The United States Supreme Court ruling on its first case involving international arbitration under a bilateral investment treaty, interpreted the treaty provisions as it would under a contact between two parties and determined that the arbitrators, not the courts, should decide procedural arbitrability questions. In doing so, the court affirmed the deference afforded by U.S. courts to decisions of arbitrators, even in the context of an international treaty. The case again highlights the critical need for precision in drafting dispute resolution clauses in contracts (and treaties).
Bilateral Investment Treaties
A bilateral investment treaty (“BIT”) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. BITs typically require that investors and their investments be treated as favorably as the host party treats its own investors and their investments, or investors and investments from any third country. The BIT generally affords this treatment for the full life-cycle of investment – from establishment or acquisition, through management, operation, and expansion, to disposition. Key features of BITs often include:
- Establishment of limits on the expropriation of investments and provide for payment of prompt, adequate, and effective compensation when expropriation takes place.
- Provision for the transferability of investment-related funds into and out of a host country without delay and using a market rate of exchange.
- Restrictions on the imposition of performance requirements, such as local content targets or export quotas, as a condition for the investment.
- The right to engage the top managerial personnel of their choice, regardless of nationality.
A key provision in many BITs give investors the right to submit an investment dispute with the government of the other party to international arbitration, thus avoiding possible litigation in that country’s domestic courts. Investors, as with contractors and others doing business abroad, are sometimes reluctant to submit claims to the local court systems. The BITs often allay these concerns by referring disputes to international arbitration under either United National Commission on International Trade Law (UNCITRAL) or International Center for Settlement of Investment Disputes (ICSID) arbitration rules. It is the BIT arbitration provision that provides the backdrop for the Supreme Court’s decision.
BG Group, PLC v. Republic of Argentina
The case arose out of a dispute between BG Group, a United Kingdom company, and Argentina, under a 1990 BIT between the two countries. The treaty provides the general protections for investors noted above. With respect to dispute resolution, the treaty authorizes either party to submit a dispute “to the decision of the competent tribunal of the Contracting Party in whose territory the investment was made” –i.e., the local courts. It provides for arbitration “(i) where, after a period of eighteen months has elapsed from the moment when the dispute was submitted to the competent tribunal . . ., the said tribunal has not given its final disposition; [or] (ii) where the final decision of the aforementioned tribunal has been made but the Parties are still in dispute.”
BG Group acquired a majority stake in an Argentine gas distribution company in the early 1990s resulting from the government’s privatization of its state-owned gas utility. The Argentine company was awarded a 35 year exclusive license to distribute gas in Buenos Aires. Argentina also enacted statutes that required its regulators to calculate gas tariffs in U.S. dollars and to set levels to ensure reasonable returns on investment.
In the early 2000s, Argentina faced economic crisis and enacted new laws changing the basis for the gas tariffs from dollars to pesos, the local currency, and set an unreasonable exchange rate. The result was that BG Group lost much of its investment. In 2002, the President of Argentina issued a decree staying for 180 days the execution of its courts’ final judgments in suits claiming harm as a result of the new economic measures. In addition, Argentina established a “renegotiation process” for public service contracts (including the license for the distribution of gas in Buenos Aires), but barred from participation in the process firms that were litigating against Argentina in court or arbitration.
In 2003, BG Group, under the BIT, sought arbitration claiming that Argentina’s new laws and regulations violated the treaty’s provisions against expropriation of its investment and requiring “fair and equitable” treatment of investors. The parties appointed an arbitration tribunal and agreed to Washington, DC as the site of the arbitration. Argentina denied the claims and asserted that the tribunal lacked jurisdiction to hear the dispute because, among other reasons, BG Group initiated arbitration without first litigating the claims in Argentina’s courts.
The arbitration tribunal issued a decision in December 2007 finding that it had jurisdiction and awarding BG Group US $185 million. With respect to BG Group’s failure to initiate litigation first, the arbitrators found that Argentina’s own conduct had waived or excused the litigation requirement through its decrees and regulations relating to the courts and the renegotiation process. While these measures did not make litigation in the Argentine courts literally impossible, the arbitrators found that requiring compliance under these circumstances would lead to “absurd and unreasonable result[s].”
Both sides filed petitions for review in Federal District Court in the District of Columbia – BG Group sought to confirm the award under The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (The New York Convention) and the Federal Arbitration Act. Argentina sought to vacate the award in part on the ground that the arbitrators lacked jurisdiction because of BG Group’s failure to first initiate litigation in the Argentine courts (under Section 10(a)(4) of the Federal Arbitration Act, a federal court may vacate an award “where the arbitrators exceeded their powers.”).
The District Court affirmed the award and denied Argentina’s petition to vacate. The Court of Appeals for the District of Columbia Circuit reversed, finding that the interpretation of the treaty provision for local litigation was a matter for the courts to decide de novo, i.e., without deference to the views of the arbitrators. The Court of Appeals went on to decide that the circumstances did not excuse BG Group’s failure to comply with the treaty requirement. Because of BG Group’s failure to initiate litigation and wait 18 months, the arbitrators lacked jurisdiction and the appeals court vacated the award. The U.S. Supreme Court granted BG Group’s petition for certiorari, “[g]iven the importance of the matter for international commercial arbitration.”
Supreme Court Decision
The question before the Court was simply who – as between the courts or the arbitrators – bears responsibility for interpreting and applying the arbitration provision and the local litigation requirement. The Court conducted its analysis of the question in two stages. First, the Court treated the arbitration provision before it as if it were an ordinary contract between two private parties. The Court then analyzed whether the fact that the arbitration provision at issue was included in a treaty as opposed to a contract made a substantive difference.
With respect to the question of private contracts for arbitration, the Court noted that it is up to the parties to determine whether a particular matter is for the arbitrators or the courts to decide, as the parties are free to structure their contractual affairs as they see fit. Where the arbitration agreement is silent, the courts generally presume that substantive matters of arbitrability are left to the courts, including such matters as “whether the parties are bound by a given arbitration clause” or “whether an arbitration clause . . . applies to a particular type of controversy.” On the other hand, the Court noted that courts will presume that the parties intended the arbitrators, not the courts, “to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration”, including claims of waiver or delay and the satisfaction of prerequisites “such as time limits, notice, laches, estoppel and other conditions precedent” to arbitrate.
Utilizing those guidelines and presumptions, the Court found that the litigation provision in the arbitration clause before it was “a purely procedural requirement – a claim-processing rule that governs when the arbitration may begin, but not whether it may occur or what its substantive outcome will be on the issues in dispute.” Thus, the Court determined, the local litigation requirement, if this were an ordinary contract, would be interpreted and applied by the arbitrators.
With respect to the second part of the analysis – whether it makes a difference that the arbitration provision at issue is contained in a treaty as opposed to a contract – the Court answered in the negative. A treaty is simply a contract between nations and, like a contract, its interpretation is a matter of determining the parties’ intent. The treaty did not evidence any contrary intent to the normal presumptions about who should decide threshold arbitrability issues and thus the arbitrators hold that power, with a very deferential court review. The Court then conducted a very brief review of the arbitration tribunal’s decision regarding the litigation requirement and found that the arbitrators “did not ‘stra[y] from interpretation and application of the agreement’ or otherwise ‘effectively dispens[e]’ their ‘own brand of . . . justice.’” The Supreme Court thus reversed the Court of Appeals and reinstated the award in favor of BG Group.
The Supreme Court’s decision underscores the special place arbitration occupies in the United States’ legal structure. Courts have and will continue to generally defer to the decisions of arbitrators absent a specific contractual limitation on the arbitrators’ authority. Even in the area of investor-state arbitrations, the courts will apply standard contracting principles to the interpretation of arbitration clauses. The decision also highlights the critical importance of drafting and negotiating arbitration provisions. Whether courts or arbitration tribunals will hear and decide questions of arbitrability and preconditions to arbitration needs to be planned and addressed during the contract negotiation – when the parties are free to bargain for the system that works best for their circumstances.