The United States Supreme Court (the “Court”), on 5 March 2014, issued its first decision in the area of international investment treaty arbitration. The Court, by a 7-2 majority, decided BG Group PLC. v. The Republic of Argentina in favor of BG Group.
The Court effectively elected not to second-guess procedural rulings made by investment treaty tribunals. The Court reversed the U.S. Court of Appeals for the D.C. Circuit’s ruling that an UNCITRAL tribunal lacked the authority to decide a US$185 million dispute, and instead upheld the tribunal’s award in favor of BG Group. The Court’s decision is broadly consistent with its precedent in the area of international commercial arbitration.
Justice Breyer authored the majority opinion and was joined by Justices Alito, Ginsburg, Kagan, Scalia, and Thomas. Justice Sotomayor wrote a concurring opinion, largely siding with the majority. Chief Justice Roberts, joined by Justice Kennedy, dissented.
Background of the case and procedural posture
The Supreme Court case arose out of a 2007 investor-state arbitration award of more than US$185 million (plus legal fees and expenses) in favor of BG Group. The dispute involved a consortium’s early 1990s investment in Argentina’s gas industry. The investment was subsequently harmed by measures taken by Argentina to counteract the country’s financial crisis in the late 1990s.
The arbitration was brought under the UK-Argentina Bilateral Investment Treaty (BIT). The investor selected the UNCITRAL rules, with the seat of arbitration in Washington, D.C.
Argentina challenged the award in the U.S. District Court for the District of Columbia, which affirmed the award. The U.S. Court of Appeals for the D.C. Circuit reversed the District Court and vacated the award. The D.C. Circuit’s reversal cited BG Group’s failure to (1) submit the case to Argentina’s court system and (2) meet the “waiting and negotiation” period of 18 months before bringing its international arbitration claim. Both of these requirements are set forth in Article 8(2) of the BIT.
The Supreme Court granted BG Group’s petition for certiorari. The central matter before the Supreme Court, given BG Group’s failure to meet the conditions precedent to arbitration as delineated in the BIT, was whether Argentina had consented to arbitration. The appeal also addressed the level of deference U.S. courts should give to arbitral awards and whether the level of deference to an investment treaty arbitration panel should be the same as the deference level provided to commercial arbitration awards, which the Supreme Court had established in Howsam v. Dean Witter Reynolds, Inc. (2002).
Principal issues in the case
The case before the U.S. Supreme Court primarily concerned party consent to arbitration in the context of an investment treaty. In Howsam, the Court determined that the arbitrators reviewing an international commercial dispute have complete discretion to determine procedural issues, including conditions precedent to arbitration, consistent with the long-standing international law principle of Competence-Competence. Accordingly, the threshold issue before the Supreme Court in BG Group was whether Argentina’s consent to arbitration is conditioned upon the requirements first to file in Argentina’s courts and to wait 18 months, or if those conditions are simply procedural matters.
BG Group’s position centered on the Supreme Court’s long-standing, favorable view towards arbitration and the enforcement of arbitral awards. BG Group relied on the Howsam precedent, arguing that arbitrators have greater expertise than U.S. judges to decide issues of international law, arbitral jurisdiction, and treaty interpretation. BG Group also pointed to Argentina’s conduct throughout the dispute, demonstrating that Argentina effectively consented to arbitration. Additionally, BG Group emphasized that one of the essential premises of an investment treaty is to provide for an impartial forum for the settlement of disputes. This premise would be undermined by a Supreme Court ruling that Article 8(2) of the BIT limits a treaty party’s consent to arbitration.
Argentina’s position was that party consent is an important and necessary condition of a BIT’s arbitration agreement. Argentina stated that, absent clear and unmistakable evidence of party consent, the reviewing court should have the ability to overturn the arbitrators’ ruling. Argentina also made policy arguments that great respect should be accorded to sovereigns in the investment treaty context, meaning that, according to Argentina, there is a fundamentally different set of public interest concerns than in the commercial arbitration context.
The U.S. government’s amicus submission focused on the difference between consent in investor-state arbitration and in international commercial arbitration in the determination of the appropriate level of domestic court review of consent-based objections.
Supreme Court oral argument
In the 2 December 2013 oral argument before the Supreme Court, several Justices questioned why consent to arbitration through an investment treaty — which has been compared to a unilateral contract — is different than consent through a contract in the context of international commercial arbitration. In addition, the Justices posed whether the 18-month “waiting and negotiation” period, if adhered to, would have impacted the outcome of the case. They pressed counsel to the government of Argentina on whether it is important for U.S. courts to review a procedural issue that is not of major consequence to a case’s outcome.
However, Chief Justice Roberts questions implied that BG Group should have attempted, at minimum, to bring suit in Argentina’s domestic courts. Comparing the BIT’s 18-month waiting period to similar U.S. regimes mandated by Congress, the Chief Justice stated that the waiting period could have had an impact on the outcome of the arbitration. Chief Justice Roberts also focused his questions on the BIT text and the reason why those terms were not followed by BG Group.
The Court’s 7-2 decision (and Justice Roberts’ dissent) falls largely in line with the concerns raised by the Justices at oral argument. The Court’s majority found nothing in the BIT to supersede the “ordinary assumption” in U.S. law, and from Howsam, that U.S. courts will not overrule a tribunal’s decision on whether procedural conditions have been satisfied. The Court did not find a meaningful distinction between international commercial arbitration and international investment treaty arbitration, despite the arguments posed by Argentina and the amicus curiae submissions of the governments of the United States and Ecuador. The Court found that “[t]he fact that the document at issue is a treaty does not make a critical difference to this analysis. A treaty is a contract between nations, and its interpretation normally is a matter of determining the parties’ intent.”
Justice Roberts’ dissent, joined by Justice Kennedy, would have remanded the case for a substantive analysis of whether Argentina has precluded BG Groups ability to comply with the BIT’s local litigation rule. The dissent highlights the fundamental difference between investment treaties agreed to by sovereigns and ordinary contracts, particularly noting that investors (i.e., the claimants) are not parties to the treaty. Instead, the dissent argues that investment treaties provide a unilateral offer to arbitrate. An investor may accept the offer by complying with the terms of the unilateral offer, which includes an 18-month waiting period in the case of this specific BIT.
The BG Group decision is important because it is the first Supreme Court decision in the area of investment treaty arbitration. Although its practical implications for specific disputes remain to be seen, BG Group appears to limit U.S. court challenges to the jurisdictional decisions of investment treaty arbitral panels. It is also noteworthy that the Court decided to apply the same deferential standard for commercial arbitration awards (i.e., “considerable deference”) to investment treaty awards.