On December 2, 2013, the US Supreme Court heard oral arguments in BG Group PLC v. Republic of Argentina.  The case concerns an arbitration award issued in December 2007 that was set aside in 2012 by the U.S. Court of Appeals for the District of Columbia Circuit.  This is the first time that the US Supreme Court has considered an issue relating to an investment treaty arbitration. 

Investment treaty arbitrations are largely based on bilateral or multilateral investment treaties (BITs and MITs, for short) such as NAFTA, the Energy Charter Treaty or, as in the BG Group arbitration, a BIT between two countries.   Investment treaties are intended to provide investors protection against expropriation without compensation and discrimination, and secure to investors the right to fair and equitable treatment. Other rights that may be included in these agreements are, for example, the right to most favored nation and national treatment. Generally, the host state will also agree to honor comparable commitments, such as contractual commitments.

Investment treaties also typically (but not always) provide the investor the option to enforce its claims in an international arbitration without the need to reach a separate agreement with the host state. Unless specifically required by the treaty, the investor does not have to first seek redress in the host state. Since national courts are often subject to political influence, this represents a significant advantage particularly given that international arbitral awards are almost universally enforceable and in most cases only subject to very limited review by the enforcing court.

Dispute betweeen Argentina and the UK

The investment treaty at issue in the BG Group arbitration was between Argentina and the United Kingdom and provided that “[d]isputes with regard to an investment…shall be submitted, at the request of one of the Parties” to local courts.  If after 18 months there has been no “final decision” or the parties are “still in dispute”, the dispute “shall be submitted to international arbitration”.  Argentina-U.K. BIT, Articles 8(1) and (2). 

A dispute arose between the parties with respect to an “Emergency Law” enacted by Argentina in 2002.  Neither BG Group nor Argentina submitted the dispute to local courts.  Instead, in 2003, BG Group submitted the dispute directly to arbitration, and the tribunal granted it an award of damages in an amount of US $185 million.  The tribunal also concluded that Argentina had enacted further laws that discriminated against companies that brought local court litigation relating to the Emergency Law, and that Argentina also enacted legislation staying any such local litigations.  The tribunal noted that all of these laws were in effect when BG Group commenced its arbitration, and also when the arbitral tribunal reached its award.   The arbitrators therefore decided that it would have been unreasonable to deny BG Group access to arbitration under these circumstances notwithstanding its failure to commence local court proceedings. 

The DC Circuit Court disagreed, decided that BG Group had failed to exhaust its remedies, and concluded that the parties would have expected the courts rather than the arbitral tribunal to determine the significance of the investor’s alleged failure to comply with treaty requirements.

Wrong on the merits

The US.Supreme Court appears to disagree with the DC Circuit.  Although Justice Kennedy first suggested that the issues presented a “close case”, he also stated that he believed that the DC Circuit was probably “wrong on the merits”.  Justice Ginsburg seemed moved by the fact that the arbitrators would, in any event, decide the merits of the dispute, and not the courts.  That is, even if the treaty contained a pre-condition to arbitration that required an investor to commence litigation, no matter the outcome, the investor would be entitled to arbitrate the dispute. It would the arbitrators’ decision – and not any decision reached by the court – that would be determinative.  Justice Alito noted that something that “serves virtually no purpose [is] unlikely to be a condition of consent”, and therefore should not bar access to arbitration.

The Justices also suggested that the DC Circuit incorrectly treated this case as if there was no agreement to arbitrate at all if BG Group did not file a local court action, and that not only BG Group, but also Argentina could have submitted the dispute to the court. Argentina responded that it was not “required” to submit the dispute to the local courts, an answer that did not appear to convince the Justices. 

Argentina also conceded that if the judges of its court were on strike and the clerk’s office was closed (a hypothetical posed by Justices Ginsburg and Kennedy), then an investor would only have to demonstrate that it “did everything it could to comply”.  Argentina admitted that, under those circumstances, BG Group would not have been required to litigate for 18 months in order to activate Argentina’s consent to international arbitration.  In response to this answer, Justice Kennedy noted that Argentina’s “whole argument….gives me intellectual whiplash”.

In the end -- while this may be a “close case” -- if the Justice’s questions and reactions are any indication, the U.S. Supreme Court can be expected to decide later this year that international arbitrations should follow the same standard that applies to domestic arbitrations.  That is, that the question of arbitrability should be decided by the arbitrators, not a court. 

Lisa Richman is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She focuses her practice on international arbitration matters.