The US Supreme Court decides BG v Argentina - right place, wrong road?

In a 7-2 majority decision on 5 March 2014, the United States Supreme Court has reinstated BG Group (BG)'s US$185 million arbitral award against Argentina.[1] The Supreme Court sought to clarify the delineation between "procedural" and "substantive" arbitrability issues in relation to pre-conditions to arbitrate. The Supreme Court found that a litigation pre-condition to arbitrate was procedural in nature, and that issues of arbitrability arising out of such a pre-condition were, therefore, for the arbitrators, not the courts, to decide. Although Article 8 of the Argentina-UK bilateral investment treaty (BIT) was a dispute resolution provision in a treaty between two sovereign nations, both the majority and the dissenters on the Supreme Court limited their analyses to principles of US commercial contracts law. All justices appeared to have found a common ground in their deliberate disregard of the rules of treaty interpretation under international law. In this respect, the decision of the District Court of Columbia that originally confirmed the award remains the only instance in the BG v Argentina US court saga that recognised the relevance of international law, and of its rules of interpretation under the Vienna Convention, in the context of treaty arbitration.

BG's investment in Argentina and the arbitration

As described in more detail in our previous blog post, BG invested in a company called MetroGas in Argentina in the 1990s. MetroGas had a 35 year exclusive electricity distribution licence in Buenos Aires and the right to charge tariffs that would provide investors a reasonable return. Then Argentina issued an emergency law which dramatically reduced the tariffs MetroGas could recover and established a renegotiation process for licence holders that 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 this emergency law for 180 days.

After negotiations with Argentina 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(2)(a) called for litigation in the Argentinian courts for 18 months as a pre-condition to arbitration. The arbitral tribunal reasoned that interpreting the 18-month litigation requirement as an absolute impediment to arbitration would allow “the state to unilaterally elude arbitration.” In light of Argentina's decree not to allow any litigation related to licensees to proceed within a period of at least 180 days, the arbitral tribunal found that to construe the BIT's pre-litigation condition as an absolute bar to arbitration, regardless of the host state's conduct, would lead to “the kind of absurd and unreasonable result proscribed by Article 32 of the Vienna Convention.” In December 2007, it dismissed Argentina's defences on jurisdiction and admissibility. The tribunal further found in BG’s favour in respect of BG's unfair and inequitable treatment claim, awarding BG around US$185 million in damages.

The battle in the US courts

The question before the US courts was whether it was for the arbitrators or the courts to appreciate whether the arbitration proceedings could proceed in light of the BIT's litigation condition. Argentina sought to vacate the award on the ground that the arbitrators lacked jurisdiction because Argentina only consented to arbitration after the 18-month pre-litigation condition was satisfied. The United States District Court for the District of Columbia rejected Argentina's argument and confirmed the award.[2] Argentina appealed to the Court of Appeals for the District of Columbia Circuit, and successfully reversed the District Court's decision.[3] The DC Circuit decided that the litigation requirement was a pre-condition to consent to arbitration, and, that it was therefore for the courts to determine whether an arbitration agreement existed prior to satisfaction of the litigation condition. The Court of Appeals further found that BG's failure to comply with Article 8(2)(a)'s litigation condition meant that Argentina had not consented to arbitrate.

BG filed a petition for certiorari, which the Supreme Court granted, despite a discouraging opinion from the US Solicitor General. At the same time as it recognized arbitration as a "critical element" of modern day bilateral investment treaties, quoting C. Dugan, D. Wallace, N. Rubins & B. Sabahi, the Supreme Court granted the petition "[g]iven the importance of the matter for international commercial[4] arbitration." The Supreme Court thus announces, from the outset, its deliberate choice disregard the international law component of treaties, and approach treaty obligations in the same way it would analyze any commercial obligation of a private party.

The US Supreme Court finds that litigation pre-conditions included in arbitration agreements are for the arbitrators, not the courts, to appreciate

In delivering the majority opinion of the court, Justice Breyer posed the question before the Supreme Court as follows:

"The question before us is whether a court of the United States, in reviewing an arbitration award made under the Treaty, should interpret and apply the local litigation requirement de novo, or with the deference that courts ordinarily owe arbitration decisions. That is to say, who – court or arbitrator – bears primary responsibility for interpreting and applying the local litigation requirement to an underlying controversy?"

The Supreme Court decided to answer the question in two steps. First, the Supreme Court treated the Argentina-UK BIT as if it were "a commercial contract between private parties." Second, it considered "whether the fact that the document in question is a treaty makes a critical difference."

A 7-2 majority of the Supreme Court enunciated the principles laid down in Howsam[5] and First Options[6], which established that, absent a provision to the contrary in the arbitration agreement, questions of whether the parties are bound by an arbitration clause (so-called substantive arbitrability questions) are for the courts to decide. In keeping with the same principles, the Supreme Court further reiterated that, conversely, parties "intend arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration" (so-called procedural gateway matters). On this basis, the majority viewed the 18-month litigation condition in Article 8(2)(a) of the Argentina-UK BIT as a "purely procedural requirement – a claims-processing rule that governs when the arbitration may begin, but not whether it may occur…". The majority found "nothing in Article 8 or elsewhere in the Treaty that might … demonstrate a contrary intent as to the delegation of decisional authority between judges and arbitrators."

Chief Justice Roberts and Justice Kennedy disagreed. The dissenting opinion, delivered by Chief Justice Roberts, considered that the BIT's litigation condition to arbitrate was not merely subordinate to arbitration, but rather constituted a condition precedent to the formation of the host state's agreement to arbitrate with an investor. The dissent accused the majority of acknowledging but failing to heed "the first principle that underscores all of our arbitration decisions: Arbitration is strictly 'a matter of consent'" – quoting Granite Rock[7], and reiterated the Supreme Court's precedents, which "presume that parties do not submit to arbitration the most important matter of all: whether they are subject to an agreement to arbitrate in the first place." And that determination, the justices considered, was for the courts, not the arbitrators to make.

But, for the BG v Argentina majority, consent to arbitrate was not at issue in the award under review. Justice Sotomayor sought to clarify in a concurring opinion that consent to arbitrate had nonetheless to be at the center of any analysis of a pre-condition to arbitrate. Justice Sotomayor agreed that, in this case, the Supreme Court was right to view the local litigation requirement as a procedural precondition to arbitration, not a condition on consent to arbitrate. But she insisted that the solution reached by the Supreme Court in BG v. Argentina could not be generalized to all procedural pre-conditions to arbitration as such pre-conditions could be set out by the parties as conditions on consent. She noted that the Supreme Court "wisely leaves for another day the question of interpreting treaties that refer to conditions of consent explicitly" or where the parties "silently intended to make [litigation] a condition on their consent to arbitrate."

The justices find a common ground in their deliberate disregard of international law, the applicable law of the "agreement"

Justice Sotomayor considered that a case-by-case analysis was particularly warranted in the context of a litigation pre-condition to arbitrate included in an investment treaty. In this regard, Justice Sotomayor is in agreement with the dissent's view that a treaty obligation to arbitrate "is no trifling matter for" a host state. Indeed, for both the concurring and the dissenting opinions, "the nature of the obligations" that a sovereign incurs when it "subjects itself to suits by private parties" is the distinguishing factor in analysing the arbitration provision in the treaty. Both opinions appear to show an implicit, but noteworthy, support for limiting access to investor-state dispute resolution systems: neither opinion mentions arbitration as an international law protection to which investors are entitled under the treaty. On the contrary, the dissenting opinion presents the host states' arbitration risk under quite a dramatic light. Host states are thus said to grant "private adjudicators, not necessarily of [their] own choosing, literally anywhere in the world, a power it typically reserves to its own courts."

In fact, in interpreting the arbitration provision in the Argentina-UK BIT, none of the dissenting, concurring, or majority opinions of the Supreme Court mentioned that Argentina and the UK undertook to participate in the neutral adjudication of investor-state disputes, and that such undertaking constituted an obligation of the states under international law, the law applicable to the document before the Supreme Court. Indeed, in interpreting the Argentina-UK BIT as if it were "a contract, though between nations," the Supreme Court did not rely on international law among the factors it weighed to reach its decision. It rather limited its interpretive methodology to "determining the parties' intent."

There was, nonetheless an opportunity for the majority to mention the relevance of international legal principles that determine treaty interpretation. A treaty between two nations called for an analysis of the extent to which, in the context of the Argentina-UK BIT, treaty law and contract law could lead to comparable results. Instead, the majority chose to shorten its quote of the BG v Argentina arbitral award, omitting, repeatedly throughout the majority's opinion, the tribunal's reference to the Vienna Convention[8]. The Supreme Court thus stayed firmly in the realm of US law, affording deference to the arbitrators' determination of the precondition to arbitration, but with a deliberate disregard of applicable principles of both private and public international law.

Both the majority and the dissent would have done well to adopt the approach taken by Judge Walton in the District Court of Columbia when the award was originally confirmed[9], giving deference to the arbitrators, as well as principles of treaty interpretation under international law.

Judge Walton correctly pointed out: "it is the arbitral panel's interpretation of the Investment Treaty, and not Argentina's (or this Court's) that controls the Court's analysis. Accepting, as it must, the arbitral panel's construction of the Investment Treaty, it is evident to the Court that Argentina was not compelled to arbitrate this dispute without its consent, and thus there was no violation of the principle set forth in Granite Rock."

Conclusion

Whilst the Supreme Court decision has secured the right headline result, it is disappointing that the justices did not regard as relevant the law applicable to the treaty, and thus resort to the relevant and useful interpretive tools provided by treaty law.

A version of this article has previously been published by Larry Shore, Amal Bouchenaki, Robert Rothkopf, Herbert Smith Freehills New York LLP on PLC Arbitration.

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[1] 572 U.S. ___(2014).

[2] 764 F. Supp. 2d 21 (DC 2011); 715 F. Supp. 2d 108 (DC 2010).

[3] 665 F. 3d 1363 (2012).

[4] Emphasis added.

[5] 537 US 79, 84 (2002).

[6] 514 U.S. 938, 942 (1995).

[7] 561 U.S. 287, 299 (2010) internal quotations omitted.

[8] The tribunal's full holding in the arbitral award was that, in the circumstances of the case, barring arbitration for 18 months when "recourse to the domestic judiciary is unilaterally prevented or hindered by the host State would lead to the kind of absurd and unreasonable result proscribed by Article 32of the Vienna Convention." The Supreme Court limited its citation to the terms "absurd and unreasonable result" without reference to the Vienna Convention.

[9] 764 F. Supp. 2d 21 (2011).