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May 22, 2014 Articles

Review by U.S. Courts of Investment Treaty Awards

By William B. Panlilio

In its first case involving investment treaty arbitration, the U.S. Supreme Court in BG Group PLC v. Rep. of Argentina, 134 S. Ct. 1198 (2014), addressed the question of whether it is primarily for arbitrators or the courts to interpret and apply a local litigation requirement enshrined in a bilateral investment treaty between two sovereign nations. Related to that question is the issue of which standard of review U.S. courts should adopt with respect to investment treaty awards. Specifically, should courts review those awards deferentially, as they would if arbitrators had the primary authority to interpret and apply the local litigation requirement, or should courts undertake a de novo review of the arbitral award, as they would if the local litigation requirement was primarily for courts to interpret and apply?

At the heart of the dispute, was the interpretation of a pre-arbitration local litigation requirement in the bilateral investment treaty between the United Kingdom and Argentina. See Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Republic of Argentina for the Promotion and Protection of Investments, U.K.–Arg., Dec. 11, 1990, 1765 U.N.T.S. 33. Article 8 of the treaty required disputes that have not been settled amicably between any contracting party (that is, the United Kingdom or Argentina) and an investor to be submitted to "the decision of the competent tribunal [that is, the local courts] of the Contracting Party in whose territory the investment was made." The dispute shall then be submitted to international arbitration as requested by one of the parties if the local court had not made a final decision within 18 months or if the parties are still in dispute even after the local court had made a final decision.

The case involved BG Group, a British firm that was a member of a consortium that acquired a majority interest in MetroGAS, an Argentine entity with an exclusive license to distribute natural gas in Buenos Aires. When the Argentine government privatized its state-owned gas utility, MetroGAS was one of the entities that acquired that utility's assets, which included a 35-year exclusive natural gas distribution license. At the time of BG Group's investment, Argentine law provided that gas "tariffs" were to be calculated in U.S. dollars and to be set at levels sufficient to ensure that gas distribution firms had a reasonable rate of return.

Beset by an economic crisis in 2001 to 2002, Argentina enacted measures that changed the basis of calculating gas tariffs from dollars to pesos at a rate of one peso per dollar. However, the exchange rate at the time was three pesos to a dollar, thus transforming any of MetroGAS's profits into losses. In 2003, BG Group invoked Article 8 of the treaty and sought arbitration against Argentina, which agreed with BG Group to site the arbitration in Washington, D.C.

After the conclusion of extensive briefing and arbitral proceedings, the arbitral panel reached a final decision in December 2007. The panel determined that it had jurisdiction over the dispute because (1) BG Group was an investor under the treaty and its interest in MetroGAS constituted a treaty-protected investment, and (2) Argentina's conduct had waived Article 8's local litigation requirement. Relevant to (2) was the issuance by the president of Argentina of a decree staying the execution of courts' final judgments and injunctions in suits where harm was the result of the enacted emergency economic measures, and the government's establishment of a renegotiation process for public service contracts, a process that firms that were litigating against Argentina in court or arbitration were barred from participating in. The arbitral panel also awarded $185 million in damages because it concluded that Argentina had expropriated BG Group's investment and denied fair and equitable treatment to BG Group.

In March 2008, BG Group asked the U.S. District Court for the District of Columbia to confirm the award under the New York Convention and the Federal Arbitration Act. See New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38; Federal Arbitration Act 9 U.S.C. § 1 et seq. Argentina cross-moved to vacate the award, arguing that the arbitrators lacked jurisdiction. The district court confirmed the award, and on appeal, the D.C. circuit reversed. The circuit court concluded that the interpretation and application of Article 8's local litigation requirement was a matter for courts to decide de novo, without deference to the arbitrators' decision.

In overturning the D.C. circuit's decision, the Supreme Court interpreted the treaty "as if it were an ordinary contract between private parties." BG Grp. PLC, 134 S. Ct. at 1206.  According to the Court, that the arbitral panel's authority to decide the dispute emanated from an international treaty did not make a critical difference. Id. The Court's treatment of the treaty as a contract was significant because in other arbitration cases where "ordinary contracts" are at issue, the parties determine whether a particular matter is for arbitrators or courts to decide. See id. When the contract is silent on who decides a threshold issue of arbitration, the courts determine the parties' intent. As the Court explained, courts generally presume that parties intend courts, not arbitrators, to decide issues on "arbitrability"—a category that covers, among others, whether parties are bound by an arbitration clause or whether that clause applies to a particular controversy or dispute at all. Id.

Interpreting the local litigation requirement in Article 8 of the treaty, the Court concluded that the text and structure of the article indicated that "it operates as a procedural condition precedent to arbitration" and that it was of the procedural, claims-processing variety. Id. at 1207. The Court held that the local litigation requirement "[d]etermines when the contractual duty to arbitrate arises, not whether there is a contractual duty to arbitrate at all." Id. (emphasis in original). As a purely procedural requirement, Article 8's local litigation requirement was therefore akin to other procedural provisions, which courts have found to be for arbitrators to interpret and apply—for example, time limits, mandatory pre-arbitration grievance procedures, or good-faith negotiation requirements. Id. at 1208.

That the agreement providing for arbitration was an international treaty also did not alter the Court's analysis. The Court noted that there was nothing in the treaty that overcame the presumption that a claims-processing rule such as the local litigation requirement was for arbitrators to decide, and that there was no indication of a contrary intent as to the allocation of decisional authority between arbitrators and courts. Id. The Court in effect rejected the view proffered by the U.S. government in its amicus brief that the local litigation provision was a condition on a state's consent to enter into an arbitration agreement. According to the Court, there was nothing in the treaty stating that the local litigation requirement was a "condition of consent" to arbitration. Id. at 1209. The text of the treaty did not state that the local litigation requirement was a "substantive condition on the formation of the arbitration contract" or that Argentina or the United Kingdom ascribed such "elevated importance" to the provision that it should be interpreted and applied by courts. Id. at 1210. Thus, the ordinary presumption that a requirement such as the local litigation provision was for arbitrators to interpret and apply was not overcome. The Court concluded that courts should not review the arbitral award de novo but should do so with "considerable deference." Id.

Because the treaty did not include explicit language indicating that Argentina and the United Kingdom intended a different delegation of decisional authority between arbitrators and courts as to the interpretation and application of the local litigation requirement, the Supreme Court left for another day and case the matter of interpreting bilateral investment treaties that explicitly refer to "conditions of consent." Id. at 1209. On that issue, the Court in dicta asserted that "[it] d[id] not see why the presence of the term 'consent' in a treaty warrants abandoning, or increasing the complexity of, [its] ordinary intent-determining framework." Id.

Although the larger impact of the Supreme Court's decision in BG Group PLC remains to be seen, its ruling does emphasize how important the text and language in investment treaties are and that those agreements should be carefully drafted to clearly convey the parties' intent as to the allocation of decisional authority between courts and arbitrators.

Keywords: litigation, minority trial lawyer, BG Group PLC, decisional authority, bilateral investment treaties, arbitrators, courts, local litigation requirement

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