Cert petition in the BG v Argentina case: No support from the US Solicitor General

In the latest development in Argentina’s challenge of the BG Group v Argentina arbitral award, the United States Solicitor General ("SG") has argued that the United States Supreme Court should deny BG Group's petition for a writ of certiorari (the application to the US Supreme Court for an appeal of the US District Court's decision) (the "Petition").

In the SG's opinion, (1) the decision of the US Court of Appeals for the District of Columbia Circuit, reported at 665 F.3d 1363, had had been correct in ascertaining that it rather than the arbitral tribunal had jurisdiction to determine the gateway issue with regard to the 18 month litigation precondition in the UK-Argentina BIT; (2) the D.C. Circuit applied settled principles in determining a question of arbitrability by reference to the intent of the parties; (3) the decision did not conflict with decisions of other United States courts of appeals because all prior decisions were fact-specific; (4) the vacatur of the BG Group award was unlikely to have implications beyond the unusual circumstances of this case; and (5) because no modern treaty to which the United States is a party includes litigation as a precondition to arbitration, the D.C. Circuit decision did not implicate the interests of the United States. As a result, the SG considers that no further review by the US Supreme Court was warranted in this case.

In urging the Supreme Court to deny the Petition, the SG disregards the long-established distinction between “admissibility” and “jurisdiction” in international law, the long-established distinction between procedural and substantive admissibility in U.S. jurisprudence, and the threat that the D.C. Circuit decision poses both to treaty and commercial arbitration in the United States. The SG’s brief is truly a disappointment to arbitration practitioners, perhaps even more disappointing than the D.C. Circuit’s decision.

Cert petition in the BG v Argentina case: No support from the US Solicitor General

In the latest development in the BG Group v Argentina case, the United States Solicitor General ("SG") has opined that the BG Group's petition for a writ of certiorari (the application to the US Supreme Court for an appeal of the US District Court's decision) (the "Petition") should be denied.

Background to the case

During the 1990s, Argentina invited foreign investors to participate in the privatisation of various state assets. BG Group plc invested in MetroGas which had a 35 year exclusive electricity distribution licence in the City of Buenos Aires and the right to calculate tariffs in US dollars and express them in pesos. At that time, Argentina pegged its peso to the US dollar. However, during Argentina's financial crisis of 2001, an emergency law was enacted which changed these conditions significantly. Among other things, the peso-US dollar peg was withdrawn allowing the peso to devalue, and dollar-based tariffs were converted to peso-based tariffs at a rate of one peso to one dollar. These measures harmed the value of BG's investment. At the same time, the emergency law established a renegotiation process for licence holders but excluded participation of "any licensee that sought redress in an arbitral or other forum". In addition, the Argentinian government issued a decree excusing the country from compliance with judgments related to the emergency law for 180 days.

After negotiations with the state failed, BG commenced arbitration proceedings in Washington DC under Article 8 of the Argentina-UK BIT in April 2003 claiming among other things that Argentina had breached its obligation to provide fair and equitable treatment. Article 8 specified a precondition to arbitration, namely litigation in the Argentine courts for 18 months. Argentina challenged the arbitral tribunal's jurisdiction and the admissibility of Argentina’s claim on the basis, among other things, that BG had failed to comply with the precondition. The arbitral tribunal decided in December 2007 that it had jurisdiction and that BG Group’s claim was admissible. The tribunal found in BG's favour on the merits, awarding BG around USD185 million in damages.

Argentina sought to vacate the award in the US District Court for the District of Columbia challenging the arbitrators' jurisdiction. The District Court rejected Argentina's motion and confirmed the award. However, Judge Rodgers of the US Court of Appeals for the District of Columbia Circuit reversed the district court's judgment, vacating the award. The D.C. Circuit held that the Article 8 eighteen-month litigation requirement prior to commencing arbitration constituted a "temporal limitation" on Argentina's consent to arbitrate under the Treaty. Accordingly, without fulfilment of that precondition, the arbitral tribunal had lacked jurisdiction.

The D.C. Circuit disregarded the BG Group arbitral tribunal's concern that interpreting the eighteen-month litigation requirement as an absolute impediment to arbitration would allow "the state to unilaterally elude arbitration" and lead to "the kind of absurd and unreasonable result proscribed by Article 32 of the Vienna Convention.” The arbitral tribunal had viewed as essential Argentina’s and the U.K.’s commitment, under international law, to provide foreign investors with an effective forum in which their claims may be heard. According to the arbitral tribunal, strict application of Article 8’s litigation precondition would have left BG Group with no forum to assert its claims.

BG Group filed a petition for writ of certiorari which invites the US Supreme Court to consider whether it should review the decision of the US Court of Appeals for the District of Columbia Circuit. The Supreme Court requested the SG to submit an opinion with regard to the BG petition.

Why did the US Solicitor General not support BG's Petition?

In the SG's opinion, (1) the decision of the US Court of Appeals for the District of Columbia Circuit, reported at 665 F.3d 1363, had had been correct in ascertaining that it rather than the arbitral tribunal had jurisdiction to determine the gateway issue with regard to the 18 month litigation precondition in the UK-Argentina BIT; (2) the D.C. Circuit applied settled principles in determining a question of arbitrability by reference to the intent of the parties; (3) the decision did not conflict with decisions of other United States courts of appeals because all prior decisions were fact-specific; (4) the vacatur of the BG Group award was unlikely to have implications beyond the unusual circumstances of this case; and (5) because no modern treaty to which the United States is a party includes litigation as a precondition to arbitration, the D.C. Circuit decision did not implicate the interests of the United States. As a result, the SG considers that no further review by the US Supreme Court was warranted in this case.

Confined to its facts?

The recurrent theme in the SG’s brief is that the D.C. Circuit decision is fact-specific because it stems from “unusual circumstances.” Thus, in the SG’s view, even if wrongly decided, the D.C. Circuit decision will not affect judicial review of treaty and commercial arbitration cases in the United States. One important reason for this, the SG explains, is that the precondition to arbitration under Article 8(2) of the Argentina-UK BIT differs from most other preconditions to arbitration because it entails the obligation to litigate in the host State’s courts. Given that such a precondition is extremely unusual in modern treaties and particularly in treaties to which the United States is a party, the D.C. Circuit’s decision does not implicate the interests of the United States. Interestingly, in order to reach this conclusion, the SG has to disregard its own more general characterization of Article 8(2) as a “two-tiered system of dispute resolution” (SG brief at 3). The SG does not explain why the D.C. Circuit decision would have a limited impact on judicial assessment of other multi-tiered arbitration clauses.

Misapplication of settled principles: the distinction between procedural and substantive arbitrability

In asserting the DC Circuit's application of so-called "settled principles" in determining arbitrability, SG fails to recognize the Supreme Court’s distinction in John Wiley & Sons, Inc. v. David Livingston 376 U.S. 543 (1964), and then Howsam v. Dean Witter Reynolds, Inc. 537 U.S. 79 (2002), between substantive and procedural “arbitrability.” Despite the shortcomings of the Supreme Court’s terminology, this distinction reflects a consistent approach towards differentiating the review of threshold questions that implicate the parties’ consent to arbitrate (substantive) from those that do not (procedural), even if they are antecedent to the determination of the merits of an arbitral dispute.

The SG’s brief also evinces no understanding of the distinction made by international arbitral tribunals between jurisdiction over a claim and admissibility of a claim. The SG’s failure in this respect is all the more surprising considering the extensive treatment its brief accords to the specific content of international law in Argentina’s challenge of the BG Group award. The U.S. Government’s view, as expressed by the SG, is that even when a State-respondent’s standing offer to arbitrate is accepted, and therefore consent to jurisdiction is not at issue, a court, not the arbitral tribunal, has the authority to determine – as a matter of jurisdiction – whether a claim has complied with any preconditions and therefore is admissible. The SG further insists on the distinct nature of a litigation precondition to arbitration, and notes that none of the decisions following Howsam and First Options of Chicago v. Kaplan, 514 U.S. 938 (1995), “concerned a litigation requirement, much less such a requirement in a Treaty between sovereign States.” (SG brief at 15, 16).

However, the SG does not explain what makes the obligation to litigate in the host State’s courts for 18 months prior to initiating arbitration different from an obligation to negotiate or to pursue any particular conduct for a specified period of time prior to commencing arbitral proceedings. The arbitration experts, institutions, and practitioners who filed amicus briefs in support of the Petition saw no reason to differentiate “litigation” from other preconditions to arbitration.

Additionally, the SG fails to recognize that the Supreme Court in Howsam posited, as a general rule, that the arbitrator, not the court, is competent to adjudicate procedural arbitrability issues. Rather, the SG considers that the line of cases following Howsam is specific to the facts before the courts in each of those cases. And in the case of BG Group, the SG contends that Article 8(2) sets a “temporal limitation” to the parties’ consent to arbitrate. In its Amicus Brief, the American Arbitration Association (AAA) aptly notes the uncertainty that a “new ‘temporal limitation’ on the effectiveness of the UNCITRAL Rules” would create. (AAA 12). The SG seems not to appreciate the AAA’s concern that, “[given] the popularity of the UNCITRAL Rules and multi-tiered dispute resolution clauses, this expansion of judicial scrutiny” would create a dangerous precedent regarding the judicial scrutiny of preconditions to arbitration. The SG is content to hang virtually its entire position on Article 8(2) being sufficiently “unusual” so that the D.C. Circuit’s decision will not expand the regime of judicial review of multi-tiered clauses, whether governed by the UNCITRAL or other arbitration rules. This seems a highly questionable prediction.

While fact-specific, the decisions of U.S. courts on “arbitrability” have developed a pattern of rules that have provided a reasonable degree of predictability. However, the SG’s brief refuses to accept that the D.C. Circuit’s decision departs from the rules on allocation of authority between arbitral tribunals and courts to review threshold issues. Until the D.C. Circuit’s BG Group decision, U.S. courts had overwhelmingly considered procedural preconditions to arbitration as calling for an interpretation of the scope of the arbitration agreement, which the parties intended for the arbitrators to address. While a party resisting arbitration could characterize virtually any antecedent issue as a matter of consent, the courts have progressively limited court review to issues clearly involving the existence of a party’s intent to arbitrate. The SG ignores the reality that the D.C. Circuit has blurred the line between consent to arbitrate and scope of an arbitration agreement in a way that is very likely to be damaging to the United States as a seat for international arbitration. And none of the factors that are said to limit the D.C. Circuit’s decision to its “unusual” circumstances can counterbalance the uncertainty that the D.C. Circuit Court has created.

As indicated above, there is no basis for the SG’s confidence that the D.C. Circuit’s reasoning can be confined to the relatively few situations where the precondition to arbitration is litigating in the courts. Even if the precondition is a litigation requirement, the issue should still be for the arbitrators, as it entails interpretation of the scope and procedure of implementation of the parties’ agreement to arbitrate. Indeed, a precondition to litigate does not create an agreement to two fora for dispute resolution: the only forum in which parties to multi-tiered arbitration clauses agree to resolve their dispute is arbitration. When litigation is provided for as a preliminary step, the parties’ intent remains the submission of their claims for final resolution by the arbitrators. Thus, the nature of the precondition to arbitration does not – or at least should not – alter the arbitrability equation as established by the Supreme Court. The additional comfort offered by the SG that the D.C. Circuit’s BG Group judgment will remain limited to instances where a sovereign is a party ignores the fact that the D.C. Circuit itself did not identify the international law component of the case as being relevant to its analysis.

At odds with other major international arbitration centers

Finally, the SG disagrees that the “D.C. Circuit’s decision sets the United States unhappily apart from other major international arbitration centers. “ (AAA brief at 22). The SG notes that both the French and the English courts conduct de novo judicial review of jurisdictional decisions by arbitral tribunals. (SG brief at 19, fn.4). But the SG’s brief omits to mention that de novo review of jurisdictional decisions by those courts does not extend to arbitral findings of admissibility of claims. Further, while seeking to rely on Professor George Bermann’s analysis of the “gateway problem” in international commercial arbitration, the SG simply ignores the position developed by Professor Bermann and others in the Amicus Brief filed by Professors and Practitioners of Arbitration Law. The Professors’ brief rightly points out that “[t]he Petition provides an opportunity for this Court to make clear that arbitrators’ determinations of threshold questions that do not call into question the consent of the parties to engage in arbitration at some stage of proceedings are entitled to deference from the courts.” (Professors’ brief at 15).

Conclusion

The legal acumen of the SG cannot be doubted and yet this opinion is not the thoughtful support for BG's Petition that might have been expected. The D.C. Circuit decision at issue in the Petition is not only contrary to the well-reasoned opinions of the majority of other Circuit Courts, but it also revealed ignorance of, or at least lack of interest in, international law, the law applicable to the arbitral dispute.

In urging the Supreme Court to deny the Petition, the SG disregards the long-established distinction between “admissibility” and “jurisdiction” in international law, the long-established distinction between procedural and substantive admissibility in U.S. jurisprudence, and the threat that the D.C. Circuit decision poses both to treaty and commercial arbitration in the United States. The SG’s brief is truly a disappointment to arbitration practitioners, perhaps even more disappointing than the D.C. Circuit’s decision. 

A version of this article has also been published by Transnational Dispute Management.

For further information, please contact Laurence Shore, Partner, Amal Bouchenaki, Counsel, or Robert Rothkopf, Associate, or your usual Herbert Smith Freehills contact.