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The BG Group obtained a $185 million judgment against Argentina from The World Bank's International Centre for Settlement of Investment Disputes, but Argentina obtained a reversal from the DC Circuit Court of Appeals. (Photo: The World Bank)
Wednesday, November 6, 2013

Arbitration Threat: BG Group v. Argentina

Will the US Supreme Court threaten or uphold the viability of international arbitration as a neutral and impartial forum for dispute resolution free from undue interference by national courts?


On December 2, 2013 the US Supreme Court will hear oral arguments in BG Group v. Argentina, addressing for the first time the applicable rules when a US court reviews an international arbitral award made under a bilateral investment treaty. This case has earned the attention of the international arbitration community, given its potential impact on future arbitral practice in the United States and abroad.

The BG Group case stems from an investor-state arbitration in which BG Group, an investor based in the United Kingdom, obtained a $185 million judgment against Argentina; one of the many investment arbitrations filed against Argentina in the wake of its economic collapse in 2001. Foreign investors allege that the emergency laws passed by Argentina to stabilize its economy cost them millions. 

BG Group initiated arbitration pursuant to the dispute settlement clause in the UK-Argentine Bilateral Investment Treaty, which includes a provision requiring investors to submit their disputes to local courts for a period of 18-months; a step BG Group did not take. Despite this failure, the arbitral tribunal asserted jurisdiction, finding the 18-month provision was procedural in nature and compliance with the provision could be excused as futile. The nature of these temporal provisions as either substantive barriers to jurisdiction or procedural hurdles capable of circumvention is well-traveled within international arbitral jurisprudence with tribunals split on the issue.

After the issuance of the award in favor of BG Group, Argentina obtained a reversal from the DC Circuit Court of Appeals, which recasted the issue as a threshold question of “arbitrability.” The DC Circuit reasoned that BG Group’s noncompliance with the 18-month provision was a condition precedent to arbitration, raising the substantive question of whether or not there was an agreement to arbitrate in the first place. Applying the US Supreme Court’s holding in First Options of Chicago v. Kaplan, 514 U.S. 938 (1995), the DC Circuit found that because there was no “clear and unmistakable evidence” of an intention to arbitrate this issue, it was a question for the court to review de novo.  The DC Circuit relied on US domestic arbitration precedent without considering the applicability of the Vienna Convention, in determining the parties intended that a court rather than an arbitrator decide the question of arbitrability.  The DC Circuit held that there was no intention to arbitrate absent compliance with the 18-month local litigation provision and vacated the award.

The US Supreme Court granted certiorari to address the following question: “In disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been met?” 06-14-2013 U.S. Sup. Ct. Actions 3.  If the court addresses the question in the first instance, then its review is de novo, but if the arbitrator is required to decide, then the court’s review of the arbitrator’s decision is based on the deferential standard  set out in Art. 10(a)(4) of the Federal Arbitration Act (FAA). 

The resolution of the applicable standard of review is often outcome determinative, as courts rarely vacate decisions when applying the FAA’s deferential standard of review. Not surprisingly, BG Group argues in its brief that the tribunal’s decision should be afforded deferential review pursuant to Art. 10(a)(4) of the FAA.  An important part of BG Group’s argument to this end is its characterization of the 18-month provision as one of procedural rather than substantive arbitrability.

For some, this case potentially threatens two core principles of international arbitration: (1) that arbitral tribunals are empowered to make determinations about their own jurisdiction, and (2) that the arbitration process be free from interference by national courts. This tension is borne out by the amicus briefs filed. In each of their respective briefs, arbitration practitioners and professors, the American Arbitration Association, and the Council for International Business  argue that the DC Circuit lacked the authority to review arbitrability de novo and that a deferential standard should apply in conformity with international norms and comity. Though these amici argue the irreconcilability between the nature of investment arbitration as the product of treaty and international law, and a precedent would subject tribunal decisions on jurisdiction to de novo review under domestic law; they also highlight the disruption it would cause to an established legal order.

The Council for International Business describes how such a precedent could “wreak havoc on the settled expectations” that jurisdiction be decided by tribunals, not courts. The AAA notes similarly that the District of Columbia has adopted the Revised Uniform Arbitration Act which states explicitly that arbitrators shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable. Revised Uniform Arbitration Act, Art. 45C, § 1-569.6(c).

The implications of BG Group for international arbitration practice in the United States are substantial. Practitioners and academics are justifiably wary of intervention by national courts in the arbitral process to decide de novo questions of arbitrability unless the arbitration provision expressly bars the arbitrator from deciding upon his or her own jurisdiction under the doctrine of competence-competence. Such a development could threaten the viability of international arbitration as a neutral and impartial forum for dispute resolution free from undue interference by national courts.

John Jay Range and Gustavo Membiela are partners in the Latin America, business litigation and international arbitration and transnational practices of Hunton & Williams. Associate Ramon Hernandez  also contributed to this article, which was written for Latinvex.

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