BG Group v. Argentina: CPR Reviews US Supreme Court Decision

March 6, 2014

On March 5th, the Unite States Supreme Court issued a decision in its first-ever case pertaining to international investment arbitration: BG Group PLC v. Republic of Argentina, No. 12-138; available here. CPR has previously analyzed the amicus and party briefs filed (see 31 Alternatives 162 (November 2013) and 31 Alternatives 178 (December 2013); see also our post of Nov. 27, 2013). This note offers an overview of the much anticipated decision.

The arbitration provision in the UK-Argentina bilateral investment treaty (UK-Argentina BIT) permitted investors to submit a dispute “to the decision of the competent tribunal of the contracting party in whose territory the investment was made.” See Art. 8(1), available here. Recourse to arbitration is permitted under this treaty “where, after a period of eighteen months has elapsed from the moment when the dispute was submitted to [that] tribunal . . . , the said tribunal has not given its final decision.” After a change in Argentinean domestic law rendered BG Group’s investment unprofitable, BG Group proceeded to invoke Article 8 and sought arbitration on the grounds Argentina’s new laws violated Treaty provisions that disallowed “expropriation” of investments” and required “fair and equitable treatment” of investors of the partner country.

Argentina denied the merits of the claim, and further argued that the arbitrators lacked jurisdiction to hear the dispute because BG Group had not complied with the local litigation requirement of Article 8. The arbitral tribunal found it had jurisdiction, concluding that actions of the Argentinean government had sufficiently hindered BG Group’s access to the court system in such a way that BG Group was excused from the Article 8 requirement; the tribunal also found for BG Group on the merits. Both parties sought review in federal district court – Argentina to vacate and BG Group to confirm under the New York Convention and the Federal Arbitration Act (FAA). The district court confirmed the award, but the DC Circuit reversed and vacated the confirmation, holding that the Article 8 local litigation requirement was to be reviewed de novo and finding that the arbitral tribunal lacked jurisdiction, because BG Group had failed to commence proceedings in Argentina and wait the requisite eighteen months prior to initiating arbitration.

The question at issue before the Supreme Court was “who – court or arbitrator – bears primary responsibility for interpreting and applying the local litigation requirement to an underlying controversy?” When considered in terms of judicial review, the issue resolves to one of deference: may the court review the arbitrator’s interpretation and application of the local litigation requirement de novo, or “with the deference the courts ordinarily show arbitral decisions on matters the parties have committed to arbitration?”

The Court overturned the DC Circuit, deferring to the decision of the arbitral tribunal under the same standards as would be applied to analogous decisions in arbitration arising under a regular contract. In its decision, the Court first analyzed the document “as if it were an ordinary contract between private parties,” before moving on to ask whether or not the fact that the document in question was a treaty made a critical difference.

The Court noted that, in ordinary contracts, it is up to the parties to determine whether an issue is for the arbitrators or the courts. Where the contract is silent with respect to “threshold” matters, courts use presumptions to determine the intent of the parties. The first presumption is that parties intend courts to decide issues of arbitrability; the second presumption is that courts assume that the parties intend arbitrators to decide disputes about the meaning and applicability of any procedural preconditions to arbitration. The Court found that the local litigation provision was procedural, rather than related to arbitrability. “The text and structure of the provision make clear that it functions as a procedural condition precedent to arbitration . . . It determines when the contractual duty to arbitrate arises, not whether there is a contractual duty to arbitrate at all.”

Moving on to address the interpretation of a treaty as opposed to a contract, the Court found that there was no substantial difference in treatment. “As a general matter, a treaty is a contract, though between nations. Its interpretation normally is, like a contract’s interpretation, a matter of determining the parties’ intent.” Where a federal court is interpreting intent under the FAA, it should apply the presumptions supplied by American law: here, the presumption that the parties intended the arbitrator to decide disputes regarding procedural preconditions to arbitration would apply.

Argentina posited that the 18-month requirement was not a procedural precondition, but instead a “condition of consent” to arbitration. The Court noted that no available case law shows that inclusion of the word “consent” would fundamentally change how one discerns the parties’ intent regarding who should interpret and apply the relevant provision, but ultimately leaves the issue open for future argument. The treaty at issue did not state that the local litigation requirement was a condition of consent to arbitration, and, in the absence of “explicit language . . . demonstrating that the parties intended a different delegation of authority,” the Court found that the usual presumptions applied.

The Court went on to state that, while a treaty could demonstrate intent contrary to the typical presumptions, the text and language of Article 8(1) made it clear that the provision was a procedural condition precedent to arbitration; the treaty did not say that it was a substantive condition to the formation of an agreement to arbitrate. Furthermore, the Treaty provided for recourse to arbitration under established international arbitration rules (specifically, either those of UNICITRAL or ICSID), under which the arbitral tribunal is authorized to determine its own jurisdiction and to interpret provisions of this kind. Accordingly, the interpretation and application of the local litigation requirement is for the arbitrators to decide, and, in reviewing that decision, the courts owes the arbitral tribunal considerable deference; they may not review de novo, as the appellate court chose to do.

The dissent, in contrast, reads Article 8 as a “unilateral standing offer” to arbitrate that each of the parties extends to the investors of the other, and views the local litigation requirement being a term of this offer. The Court found this reading to be inconsistent with case law interpreting similar provisions in private party contracts, and went on to state that the majority of international authority supports the finding that the provision is simply a procedural precondition to arbitration. “A substantial body of arbitral authority from investor-state disputes concludes that compliance with procedural mechanisms in an arbitration agreement (or bilateral treaty) is not ordinarily a jurisdictional prerequisite.”

The Court therefore found that the arbitral tribunal was within its authority in ruling that (a) the local litigation provision was not an absolute bar to arbitration and (b) that Argentina had enacted laws that hindered access to the court system. While the Court did not necessarily agree with the tribunal’s finding that, under the circumstances in Argentina at the time, it would be “absurd and unreasonable” to require the parties to adhere to the local litigation requirement, such a finding was not, however, barred by the treaty, or arrived at by straying from the interpretation and application of the agreement, and was therefore lawful.

This decision will be reassuring to the international arbitration community. It is axiomatic in international arbitration that arbitrators have the power to decide on objections to their jurisdiction. Had the circuit court opinion been upheld, this decreased level of deference to international arbitral tribunals would have put the United States out of step with international practice, and likely decreased its attractiveness as a forum for international arbitration.

-          Alexandra Douglas, CPR Legal Intern