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August 14, 2012 Articles

Conditions Precedent to Commencing an International Arbitration

By Manjit Gill

Parties to international commercial transactions routinely expend significant time and resources negotiating the details of the relationship. Against this backdrop, the nations in which these transactions take place also have often negotiated a myriad of treaties that impact the procedural landscape for enforcing rights under these commercial transactions. Sometimes, the precise adherence to any procedural requirements set forth in these treaties may seem a waste of time or futile, and as a result, one of the parties to the transaction may instead elect to initiate the agreed-upon arbitral process to resolve the dispute, once and for all. Arbitration has long been recognized as a dispute-resolution mechanism to be encouraged. However, in the quest to resolve disputes by arbitration, can the rules that set forth the procedure to be followed before arbitration can commence be ignored, because one or both parties think that a particular procedural condition precedent to arbitration would be a waste of time? The District of Columbia Circuit recently answered this question with an emphatic no.

Republic of Argentina v. BG Group PLC
In Republic of Argentina v. BG Group PLC, No. 11-7021 (D.C. Cir. Jan. 17, 2012), the D.C. Circuit decided that the arbitral panel that resolved a dispute between BG Group, PLC, a British corporation and investor in certain Argentinean companies, and the Argentine government, brought pursuant to the Bilateral Investment Treaty between the United Kingdom and Argentina (BIT), overstepped its authority in hearing the dispute because of the parties' failure to first litigate the dispute in Argentina's courts for at least 18 months, as required by the BIT. Consequently, the D.C. Circuit reversed the order of the trial court, denying the Argentine government's motion to vacate the $185 million award and granting BG's cross-motion to confirm the award, and ultimately vacated the award.

The BIT articulated a precise procedural framework for initiating an arbitration of a dispute. Article 8(1) of the BIT provided that if the dispute could not be amicably resolved, a dispute between an investor under the BIT and the host state "shall be submitted, at the request of one of the Parties to the dispute, to the decision of the competent tribunal of the Contracting Party in whose territory the investment was made."

Article 8(2) of the BIT then articulated the preconditions for the initiation of arbitration under the BIT. If the parties to the dispute agree to submit it to arbitration, then the parties could proceed. Article 8(2)(b). Otherwise, the arbitration could only commence after one of two things happened: (a) either a competent tribunal in the host state has made a final decision on the dispute, but the parties are still in dispute; or (b) the tribunal has not made a final decision, and the dispute was submitted to that tribunal at least 18 months before one of the parties seeks to commence an arbitration of the dispute.

Around the time the BIT took effect, Argentina privatized Gas del Estado, the previously state-owned gas transportation and distribution company, and also established a currency parity of 1:1 between the Argentine peso and the U.S. dollar. Soon after, Gas del Estado was split up, and one of the offspring was a distribution company, MetroGAS. The Argentine government granted MetroGAS a 35-year exclusive distribution license for Buenos Aires, and this license provided that the tariffs for the gas would be determined in U.S. dollars, and that any adjustments to the tariffs would be made in accordance with the U.S. Product Price Index (PPI). BG purchased direct and indirect stakes in MetroGAS, and by 1998, owned more than 45 percent of the company.

In January 2002, in response to severe economic pressures in Latin America, Argentina enacted a series of laws and regulations. One of the laws eliminated the currency parity between the Argentine peso and U.S. dollar, prohibited tariff adjustments in agreements to be pegged to foreign price indices such as the PPI, and required tariff calculations to be done in pesos, not dollars. One of the regulations further provided a mechanism to renegotiate public-services contracts, but specifically did not extend this mechanism to licensees who sought to resolve any dispute they might have with the government through the courts or arbitration.

BG did not pursue a court action in Argentina against the Argentine government, but instead filed a notice of arbitration in April 2003, pursuant to Article 8(3) of the BIT. The Panel conducted the arbitration under United Nations Commission on International Trade Law  (UNCITRAL) rules, and in December 2007, nearly four and a half years later, the panel issued its award for damages of more than $185 million against the Argentine government, arising from the passage and application of the emergency legislation and regulation.

During the arbitration, to explain why it had not first availed itself of judicial remedies in Argentina, as required by Article 8(3) of the BIT, BG argued to the panel that it would take at least six years to resolve its claim against the Argentine government through the Argentine courts, and therefore the insistence on that avenue as a precondition to arbitration would be "senseless." Although the panel did not accept this argument, the panel nevertheless concluded that BG was not required to first pursue a judicial remedy in Argentina because the legislation and regulation enacted by Argentina "had restricted access to its courts and had excluded from the renegotiation process any licensee that sought redress," so a literal reading of Article 8(3) of the BIT (and its requirement of pursuing the judicial remedy for at least 18 months before initiating arbitration) "would produce 'an absurd and unreasonable result.'" Id. at *6, citing BG Group PLC v. The Republic of Argentina(2007).

The Argentine government petitioned the federal district court in the District of Columbia, the situs of the arbitration, to vacate or modify the award, and BG filed a cross-motion with the court to recognize and enforce the award. The district court denied vacatur and granted BG's motion to recognize and enforce the award. Republic of Argentina v. BG Group PLC, 715 F.Supp.2d 108 (D.D.C. 2010); Republic of Argentina v. BG Group PLC, 764 F. Supp.2d 21 (D.D.C. 2011). Argentina appealed that decision, and the matter was then before the District of Columbia Circuit.

The D.C. Circuit characterized the "gateway" question as being one of arbitrability. In other words, when did the contracting states to the BIT (the U.K. and Argentina) intend for an investor to be able to arbitrate a dispute without first adhering to the requirements in Articles 8(1) and (2) of the BIT? The court reasoned that this question could only be answered after determining who was authorized to answer that question in the first instance—the Argentine court or the panel, and the intent of the contracting parties to the BIT would control.

Citing to U.S. Supreme Court precedent, the D.C. Circuit articulated that a court should determine questions of arbitrability of a dispute "in the kind of narrow circumstances where the contracting parties would likely have expected a court to have decided the gateway matter . . ." Arbitrators themselves should decide questions of arbitrability only if "there is clear and unmistakable evidence that the parties intended for the arbitrator to decide the question of arbitrability . . ."

The D.C. Circuit then proceeded to examine Article 8(3) of the BIT. The court concluded, based on its "temporal analysis" of the article, that the provision set forth a procedure for conducting an arbitration in accordance with UNCITRAL rules, "but only after an Argentine court first has an opportunity to resolve the dispute." If Article 8(3) was properly triggered, the D.C. Circuit concluded that the BIT's incorporation of the UNCITRAL rules provided the "clear and unmistakable evidence" that questions of arbitrability should be resolved by the arbitrators. However, the D. C. Circuit continued that "the Rules are not triggered until after an investor has first, pursuant to Article 8(1) and (2), sought recourse, for eighteen months, in a court of the contracting party where the investment was made."

The D.C. Circuit noted that the BIT does not expressly address whether the parties to the treaty intended for a court or an arbitrator to determine issues of arbitrability where these two articles are not first followed by the party initiating the arbitration. Focusing on the language of the BIT, the D.C. Circuit noted that in Article 9 of the BIT, concerning the resolution of disputes between the states themselves under the BIT, the contracting states had provided for diplomatic discussions before resorting to the arbitration of disputes between the States themselves, and once the matter was before an arbitrator, the BIT provided that the tribunal "shall determine its own procedure." Because the BIT did not contain similar language in Article 8, the D.C. Circuit reasoned that this omission "underscore[d] the importance the contracting parties ascribed to Article 8(1) and (2), counseling against a reading that would render its requirements [to pursue litigation for at least eighteen months] inoperative."

While the D.C. Circuit was cognizant of the federal policy favoring the resolution of disputes by arbitration, the court nevertheless held that this policy cannot override the parties' contractual intent, and that intent, reflected in Articles 8(1) and (2) of the BIT, required litigation of the dispute in Argentine courts for at least 18 months prior to commencement of the arbitration. Because this did not occur, the D.C. Circuit vacated the award.

The Future?
The BG Group decision, while troubling for the investor who spent four and a half years before the tribunal to obtain a damages award from the Argentine government for the consequences of the enactment and application of the emergency legislation and regulation, nevertheless offers a clear reminder to international business actors and the counsel that represent them, that the virtues of swift resolution of disputes by arbitration are not sacrosanct. The parties must closely examine the contract from which the right to pursue arbitration arises and assure themselves that every precondition, no matter how potentially burdensome, is closely followed, lest the parties find themselves in a situation as BG did here, where the parties effectively attempted to resolve their dispute with the Argentine government in vain. Moreover, within an enforcement framework as currently exists for review of arbitral awards at the national level pursuant to the New York Convention, the parties necessarily leave themselves open to the uncertainty that a particular nation's courts will in fact refuse to enforce the award.

Keywords: litigation, alternative dispute resolution, BIT, award, vacated