Autumn 2012

United States Court of Appeals’ decision to vacate arbitral award causes controversy

In January 2012, the United States Court of Appeals for the District of Columbia (the “Court of Appeals”) vacated a US$185 million arbitration award in favour of UK energy company BG Group (“BG”) against the Argentine Republic (“Argentina”) obtained under the 1990 Bilateral Investment Treaty between the Argentine Republic and the United Kingdom of Great Britain and Northern Ireland (the “Argentina-UK BIT” or the “Treaty”). Prior to engaging in arbitration, BG had not pursued local remedies in Argentina for a period of eighteen months as required under Article 8 of the Treaty. The Argentina-UK BIT is silent as who decides the question of arbitrability when this precondition is disregarded. The Court of Appeals held this was a question for domestic courts to decide and that the arbitral tribunal (the “Tribunal”), in waiving this requirement, had exceeded its powers.

Background

BG, the UK’s third largest oil and gas producer, was an investor in MetroGas, which held a thirty-five year exclusive licence to distribute gas in Buenos Aires. In response to the Argentine financial crisis of 2001-2002, Argentina enacted emergency laws which, inter alia, unpegged the peso from the United States dollar, converted the United States dollar-based adjustments clauses in contracts into peso-based adjustment clauses and established a renegotiation process for public service contracts which excluded contractors who sought recourse in the courts. Following the imposition of these measures, BG sought to immediately commence arbitration, without first pursuing local remedies.

Original Arbitral Decision

In an UNCITRAL arbitral award of 24 December 2007, the Tribunal in BG Group Plc v. Argentina, held that a plain text reading of Article 8 of the UK-Argentina BIT would lead to a “absurd and unreasonable result” prohibited by the 1969 Vienna Convention on the Law of Treaties of allowing Argentina to “unilaterally elude arbitration” by preventing access to its courts and excluding from the renegotiation process contractors who sought judicial redress. As a matter of treaty interpretation, the Tribunal held that failure to adhere to Article 8 was not an “absolute impediment to arbitration”.
The Tribunal held that Argentina had breached Article 2(2) of the Argentina-UK BIT, violating the obligation of fair and equitable treatment, by adopting certain measures that had the purpose and effect of eviscerating the regulatory framework established to induce BG’s investment. The Tribunal ordered Argentina to pay BG more than US$185 million in damages.

Argentina moves to vacate arbitral award in United States Courts

Argentina moved to vacate the award in the United States District Court for the District of Columbia (the “District Court”) in Washington DC, the seat of the UNCITRAL arbitration. It did so on the basis that the Tribunal had exceeded its authority by ignoring the terms of the parties’ agreement. At first instance, the District Court rejected Argentina’s argument that BG’s failure to comply with Article 8 of the Treaty meant that the Tribunal could not review BG’s claims, and confirmed the award.
On appeal, the key question for the Court of Appeals to consider was whether it was for a domestic court or arbitral tribunal to determine arbitrability when the precondition to arbitration contained within the Treaty was disregarded. According to the Court of Appeals:

“Because the Treaty provides that a precondition to arbitration of an investor’s claim is an initial resort to a contracting party’s court, and the Treaty is silent on who decides arbitrability when that precondition is disregarded, we hold that the question of arbitrability is an independent question of law for the court to decide.”

In so doing, the Court of Appeals vacated the award. In its view, the Tribunal’s decision had been rendered

“without regard to the contracting parties’ agreement establishing a precondition to arbitration”.

BG lodges appeal with United States Supreme Court

On 27 July 2012, BG lodged a petition for a writ of certiorari with the United States Supreme Court (the “Supreme Court”). Four amicus briefs have been filed in support of BG’s writ by the American Arbitration Association (the “AAA”); United States Council for International Business (the “USCIB”); AWG Group Limited (which is confronted with similar legal issues in other proceedings against Argentina) and a brief filed on behalf of twenty leading practitioners and professors of arbitration law. The AAA amicus brief warns, for example, that:

“The [Court of Appeals’] decision is also troubling in that it expands the scope of judicial scrutiny of arbitration by assuming that courts, not international arbitrators, are better positioned to interpret the provisions of an investment treaty entered into by two sovereign states.”

All amicus briefs are unanimous in the opinion that the petition for certiorari should be granted by the Supreme Court. The brief filed by the leading practitioners and academics declares:

“The [Supreme] Court would do a signal service to all those engaged in international arbitration if it were to grant the Petition and use this opportunity to underscore the importance of the distinction between substantive and procedural arbitrability in delineating the proper roles of courts and arbitrators in the
resolution of threshold issues.”

Analysis

The Court of Appeals’ decision has raised come concern amongst the international arbitration community. If left unchallenged, the implications of the Court of Appeals decision could be serious indeed, risking the delay, disruption or derailing of many other arbitral proceedings. As the USCIB outlines in its amicus brief:
“The D.C. Circuit’s ruling is an open invitation for disappointed litigants to seek judicial intervention at the inception of an arbitration or to set aside awards by arguing that procedural predicates to arbitration have not been satisfied.”

The position of the United States as a preferred seat for international arbitration could also be jeopardised. As the AAA highlights:

“The AAA, and hence the United States, is believed to have the world’s largest annual international arbitration caseload. That caseload, however, is sensitive to judicial attitudes to arbitration, attitudes reflected in U.S. judicial decisions that are keenly studied by the global arbitration community. Where those decisions deviate from international arbitral norms supportive of arbitration, the United States’ reputation as a venue with a legal framework that is supportive of arbitration can be seriously diminished.”

Undoubtedly, practitioners, commentators and litigants alike will eagerly await the decision of the Supreme Court in the months ahead.