April 26 2012
The US Court of Appeals for the DC Circuit has issued an opinion in Republic of Argentina v BG Group plc(1) that calls into question the ability of an international arbitral panel to determine the scope of its jurisdiction. In so ruling, the court has highlighted the difficulty in distinguishing between matters that are to be resolved by arbitrators and those that are for courts to determine.
In the opinion, a $185 million award obtained by BG Group plc against Argentina was vacated on the grounds that the arbitral panel failed to comply with certain pre-arbitration conditions set out in the bilateral investment treaty under which the arbitration was conducted. In its opinion the DC Circuit enforced a requirement that at least 18 months of litigation in Argentina's courts be conducted before the initiation of arbitral proceedings (as is provided for in the treaty). This is significant because the finality and enforceability of the resulting award are fundamental considerations for any party invoking an arbitration agreement.
BG Group is a British concern that invested in gas companies in Argentina under the protection of the bilateral investment treaty between Argentina and the United Kingdom. In a severe economic crisis, Argentina issued emergency legislation eliminating the prior currency pegging of the Argentine peso to the US dollar, upon which BG Group's investment depended. As part of the emergency legislation, Argentina also:
Eight months after the lapse of the stay of proceedings, and without initiating any court action in Argentina, BG Group commenced arbitration proceedings against Argentina. In accordance with the bilateral investment treaty, the arbitration proceeded under the United Nations Commission on International Trade Law (UNCITRAL) rules, Article 21(1) of which provides that "[t]he arbitral tribunal shall have the power to rule on objections that it has no jurisdiction" to hear the arbitration.
The arbitral panel determined that it possessed jurisdiction over the dispute on the grounds that court proceedings in Argentina would have been futile. In rendering a $185 million award in favour of BG Group, the panel concluded that "Argentina violated the principles of stability and predictability inherent to the standard of fair and equitable treatment" required by the bilateral investment treaty. A US trial court confirmed the award and denied Argentina's petition to vacate, which was reversed by the DC Circuit on the grounds that the controversy was not arbitrable.
The DC Circuit invoked US Supreme Court precedent involving domestic arbitrations to conclude that 'arbitrability' was for courts (and not arbitrators) to decide – in the absence of evidence that the parties had "clearly and unmistakably provide[d] otherwise" – and that the pre-arbitration litigation requirement in the bilateral investment treaty was not the type of purely "procedural" matter that could be left to an arbitral panel to decide, as was held in Howsam v Dean Witter Reynolds, Inc.(2) The court reasoned that the arbitral panel's express authority under UNCITRAL Article 21(1) to determine the arbitrability of the controversy was never triggered, since the applicability of the threshold requirement of pre-arbitration litigation in Argentina preceded the arbitration and did not "grow out of the dispute". The practical consequence of the court's conclusions was that the extremely broad deference typically afforded to arbitral awards did not apply, thereby increasing the likelihood of a court reversal of the arbitral panel's award.
The BG Group opinion is a cautionary tale for parties interested in pursuing a right to arbitrate in the face of time-consuming and potentially expensive pre-arbitration conditions, the satisfaction of which may appear pointless and designed only to impose unfair delays. As a result of bypassing 18 months of litigation proceedings in Argentina, several years of arbitration and post-arbitration proceedings – along with a $185 million award – were nullified. The practical implications of this are concerning, particularly since:
The BG Group opinion may nevertheless be characterised as a strongly pro-arbitration decision. The reversal of the trial court's confirmation of the award was based on a strong affirmation of the core principle that arbitration is a creature of the consent of the parties. Although the practical consequences of the opinion may be frustrating, the notion that US courts will scrutinise an arbitral panel's disregard of express conditions precedent to the assertion of arbitration rights should be comforting to those who seek order and predictability in dispute resolution proceedings.
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