BG Group, PLC v. Republic of Argentina

Facts

On December 11, 1990, the United Kingdom and Respondent Argentina signed the Bilateral Investment Treaty (“BIT”). The purpose of the treaty was to promote foreign investment in the Argentine market to reduce inflation and public debt in Argentina.

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. 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. 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.

Petitioner BG Group held substantial shares of MetroGAS, a private Argentinian gas transportation and distribution company. 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. 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. 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. 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.

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. BG Group claimed that the emergency laws negatively impacted their investment in MetroGAS, for which it sought damages.

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. 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.

The arbitral tribunal determined that they had jurisdiction over the dispute and issued an award for BG Group. 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.

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

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).

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

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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. 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. 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. 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. 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. 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.

Argentina counters that the purpose of arbitration is to enforce the parties’ intent in making the contract. 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. 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.

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. 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. 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. 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. Argentina claims that courts and arbitrators alike must be cautious to not bind sovereign states to proceedings they do not consent to. Specifically, Argentina claims that allowing arbitral tribunals to bind states to arbitration that they did not agree to implicates comity concerns between nations.

EFFICIENCY AND COSTS OF ARBITRATION VERSUS LITIGATION

BG Group also asserts that courts second-guessing arbitral tribunal decisions is inefficient and costly. First, BG Group argues that if courts review arbitral decisions, dissatisfied parties will swamp the courts and cause wasteful and unnecessary litigation. AAA and CIB add that such litigation could delay arbitral proceedings and increase costs for parties.

Argentina argues that if arbitrators can bind states to arbitration without consent and with no judicial review, international treaty costs will increase.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.

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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. BG Group argues that this question is one of procedural arbitrability that should be resolved by the arbitrators, not the courts.

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. 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. 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.

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. 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.

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. 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.

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.

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. 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. Argentina also argues that it is a common practice in international law for courts to determine the existence of a valid arbitration agreement. 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. 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.

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. 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. 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.

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. 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.

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. 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. Argentina points out that BG Group never presented an alternative basis for the tribunal’s jurisdiction in the proceedings below.

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. Argentina contends, however, that the UNCITRAL Rules allow the arbitrators to decide their jurisdiction subject to de novo judicial review. 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. 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.

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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.

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