On March 5, a majority of the US Supreme Court rendered a decision confirming that a court must apply a deferential standard of review to a tribunal’s determination of its own jurisdiction under a bilateral investment treaty (BIT) rather than reviewing the award de novo, at least where the respondent’s challenge to jurisdiction rested on procedural rather than substantive grounds.
The issue arose in BG Group v. Argentina,1 which concerned competing petitions for enforcement (BG) and vacatur (Argentina) of an award rendered in BG’s favor under the UK-Argentina BIT according to the arbitration rules of the United Nations Commission on International Trade Law (“UNCITRAL”). BG’s claims arose from what it claimed was the negative impact on BG’s investment in a natural gas distribution company in Argentina of laws passed by Argentina in 2001 and 2002 to address its financial crisis.
During the arbitration, Argentina argued, among other things, that there was no jurisdiction because BG had failed to comply with a provision of the BIT requiring investors to submit their claims to Argentine courts for resolution for at least 18 months prior to resorting to arbitration under the treaty. The tribunal found, however, that Argentina had effectively waived this requirement because it had taken a series of actions in 2002 allegedly making it more difficult for investors to obtain relief from Argentine courts, including issuing a decree staying execution of final judgments for 180 days, and initiating a renegotiation process that was only available to investors that were not in litigation or arbitration. The tribunal awarded BG US$185 million for breach of the fair and equitable treatment provision of the BIT.
In March 2008, BG filed a petition in the District Court for the District of Columbia requesting recognition and enforcement of the award under the New York Convention and the FAA. At the same time, Argentina petitioned the Court for vacatur of the award on the ground that the tribunal lacked jurisdiction. The District Court confirmed the award, but was reversed by the Court of Appeals for the District of Columbia Circuit.2 According to the DC Circuit, the tribunal’s jurisdiction must be determined de novo because the local litigation requirement was a condition to Argentina’s consent to arbitrate the dispute. The DC Circuit went on to find that Argentina’s actions had not waived that requirement, and that the tribunal therefore did not have jurisdiction to hear BG’s claims.
A majority of the Supreme Court reversed the decision of the DC Circuit because it found that the local litigation requirement in the BIT was a procedural one that determined when arbitration may begin, but not whether the parties had consented to arbitration. In reaching this conclusion, the Court first examined the issue as if the agreement to arbitrate were embodied in a contract, and then found that the fact that it was contained in a treaty did not change the analysis. Justices Roberts and Kennedy dissented from this decision, arguing that the fact that the instrument of consent was a treaty and not a contract was a crucial element of the analysis. Unlike a contract, a standing offer to arbitrate contained in a treaty was not a perfected agreement to arbitrate, because the investor is not a party to the agreement. In the view of the dissenting justices, Argentina’s standing offer to arbitrate disputes was conditional upon the fulfillment of the local litigation requirement, and BG could only accept that offer in the form it was given. Because the issue of jurisdiction raised by Argentina hinged on a question of consent to arbitration (and not a mere procedural requirement), the dissenting justices argued, it was an issue for the courts and not the arbitrators to decide. Thus, in their view, the tribunal’s award should be reviewed de novo. The justices did not, however, appear convinced by the Circuit Court’s conclusion that the tribunal had erred in finding that it had jurisdiction, noting that the Court seemed to have “simply taken it for granted” that BG’s failure to submit the dispute to the local courts rendered the award against Argentina invalid.
Practitioners in the arbitration community have welcomed the Court’s ruling as an important statement on the appropriate standard of review for investment treaty awards. The ruling should, moreover, provide comfort to investors who seek resolution of their disputes outside the ICSID context and may want to seek enforcement in the US. One reason investors frequently choose ICSID over other fora, such as arbitration under the UNCITRAL rules, is a perception that it may be more difficult to enforce an award under the New York Convention than under the ICSID Convention. The majority’s ruling in BG Group v. Argentina confirms that, unless there is a jurisdictional objection raising the issue of the parties’ consent to arbitrate, a US court should accord deference to such awards rather than reviewing them de novo. On the other hand, the Supreme Court’s distinction between “procedural” preconditions to arbitration and substantive conditions on the State’s agreement to arbitrate leaves substantial room for future debate on when preconditions are procedural, and when they are conditions to the State’s consent to arbitrate investment disputes under a treaty.