BG Group, PLC v. Republic of Argentina

Issues 

  1. Does an arbitrator or a court decide whether a precondition to arbitration has been satisfied?
  2. To what extent can federal courts review such decisions?
Oral argument: 
December 2, 2013

The United Kingdom and Argentina signed the Bilateral Investment Treaty in 1990 to promote international investment in Argentina. The Treaty requires that disputes first be submitted to Argentine courts for a certain period before being arbitrated. After the Argentine economic crisis in 2001 and 2002, Argentina enacted several measures that restrained investors from litigating effectively. BG Group filed for arbitration in the United States against Argentina without first submitting the dispute to Argentine courts. After the arbitral tribunal issued an award, Argentina argued that the tribunal had no jurisdiction over the parties. The issue here is whether the arbitrators or the courts should determine whether a precondition for arbitration has been satisfied. BG Group argues that the purpose of international arbitration is to allow experienced arbitrators to decide issues in a neutral forum, not governed by a particular country. Argentina argues that the purpose of arbitration is to give the parties what they agreed to and that judicial review is necessary for securing international treaties. The Supreme Court will determine whether courts or arbitrators decide these threshold questions of arbitrability. This decision will impact the substance of international arbitration agreements and how the United States is perceived as a seat for international arbitration.

Questions as Framed for the Court by the Parties 

  1. In disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied?
  2.  Whether a federal court with jurisdiction over an application to vacate an arbitral award may independently decide whether a valid and binding agreement to arbitrate has been created under the terms of a bilateral investment treaty?

top

Facts

On December 11, 1990, the United Kingdom and Respondent Argentina signed the Bilateral Investment Treaty (“BIT”). See Republic of Arg. v. BG Group PLC, 665 F.3d 1363, 1366 (D.C. Cir. 2012). The purpose of the treaty was to promote foreign investment in the Argentine market to reduce inflation and public debt in Argentina. See id. 

Article 8(2) of the BIT states that disputes under the Treaty between an investor and Argentina must first be submitted to a competent tribunal in the state where the investment was made. See id. Subsequently, the dispute can go to international arbitration at one party’s request if (1) a period of eighteen months has passed since the dispute was presented to the tribunal and no decision has been made; or (2) the final decision was made, but the parties still disagree. See id. Article 8(3) specifies that if a dispute goes to arbitration and the parties cannot agree on arbitration procedures, the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL Rules”) will govern. See id.

Petitioner BG Group held substantial shares of MetroGAS, a private Argentinian gas transportation and distribution company. See id. MetroGAS granted thirty-five year, exclusive licenses to distribute gas in and around Buenos Aires. These licenses provided that tariffs would be calculated in U.S. dollars. See id. The tariffs could be adjusted every six months for inflation based on the United States Product Price Index (“PPI”). 

Between 2001 and 2002, the Argentine economy collapsed. See id. at 1367. In response, the government enacted Emergency Law 25,561 to prohibit inflation adjustments based on PPI and converted dollar-based tariffs to peso-based tariffs at a rate of one U.S. dollar to one peso. See id. Then, Argentina passed Decree 214/02, Article 12 (“Article 12”), which stayed for 180 days compliance with injunctions and trial judgments resulting from lawsuits relating to the Emergency Law. See id.

Eight months after Article 12 expired, BG filed a Notice of Arbitration under Article 8(3) of the Treaty and submitted the dispute to arbitration in the United States under the UNCITRAL Rules. See id. BG Group claimed that the emergency laws negatively impacted their investment in MetroGAS, for which it sought damages. See id.

At arbitration, Argentina argued that the arbitral tribunal did not have jurisdiction over the parties because the dispute had not gone before an Argentine tribunal for at least eighteen months, which was a precondition to beginning arbitration under Article 8(2) of the Treaty. See id. BG Group argued that waiting to meet the requirements of Article 8(2) of the Treaty would have been a waste of time because it would likely take years to resolve the dispute in Argentine courts. See id.

The arbitral tribunal determined that they had jurisdiction over the dispute and issued an award for BG Group. See id. The tribunal reasoned that Argentine courts would not have made a decision within eighteen months because of the emergency decrees that restricted access to the courts and prevented renegotiating the license. See id.

The District of Columbia District Court upheld the arbitration award, stating that the tribunal could decide its own jurisdiction. See id. Accordingly, the court denied Argentina’s motion to vacate the award and granted BG Group’s motion to recognize and enforce the award. See id. 

The District of Columbia Circuit Court of Appeals overturned the district court decision and found that the tribunal did not have jurisdiction because the parties did not meet the preconditions for Article 8(2). See id. at 1373.

BG Group filed a petition for a writ of certiorari with the Supreme Court, which granted the petition on June 10, 2013.

top

Discussion

BG Group argues that the arbitrator and not the court should make decisions on arbitrability. BG Group asserts that the purpose of arbitration is to provide a neutral forum with experienced arbitrators as decision-markers. See Brief for Petitioner, BG Group, PLC at 54, 46. If courts second-guess these decisions, BG Group argues, the purpose of arbitration will be defeated and courts and the United States will bear the costs. See id.On the other hand, Argentina argues that the purpose of arbitration is to give the parties what they agreed to, and if arbitrators can bind countries to arbitration without consent and judicial review, the international commercial market will suffer. See Brief for Respondent, Republic of Argentina at 20–21, 53. The Supreme Court’s resolution of this case will determine whether arbitrators can make threshold decisions on arbitrability and the extent to which courts can review these decisions.

PURPOSE OF INTERNATIONAL ARBITRATION

BG Group and supporting amici argue that the purpose of international arbitration is to provide businesses engaged in international transactions with a neutral forum for dispute resolution. See Brief for Petitioner at 54; see Brief of Amicus Curiae United States Council for International Business (“CIB”) in Support of Petitioner at 10; see Brief of Amici Curiae Professors and Practitioners of Arbitration Law (“Professors and Practitioners”) in Support of Petitioner 6–7. BG Group asserts that businesses pursuing international transactions choose to bring their disputes to arbitration because they fear that courts may be biased towards businesses based in that country, rather than neutral towards both parties. See Brief for Petitioner at 54. BG Group and certain professors and practitioners of international law claim that arbitrators and their decisions should be respected because they have experience and expertise in international law and resolving complex disputes. See id. at 55; see Brief of Professors and Practitioners at 10–11.

Argentina counters that the purpose of arbitration is to enforce the parties’ intent in making the contract. See Brief for Respondent at 20–21. It argues that the parties here did not intend for the arbitrators to decide the validity of the agreement, otherwise they would have specified this threshold issue in the agreement. See id. at 21. Furthermore, Argentina contends that the international arbitration community relies on the assumption that courts will have power to review arbitrator decisions, citing multiple countries with specific provisions outlining this requirement. See id. at 25–26, 28.

UNITED STATES IN THE ARBITRATION COMMUNITY

BG Group argues that the Federal Arbitration Act (“FAA”) shows that the United States is committed to a policy of arbitration. See Brief for Petitioner at 42. The American Arbitration Association (“AAA”) adds that the U.S. is one of the preferred seats for international arbitration because of (1) the respect U.S. courts have for FAA-based arbitration and (2) U.S. participation in the New York Convention. See Brief of Amicus Curiae American Arbitration Association (“AAA”) in Support of Petitioner at 18. In its amicus brief in support of BG Group, the Council for International Business (“CIB”) notes that if the courts in one country refuse to enforce arbitration agreements and decisions made by arbitrators, other countries will show similar disregard, and the framework for fair and neutral international arbitration will unravel. See Brief of CIB at 27. Specifically, BG Group argues that if U.S. courts second-guess arbitral decisions, international businesses will stop going to the U.S. for arbitration.

Argentina argues that for international commercial treaties such as bilateral investment treaties, the states involved rely on judicial review to monitor the fairness of arbitral decisions. See Brief for Respondent at 52. Argentina claims that courts and arbitrators alike must be cautious to not bind sovereign states to proceedings they do not consent to. See id. at 53. Specifically, Argentina claims that allowing arbitral tribunals to bind states to arbitration that they did not agree to implicates comity concerns between nations. See id.

EFFICIENCY AND COSTS OF ARBITRATION VERSUS LITIGATION

BG Group also asserts that courts second-guessing arbitral tribunal decisions is inefficient and costly. See Brief for Petitioner at 46. First, BG Group argues that if courts review arbitral decisions, dissatisfied parties will swamp the courts and cause wasteful and unnecessary litigation. See id. AAA and CIB add that such litigation could delay arbitral proceedings and increase costs for parties. See Brief of AAA at 12; see Brief of CIB at 22–23.

Argentina argues that if arbitrators can bind states to arbitration without consent and with no judicial review, international treaty costs will increase. See Brief for Respondent at 53. In particular, the State argues that nations entering treaties will be “unnecessarily cautious” in making these agreements to avoid the expense, burden, and uncertainty of treaty claims that could arise in the future. See id.

top

Analysis

According to BG Group, the issue in this case is whether it had to satisfy the litigation precondition contained in Article 8(2) of the BIT before beginning arbitration proceedings. See Brief for Petitioner at 36. BG Group argues that this question is one of procedural arbitrability that should be resolved by the arbitrators, not the courts. See id

According to Argentina, the issue is not one of procedural arbitrability, but one of substantivearbitrability. That is, the issue is whether there was a valid arbitration agreement between the parties. See Brief for Respondent at 30. Argentina believes that courts, not arbitrators, must decide this question of substantive arbitrability. 

THE FEDERAL ARBITRATION ACT AND SUPREME COURT PRECEDENT 

BG Group argues that the arbitrability issue is resolved by Howsam v. Dean Witter Reynolds, Inc., in which the Court held that courts decide questions of substantive arbitrability—such as whether a party is bound at all by a particular arbitration clause—whereas arbitrators decide questions of procedural arbitrability—such as whether prerequisites like time limits, notices, and estoppel to arbitrate have been met. See Brief for Petitionerat 32–33; 537 U.S. 79 (2002). The issue in Howsam was whether a claim submitted for arbitration was barred under the time limit rules of the National Association of Securities Dealers. The Court held that this procedural question was for the arbitrators to decide, relying on its previous holding in John Wiley & Sons, Inc. v. Livingston. There, a contract between a union and an employer required the parties to hold two conferences in an attempt to resolve their grievances before arbitration proceedings could commence. The Court held in John Wiley that because this was a question of procedural arbitrability, it was up to the arbitrator to decide whether the two preconditions were satisfied. See id. at 34–35; 376 U.S. 543 (1964).  

BG Group contends that Howsam and John Wiley stand for the proposition that a dispute concerning compliance with preconditions to arbitration must be decided by the arbitrators. Brief for Petitionerat 35. According to BG Group, this case falls clearly under these precedents and compels the conclusion that whether the litigation precondition in Article 8(2) of the Treaty was satisfied is a question of procedural arbitrability for the arbitrators to decide. See id. at 34–35. 

BG Group additionally contends that neither of the rationales proposed by the Court in First Options of Chicago, Inc. v. Kaplan—holding that courts rather than arbitrators should decide the question of “who” decides arbitrability—are present here. First, BG Group asserts that the parties explicitly agreed to arbitrate, so there is no fear that a party is being forced to arbitrate a dispute when it has not agreed to do so. See Brief for Petitioner at 43–44; 514 U.S. 938 (1995). Second, BG Group argues that both the United Kingdom and Argentina are sophisticated parties who have negotiated dozens of BITs. Thus, it would be difficult to imagine, in BG Group’s estimation, that the parties did not give any thought to the question of who would decide the question of arbitrability. See id. at 44–45.  

Argentina argues that Article 8(2) of the Treaty constitutes an offer to arbitrate, subject to various conditions. To form an agreement, the investor must accept the offer along with its conditions, one of which is that the dispute must be submitted to the local courts for at least eighteen months before arbitration can be initiated. Because BG Group failed to satisfy this condition, Argentina argues that BG Group’s invitation to begin arbitration was a counteroffer, not an acceptance of the offer contained in the Treaty. In order to have a binding agreement between the parties, Argentina must have accepted the counteroffer. However, it contends that it specifically rejected the counteroffer and thus never consented to arbitration. According to Argentina, it follows that the arbitral tribunal lacked jurisdiction in this case because it never consented to arbitrate. See Brief for Respondent at 30–32. 

According to Argentina, under the Federal Arbitration Act (FAA), when there is a question of the existence, validity, or scope of an arbitration agreement, the default presumption is that courts decide those questions, not arbitrators. See Brief for Respondent at 21. Argentina argues that this is not surprising given the fact that if parties never entered into a contract to arbitrate, then the arbitral tribunal has no power over the parties or any power to determine its own jurisdiction. See id. at 23. Argentina also argues that it is a common practice in international law for courts to determine the existence of a valid arbitration agreement. See id. at 24–26. Argentina also minimizes the issue of competence, arguing that even though arbitrators are competent to determine their own jurisdiction, this presumption merely allows an arbitrator to decide their jurisdiction over a dispute subject to judicial review; it does not entirely displace judicial review. See id. at 26–29. For instance, Argentina cites the United Nations Commission on International Trade Law (UNCITRAL) Model Law, which it argues represents an international consensus on the appropriate role for national courts in international commercial arbitration. The Model Law, Argentina argues, clearly shows that an arbitral tribunal’s competence to determine its jurisdiction is subject to judicial review. See id. at 28. 

THE BILATERAL INVESTMENT TREATY 

BG Group argues that the Treaty does not establish any presumption that the parties intended to allow the courts, rather than the arbitrators, to have the final word with respect to disputes about the litigation precondition. See Brief for Petitioner at 39–41, 47–48. Rather, BG argues, the Treaty only permits the Argentine courts to issue a non-binding decision on the merits of the dispute and does not contemplate that those courts would decide issues of arbitral jurisdiction. See id. Indeed, BG Group contends that under the terms of the Treaty, only the arbitral tribunal has the authority to issue a final decision, even with respect to its own jurisdiction. See id

Moreover, BG Group argues that the Treaty was intentionally drafted so that local courts would not be able to pass on the question of the arbitrators’ jurisdiction. According to BG Group, no rational investor would have agreed to invest hundreds of millions of dollars in Argentina if its only protection was before the courts of Argentina. See Brief for Petitionerat 40–41, 54–56. If that were the case, BG Group posits, then the courts or executive branch of the Argentine government could improperly interfere with the enforcement of the Treaty. See id

In response, Argentina contends that the lower court properly interpreted the Treaty under the Vienna Convention on the Law of Treaties (Vienna Convention), under which the terms of a Treaty are to be interpreted according to their ordinary meaning. See Brief for Respondent at 44–45. According to Argentina, the Treaty in question requires on its face that the parties submit their dispute to eighteen months of litigation in Argentina before arbitration proceedings can be commenced. See id. at 45–46. Argentina points out that BG Group never presented an alternative basis for the tribunal’s jurisdiction in the proceedings below. See id. at 46.

BG Group also relies on the fact that the parties agreed that arbitration proceedings would be governed by the UNCITRAL Rules, which grant the arbitration tribunal power to decide any objection to its jurisdiction. See Brief for Petitioner at 48. Argentina contends, however, that the UNCITRAL Rules allow the arbitrators to decide their jurisdiction subject to de novo judicial review. SeeBrief for Respondent at 38–43. It further argues that the parties’ adoption of the UNCITRAL Rules does not provide the “clear and unmistakable” evidence required under First Options to hold that the arbitrators, rather than the courts, are to decide the question of whodecides arbitrability. See id. Argentina argues that the adoption of the UNCITRAL Rules has been held to provide “clear and unmistakable” evidence of the parties’ intention to refer questions of arbitrability to the arbitrator only in cases where there was no dispute that a valid arbitration agreement existed in the first place. Thus, Argentina argues, those cases are inapposite since the very issue before the Court here is whether a valid arbitration agreement existed. See id. at 40–42. 

top

Conclusion

The Court will determine whether, as BG Group contends, the issue concerns the satisfaction of a precondition to arbitration, or, as Argentina argues, whether the parties ever entered into a valid arbitration agreement. The Court’s decision implicates the United States’ role in international commercial arbitration, how U.S. courts interpret arbitral awards and bilateral investment treaties between foreign sovereigns, and how the U.S. is perceived as a seat for international arbitration.

top

Written by 

Edited by 

Additional Resources 

top