedings are admissible, prior to the constitution of an arbitral tribunal.

The Dutch Government is also relying on a recent judgment by the Higher Regional Court of Frankfurt which held that the Achmea decision is transferable to other intra-EU-BITs (“Croatia case”).  In that case, a UNCITRAL arbitration commenced against Croatia under the Croatia-Austria BIT was declared to be inadmissible on the ground that the arbitration clause in the relevant BIT violates EU law.

 

Procedural and legal issues

The question whether the German Court has jurisdiction to hear the Netherlands’ challenge is yet to be determined.  Unlike the UNCITRAL regime, the ICSID system is insulated from the law of the place of arbitration, which has no relevance in determining the substantial and procedural law applicable to ICSID proceedings.  Moreover, several investment tribunals have already ruled that the Achmea decision does not deprive them of their jurisdiction under intra-EU BITs.

Although the Dutch Government is expecting a relatively quick ruling from the Court, the German proceedings could be delayed if an appeal is lodged or the question is referred to the CJEU for a preliminary ruling.  Meanwhile, the ICSID arbitration could continue in parallel, requiring parties to participate in both proceedings simultaneously.  Even if the German Court rules that it is competent to determine this issue, the possibility of parallel proceedings raises challenging questions regarding the impact of the Court’s decision on the ICSID arbitration proceedings and on any award that may be issued.

 

Potential implications for intra-EU investor-State arbitration

The outcome of the German proceedings, whatever it may be, is of significance to EU Member States and investors alike.  Recently, States have come under increased pressure to accelerate their efforts to combat climate change and meet their targets under the Paris Agreement.  On 18 May 2021, the International Energy Agency unveiled a roadmap for decarbonising the energy sector.  This included a number of proposals, some of which have been described as radical.  Similarly, in response to a decision of the Constitutional Court, the German Government has indicated a potential plan to achieve net zero emissions by 2045, five years earlier than initially planned.  Such measures by States to implement climate change policies could adversely impact investments in the fossil fuel sector, triggering investor-State arbitration claims such as those by RWE and Uniper.

 

For further information about these developments and other issues related to climate change litigation, please contact Graham Coop (Graham.Coop@volterrafietta.com) or Florentine Vos (Florentine.Vos@volterrafietta.com).