Placing New Focus on Clear Prerequisites to Arbitration in Bilateral Investment Treaties

In an opinion issued in BG Group PLC v. Republic of Argentina, 134 S. Ct. 1198 (2014), the United States Supreme Court found that a prerequisite to arbitration was a procedural issue to be decided by the arbitration panel and not an issue for the courts to decide. In effect, the opinion reinstated the award by an arbitration panel of $185 million in favor of the British firm, BG Group, PLC and against the Republic of Argentina. 

In the early 1990s, BG Group was a part of a consortium that became the successful bidder to purchase a controlling interest in a state-owned gas utility in Argentina named MetroGAS. Argentina had awarded MetroGAS a 35-year exclusive license to distribute natural gas in Buenos Aires. At the time, Argentina had enacted statutes providing that its regulators would calculate gas tariffs in U.S. dollars and that those tariffs would be set at rates sufficient to allow gas distribution firms a reasonable return. 

In 2001 and 2002, however, Argentina faced an economic crisis and enacted new laws, changing the basis for calculating gas tariffs from dollars to pesos, at a rate of 1 peso per dollar, at a time when the exchange rate was 3 pesos to the dollar. As a result, MetroGAS’ profits quickly became losses. 

BG Group sought arbitration, invoking an investment treaty that had been executed by the United Kingdom and Argentina, which applied to disputes between one of those nations and an investor from the other. Article 8 of the treaty authorized either party to submit a dispute to a competent tribunal of the country in whose territory the investment was made. Article 8 also provided for arbitration if, eighteen months after the dispute had been submitted to the tribunal, no decision had been made or if the decision had been made but the parties were still in dispute. 

The parties chose arbitrators and those arbitrators conducted hearings on both the substance of the dispute, as well as the arbitrators’ “jurisdiction” to hear the dispute. Argentina had claimed that BG Group’s failure to first seek relief in an Argentine court prevented the arbitrators from exercising jurisdiction over the dispute. The arbitrators found that they had jurisdiction, noting among other things that Argentina had limited access to its court system for parties injured by the economic measures, and that requiring a private party to seek relief in Argentina’s courts for eighteen months would lead to “absurd and unreasonable result[s].” The arbitrators also found in favor of BG Group on the merits and awarded it $185 million in damages. 

Both parties filed petitions for review in the United States District Court for the District of Columbia, as the locus of the arbitration had been in Washington, D.C. BG Group sought to enforce the arbitral award under the New York Convention and the Federal Arbitration Act, and Argentina sought to set aside the award in part on the ground that the arbitrators lacked jurisdiction. The Court confirmed the award, but following an appeal, the United States Circuit Court for the District of Columbia Circuit reversed that decision. The appellate court found that the application of the precondition to arbitration—litigation in Argentina’s courts—was a matter for the courts to decide, and it gave the arbitrators’ decision no deference. It found that the circumstances did not excuse BG Group’s failure to comply with the requirement, and as a result, the arbitrators lacked authority to decide the dispute. BG Group sought review before the United States Supreme Court on the question of whether the application of the precondition was a matter for the arbitrators or the courts to decide. 

The Supreme Court first decided that it would interpret the bilateral investment treaty as it would interpret a contract. It held that courts usually presume that the parties intend arbitrators to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration, while courts may presume that the parties intend courts to decide questions concerning whether an arbitration clause applies to a particular controversy. Since the issue in this case was of the former variety—a dispute about a precondition to arbitration, not whether there is a duty to arbitrate at all—if the treaty were a contract, the Court found that the parties would have intended that arbitrators would decide the issue. 

Next, the Court considered whether the document being a treaty instead of a contract made a difference in its analysis. The Court found that the language of the treaty did not evidence an intent other than that the arbitrators would decide procedural issues. Thus, the usual presumption that the parties intended arbitrators to decide those procedural issues applied. The Court left open the question whether treaties that contain conditions of consent, as some do, would compel a different result. Since the issue was one to be decided by the arbitrators, the Court held that it should grant the arbitrators a great level of deference in their decision as to their own authority to hear the dispute. 

Having decided what level of review to grant the arbitrators’ decision, the Court proceeded to consider whether the arbitrators had correctly decided whether the precondition to arbitration should be forgiven. The Court found that the arbitrators’ decision was lawful, and even though the Court may not have decided the issue the same if it were presented to it initially, it could not say that the arbitrators’ decisions were barred by the treaty. Thus, the Court reversed the decision of the Court of Appeals and in effect, reinstated the award in BG Group’s favor. 

The decision certainly warrants review by parties negotiating bilateral investment treaties. If those parties wish to deviate from the courts’ presumptions about whether arbitrators or courts should decide prerequisites to arbitration, they should make that clear in the treaty. But the same principle applies to parties negotiating a contract containing an arbitration clause. If there is a preference whether courts or arbitrators decide issues concerning prerequisites to arbitration, those parties should clearly state their intentions within the arbitration clause, so that the focus can be on the substance of the dispute and not on preliminary questions of the authority to hear the dispute.