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The US Supreme Court upheld a 2007 ruling that compensates BG for its losses at MetroGas in Argentina. (Photo: Argentine Planning Ministry)
Timothy Nelson, a partner and international arbitration lawyer at Skadden, Arps, Slate, Meagher & Flom.
Wednesday, March 12, 2014
Special Reports

Argentina & BG: SCOTUS Reaffirms Arbitration Rights

The US Supreme Court reaffirms deference to arbitrators.


The decision by the US Supreme Court to reinstate a 2007 arbitration award against Argentina and for UK-based BG Group is being welcomed by arbitration lawyers. 

The dispute hails back to Argentina’s 2001 crisis when the government froze gas prices, causing BG to lose substantial amounts in its 45 percent investment of local company MetroGas. Arguing that the move broke the UK-Argentine investment treaty, BG fought to get compensated. 

In 2007, the International Chamber of Commerce International Court of Arbitration – following rules from the United Nations Commission on International Trade Law (UNCITRAL)  -- ruled that Argentina should pay BG Group $185.3 million.

However, in January 2012 a Washington DC federal appeals court threw out the ruling.  In a 7-2 vote last week, the Supreme Court said the federal appeals court should not have thrown out the ICC award.

“The reversal of the D.C. Circuit's decision in BG Group, and the reinstatement of the UNCITRAL Tribunal's 2007 award, marks an important re-affirmation by the Supreme Court of the principle expressed in its Howsam decision of 2002 – namely, that when arbitrators are given the power to determine questions of "arbitrability," the courts should give deference to the arbitrators' decisions,” says says Timothy Nelson, an international arbitration lawyer at Skadden, Arps, Slate, Meagher & Flom.

Notably the court's opinion is written by Justice Stephen Breyer, who authored the Howsam decision and  Breyer was also among the judges who asked the most questions during the December oral argument, he points out.

“The Court has strongly affirmed the principle of kompetenz-kompetenz in international arbitration, and UNCITRAL arbitration in particular,” Nelson says.  In the specific context of investor-state arbitration, it held that "[]international arbitrators are likely more familiar than are judges with the expectations of foreign investors and recipient nations regarding the operation of [a BIT]."   

The Supreme Court cites the amicus brief submitted by a group of international law practitioners and academics – who had warned of the potentially deleterious impact of the D.C. circuit's ruling on U.S.-based international arbitration.  “The Court's reversal of the D.C. Circuit's decision appears to fully address those concerns,” Nelson says.

The crux of the majority opinion is the passage that decides that the "18-month" rule in Article 8 of the BIT is a "forum-specific procedural gateway" requirement, which the arbitrators have the power to decide – a conclusion it reached by analogy with domestic contracts.  “Once the Supreme Court characterized Article 8 in this manner, reversal was inevitable,” he says.

Notably, the majority opinion frames the questions primarily in terms of private "contractual" issues, i.e., it construes the Treaty on the assumption it were a private contract, and only addresses the issue of treaty interpretation after it has already engaged in a contract analysis.  The dissent of Chief Judge Roberts sharply criticizes this approach. 

“Nevertheless, the latter parts of the Court's opinion do contain some important statements about international arbitration, and investor-state arbitration in particular,” Nelson says. 

It cites the principle of kompetenz-kompetenz as enshrined in Article 23 of the UNCITRAL Arbitration Rules and Article 41 of the ICSID Convention, and indicates that the D.C. Circuit should recognize this principle in giving deference to the BG Group tribunal's findings on jurisdiction – including in particular that the 18-month litigation rule had been rendered inapplicable in this case, by reason of Argentina's measures curtailing access to domestic courts. 

“The Court concludes that the BG Group tribunal had not exceeded its power in determining that the dispute was arbitrable,” Nelson says.  

The concurrence by Justice Sotomayor explores an issue not fully reached by the majority, namely, whether a treaty that explicitly imposes pre-conditions to a sovereigns' "consent" to arbitration (something not present in this case) should be construed in a different manner.  “This point is potentially a matter for further debate if and when such a treaty dispute reaches the Court,” he says. 


Meanwhile, the dissent by Chief Justice Roberts frames the issues in a completely different manner to the majority.  Embracing the view posited by Argentina's counsel on appeal, he construes Article 8 of the BIT as being a conditional, unilateral offer to arbitrate with private investors – which can only become effective if the private investor fulfills those conditions. The issue is one of "contract formation," not arbitrability – and if the conditions are not fulfilled, there simply is no arbitration agreement.  The "formation" issue is for the courts to decide.  

“Critically, however, even the dissent refuses to endorse the analysis of the D.C. Circuit on whether the dispute was properly arbitrable,” Nelson says.  “Chief Justice Roberts describes the reasoning of the D.C. Circuit on this issue as "perfunctory," and would have remanded the case for a substantive analysis by the courts of whether Argentina's conduct, in precluding access to its own domestic courts, had frustrated fulfillment of the 18-month rule.” 

Both the majority opinion and dissent are revealing in terms of the international authorities cited, he points out.  These include treaties by Gary Born, Christophe Schreuer and Jeswald Salacuse, as well as various treaty texts and decisions.  Only the dissent engages in a substantive discussion of past BIT decisions on the 18-month rule (and only cites those decisions that support the ultimate annulment of the case).  

“None of the opinions address the alternative argument put forward by BG Group on jurisdiction, i.e. that the "Most Favored Nation" clause in the U.K.-Argentina BIT could potentially have excused compliance with the 18-month requirement,” Nelson says.  “This issue has caused widespread discussion and controversy in ICSID and BIT circles.” 

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