Supreme Court’s Decision In BG Group Clarifies The Standard Of Review For Investment Treaty Awards Rendered Under The UNCITRAL Rules

Wednesday, March 19, 2014 - 14:28

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, 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”).

In a bilateral investment treaty, or “BIT,” two countries undertake to provide certain protections and treatment with regard to investments made by nationals of the other country. BITs 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, and a guarantee of “fair and equitable treatment” of the investment. 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.

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. BG Group, a British company, was part of a consortium that held a controlling interest in MetroGAS, a gas distribution company created when Argentina privatized its gas utility. Argentina had 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.

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, leading to massive devaluation of the peso. These measures unilaterally changed dollar-denominated contracts, reducing their value by as much as 75 percent. In BG Group’s case, the laws fundamentally devalued gas tariffs, leading to significant losses for BG Group’s investment.

The BG Group Arbitration

BG Group initiated an arbitration against Argentina under a BIT between the United Kingdom and Argentina. Among other things, BG Group alleged losses resulting from Argentina’s alleged violation of the BIT’s guarantee of fair and equitable treatment.

BG Group initiated arbitration pursuant to Article 8 of the BIT. That section provides, in pertinent part, that disputes shall be submitted to arbitration “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.” An investor can also submit to arbitration if the dispute is ongoing even after litigating in domestic courts and obtaining a final decision. The BIT provides for arbitration before the International Centre for Settlement of Investment Disputes (“ICSID”) or pursuant to the UNCITRAL Rules. BG Group did not initiate litigation in Argentina’s domestic courts, and instead commenced the arbitration pursuant to the UNCITRAL Rules.

Argentina argued that the arbitral tribunal was without jurisdiction to hear the case because BG Group had not first litigated the dispute in Argentina’s courts for 18 months. The tribunal rejected this argument because Argentina’s own conduct excused BG Group from having to first litigate the dispute in Argentina. 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 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 and 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. 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 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 because the arbitrators “exceeded their powers” in hearing the dispute. See 9 U.S.C. § 10(a)(4). The District Court nevertheless confirmed the arbitration award in favor of BG Group.

On appeal to the Court of Appeals for the District of Columbia Circuit, the central issue was the proper standard of review applicable to the arbitrators’ interpretation of the 18-month provision in the BIT. Courts reviewing awards under the FAA 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 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 concerning delay or time limits, are generally for the arbitrator to decide and that determination will receive deference.

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 arbitrability to be determined by the court, and BG Group’s failure to bring a claim in the Argentine courts prior to arbitration meant that the tribunal could not hear the case and the award should be vacated.

The Supreme Court Decision

On appeal, the Supreme Court was likewise tasked with deciding whether the 18-month litigation provision in the BIT was a question of arbitrability, or whether it was instead a procedural precondition to arbitration. If the former, the de novo standard of review applied by the D.C. Circuit was appropriate. If the latter, then the arbitral tribunal’s decision was entitled to deference.

The Court 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.

The Court also determined that the fact that it was interpreting a treaty, rather than a private contract, should not change the analysis. The U.S. Solicitor General argued that the 18-month provision operated as a condition on the consent of each country to arbitrate disputes under the BIT. The Court 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.”

In applying a deferential standard of review to the tribunal’s decision, the Court reversed the D.C. Circuit’s ruling, finding that the tribunal did not exceed its powers and vacatur was not warranted.

Chief Justice Roberts’s dissenting opinion 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.” Article 8 of the BIT is a standing offer to arbitrate, and an investor must accept the offer according to its terms. 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 D.C. Circuit to make further findings.

Conclusion

The BG Group decision marks the Court’s first foray into interpreting BITs. Under the Court’s ruling, arbitration clauses contained in BITs should be interpreted according to the same principles as private arbitration agreements. The decision of the arbitrators 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 arbitral tribunals that have faced the issue.

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 considering the option to bring a claim under the UNCITRAL Rules, the decision offers certainty as to the standard of review a U.S. court will use upon a motion to vacate an award.

Philip D. Robben and Melissa E. Byroade 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. The views expressed in this article are the authors’ own and do not necessarily reflect the views of any client of the firm.

 

 

Please email the authors at probben@kelleydrye.com or mbyroade@kelleydrye.com with questions about this article.