By Philip D. Robben and Melissa E. Byroade1
On March 5, 2014, the U.S. Supreme Court issued its decision in BG Group PLC v. Republic of Argentina, a case of first impression arising out of an investment treaty arbitration proceeding. This decision is important for any company that has or contemplates foreign investments that might be protected by a bilateral investment treaty, or “BIT”, in that it clarifies the standard of review that U.S. courts are obligated to employ when reviewing investment treaty awards rendered pursuant to the Arbitration Rules of the United Nations Commission on International Trade Law ( “UNCITRAL Rules”).
The BIT Paradigm
In order to encourage foreign investment, two countries will enter into a bilateral investment treaty providing that each country will undertake certain protections and treatment with regard to investments made by nationals of the other country. These treaties typically provide for similar standards of treatment to be accorded to the investor and its investment, often including protection from expropriation without compensation, protection from discriminatory treatment, a guarantee of “fair and equitable treatment” of the investment, and a guarantee that a state will fulfill any obligations it has relating to the investment.
In order to enforce these substantive protections, BITs typically provide that an investor may arbitrate disputes alleging a breach of the BIT directly with the state party to the treaty. The right to initiate arbitration pursuant to a BIT is uniquely valuable, as it allows investors to seek recourse against the host country before a panel of neutral arbitrators, typically avoiding the need to litigate in the host country’s domestic courts or pursue other local remedies. According to the United Nations, by the end of 2012 there were more than 2,800 bilateral investment treaties worldwide, and more than 500 investor-state cases had been brought. The North American Free Trade Agreement and Energy Charter Treaty, which are multi-lateral treaties, contain protections similar to those typically found in BITs.
The Underlying Dispute in BG Group v. Argentina
The BG Group case is one of many arising from Argentina’s economic crisis that came to a head in early 2002. In 1992, Argentina had created a gas distribution company called MetroGAS as part of its privatization of what had been a state-owned gas utility. BG Group, a British company, was part of a consortium that successfully bid and obtained a controlling interest in MetroGAS. Argentina gave MetroGAS an exclusive license to distribute natural gas in Buenos Aires and passed legislation requiring gas tariffs to be calculated in U.S. dollars. At that time, Argentina had a 1:1 parity in place between the peso and the U.S. dollar. The ability to earn tariffs in U.S. dollars was likely the major basis upon which BG Group could obtain a return on its investment (and, consequently, likely an important factor in BG Group’s decision to invest).
During its economic collapse in early January 2002, Argentina enacted Law 25,561, colloquially known as the “Emergency Law.” Among other things, Law 25,561 converted dollar-denominated gas tariffs into tariffs denominated in Argentine pesos on a 1:1 basis. Other measures implemented by Argentina during this period allowed the peso to float against the dollar, abrogating the 1:1 peg, and leading to a 75 percent devaluation of the peso within a matter of weeks. Thus, these measures unilaterally changed all dollar-denominated contracts, reducing their value by as much as 75 percent virtually overnight. In BG Group’s case, the laws fundamentally devalued the MetroGAS tariffs, leading to significant losses for BG Group’s investment.
The BG Group Arbitration
In an attempt to recover its losses due to the Emergency Law and the related legislation, in 2003 BG Group initiated an arbitration against Argentina under a BIT that lad been entered into between the United Kingdom and Argentina in 1990. BG Group alleged that its losses resulted from Argentina’s alleged violation of the UK-Argentina BIT’s guarantee of fair and equitable treatment and that Argentina had expropriated BG Group’s investment in violation of the BIT as no compensation was paid.
BG Group initiated arbitration pursuant to Article 8 of the BIT. That section provides, in pertinent part, that:
(2) [D]isputes shall be submitted to international arbitration in the following cases:
(a) if one of the Parties so request, in any of the following circumstances:
(i) where, after a period of eighteen months has elapsed from the moment when the dispute was submitted to the competent tribunal of the Contracting Party in whose territory the investment was made, the said tribunal has not given its final decision;
(ii) where the final decision of the aforementioned tribunal has been made but the Parties are still in dispute;
(b) where the Contracting Party and the investor of the other Contracting Party have so agreed.
Article 8 then goes on to provide that any such arbitration can be initiated before the International Centre for Settlement of Investment Disputes (“ICSID”) or an arbitrator or tribunal established under the UNCITRAL Rules. BG Group chose to initiate the proceeding under the UNCITRAL Rules. BG Group did not initiate litigation in Argentina’s domestic courts.
Argentina’s Objection to Jurisdiction
Argentina, relying on Article 8(2)(a)(i) of the UK-Argentina BIT, argued that the tribunal was without jurisdiction to hear the case because BG Group had not litigated the dispute in Argentine court for 18 months before initiating arbitration.
After complete briefing by the parties and a full hearing, the arbitral tribunal found that it had jurisdiction to hear the case because Argentina’s own conduct excused BG Group from having to litigate the dispute in Argentina for 18 months. Among other things, Argentina had passed a decree staying the execution of final judgments in cases based on Law 25,561. In addition, while Argentina initiated a renegotiation process for affected public service tariffs like that at issue, it barred any company participating in that process from bringing claims against Argentina in court. The tribunal therefore found that, faced with those facts, a literal reading of the BIT that required BG Group to litigate its dispute in Argentine court for 18 months would lead to an “absurd an unreasonable result”.
On the merits of BG Group’s claims, the tribunal found that Argentina had breached the UK-Argentina BIT’s guarantee of fair and equitable treatment, and awarded BG Group US$185 million in damages.
The Lower Court Proceedings
Both BG Group and Argentina subsequently sought relief in the District Court for the District of Columbia, the District Court covering the place where the award was issued. While BG Group sought to confirm the award under the Federal Arbitration Act (the “FAA”) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Argentina sought to vacate the award entirely. The FAA allows U.S. federal courts to vacate arbitration awards, including international arbitration awards resulting from proceedings within the United States, on certain enumerated grounds. Argentina argued that vacatur was necessary pursuant to the FAA because the arbitrators “exceeded their powers” in finding that they had jurisdiction over the dispute. See 9 U.S.C. § 10(a)(4). The District Court rejected Argentina’s arguments, and proceeded to confirm the arbitration award in favor of BG Group.
Argentina appealed the District Court’s decision to the Court of Appeals for the District of Columbia Circuit. The central issue before the Court of Appeals was the proper standard of review — and amount of deference — applicable to the arbitrators’ interpretation of the 18-month provision in Article 8 of the BIT.
Courts reviewing arbitral awards under the FAA will typically defer to the arbitrators’ determination of issues the parties have agreed to submit to arbitration. However, where the question is one of arbitrability — i.e., whether the parties have agreed to arbitrate the claims in the first place — the court will decide the issue. Arbitrability issues include, for example, whether a party is bound by an arbitration clause or whether a dispute falls within the scope of an arbitration clause. On the other hand, procedural issues arising where parties have already agreed to arbitrate, including claims of delay, time limits, notice, laches, and estoppel, are generally for the arbitrator to decide and the arbitrator’s determination will receive deference from a reviewing court.
In BG Group, the Court of Appeals applied a de novo standard because it determined that the failure to fulfill the 18-month litigation requirement raised a question of the arbitrability of BG Group’s claims that should be decided by the court. The Court of Appeals held, based on the language of Article 8, that BG Group’s failure to bring a claim in the Argentine courts prior to arbitration meant that the tribunal was without power to hear the case and the award should be vacated.
The Supreme Court Decision
The Supreme Court granted certiorari because of “the importance of the matter for international commercial arbitration.” The question before the Court was whether the 18-month litigation provision contained in the UK-Argentina BIT was a question of arbitrability or whether it was instead a procedural precondition to arbitration. If the former, a de novo standard of review would be appropriate. If the latter, then the arbitral tribunal’s decision is entitled to deference, making it less likely to be found violative of the FAA’s standards.
The Court first interpreted the BIT as if it were a private contract. If a contract is silent regarding who should determine “threshold” questions about arbitration, courts will use certain presumptions to determine the parties’ intent. Generally, courts presume that parties intend for the court to determine questions of arbitrability, and for the arbitrators to decide disputes regarding procedural preconditions.
The majority characterized the 18-month provision in Article 8 of the BIT as “a procedural condition precedent to arbitration” because it “determines when the contractual duty to arbitrate arises, not whether there is a contractual duty to arbitrate at all.” This provision was therefore “highly analogous” to procedural provisions that courts have found should be interpreted by arbitrators, not courts. Moreover, the Court held that nothing in the BIT demonstrates that the parties intended a different division of authority. For example, the BIT does not state that the 18-month provision is a “substantive condition on the formation of the arbitration contract” or that it is a matter important enough to be decided by the courts. The Court also noted that international arbitrators “are likely more familiar than are judges” with the expectations of foreign investors and the countries in which they invest regarding how the provision should operate.
The Court also determined that the fact that it was interpreting a treaty between two nations, rather than a private contract, should not change the analysis. The U.S. Solicitor General argued that, in the treaty context, the 18-month provision operated as a condition on the consent of each country to arbitrate disputes. The majority opinion rejected this argument, finding that treaty interpretation, like contract interpretation, is a matter of determining the parties’ intent. Where a court is interpreting a treaty pursuant to motion to vacate or confirm an award under the FAA, it “should normally apply the presumptions supplied by American law.” Indeed, “in the absence of explicit language in a treaty demonstrating that the parties intended a different delegation of authority, our ordinary interpretive framework applies.”
In applying the proper, deferential standard of review to the tribunal’s decision, the Court reversed the Circuit Court’s judgment, finding that the tribunal did not exceed its powers and vacatur was not warranted.
Chief Justice Roberts’ dissenting opinion, joined by Justice Kennedy, turns on a different reading of the 18-month provision. Under the dissenting view, the 18-month provision operates as “a condition to the formation of an agreement, not simply a matter of performing an existing agreement.” In the dissent’s view, the BIT is a completed agreement only between Argentina and the United Kingdom; it is not an agreement between individual investors, like BG Group, and Argentina. Rather, Article 8 of the BIT is a standing offer to arbitrate, and an investor must accept the offer according to its terms. In other words, there is no agreement to arbitrate until an investor first litigates its dispute in Argentine courts, since in the dissent’s view such litigation was a non-negotiable term of Argentina’s offer to arbitrate. However, the dissent did recognize that an agreement to arbitrate could have formed between BG Group and Argentina if BG Group’s failure to litigate in Argentina for 18 months was futile due to Argentina’s own fault (as BG Group alleged). Thus, rather than simply vacating the award, the dissent would have remanded the case to the Court of Appeals to make further findings.
The BG Group decision marks the Court’s first foray into interpreting BITs. Under the Court’s ruling, arbitration clauses contained in BITs will be interpreted according the same principles as private arbitration agreements. The decision of the arbitral tribunal in BG Group, finding that compliance with the 18-month litigation provision could be excused, is consistent with the conclusions reached by the vast majority of tribunals that have faced the issue. If the Supreme Court had found that this decision was subject to de novo review, and upheld the Court of Appeal’s decision to vacate the award, that could have led to uncertainty for those investors who have obtained awards in similar circumstances.
The application of BG Group going forward may be limited, however, because the vast majority of BIT cases are heard in arbitration before ICSID, and not in proceedings under the UNCITRAL Rules. ICSID awards are reviewed through an annulment procedure set forth in the ICSID Convention, which specifies the only grounds for annulment of an award. The FAA does not apply to the enforcement of ICSID awards, so they are not subject to vacatur under Article 10 of the FAA. See 22 U.S.C. §1650a. However, for potential investment treaty claimants and their counsel considering the option to bring a claim under the UNCITRAL Rules, the BG Group decision offers certainty as to the standard of review a U.S. court will use in considering an application to set aside any resulting award.
1. The authors are members of Kelley Drye & Warren LLP’s International Arbitration Practice Group, based in the firm’s New York office. Both are presently counsel for the claimant in HOCHTIEF AG v. Argentine Republic, ICSID Case No. ARB/07/31, which presented similar jurisdictional issues to those decided by the tribunal in the BG Group arbitration discussed in this advisory. The views expressed in this advisory are the authors’ own and do not necessarily reflect the views of any client of the firm.