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US Supreme Court weighs in on BG Group v. Argentina

By Frédéric G. Sourgens

On Monday, 2 December 2013, the US Supreme Court will hear oral arguments in a significant appeal for investor-state arbitration conducted in the United States. Last year, the US Court of Appeals for the DC Circuit set aside an award rendered by a United Nations Commission on International Trade Law (UNCITRAL) tribunal seated in Washington, DC and constituted pursuant to the United Kingdom-Argentina bilateral investment treaty (BIT) in BG Group PLC v Republic of Argentina. The arbitral tribunal in December 2007 awarded BG Group in excess of $185 million in damages.

The key question addressed by the DC Circuit decision was whether the BG tribunal had jurisdiction to proceed with the case. The United Kingdom-Argentina BIT required investors to submit disputes to local courts in the host state for a period of eighteen months. BG Group had not in fact so submitted its dispute with Argentina to the Argentine courts. The BG arbitral tribunal concluded that Argentina hindered or prevented recourse to its domestic courts. In light of this conduct, the BG arbitral tribunal concluded that interpretation of the 18 month submission requirement as an absolute impediment to arbitration would be absurd and unreasonable and exercised jurisdiction over the dispute.

The DC Circuit followed US arbitral jurisprudence that an arbitrator may only resolve a challenge to the “arbitrability” of a dispute if it is established by clear and unmistakable evidence that this threshold question was itself submitted to arbitration – ie. one cannot question whether a dispute may be submitted to arbitration unless the dispute parameters were themselves submitted to arbitration. In commercial arbitrations, parties typically provide this evidence by means of incorporating arbitration rules granting competence to arbitral tribunals to decide upon their own jurisdiction in their consent to arbitration. Barring such clear submission of this question to the arbitrator, the issue would have to be resolved by the competent court of general jurisdiction.

The Supreme Court of the United States, via Wikimedia Commons creative commons license
The Supreme Court of the United States in 2007. Photo by Kjetil Ree. Creative Commons License via Wikimedia Commons.

The DC Circuit did not find such clear and unmistakable evidence in the BIT despite the BIT’s incorporation of the UNCITRAL Arbitration Rules. Submission to local courts, the DC Circuit concluded, operated as a condition precedent to Argentina’s obligation to submit disputes to arbitration. Any reference in the UNCITRAL Arbitration Rules to the competence of the arbitrators to decide upon their own jurisdiction was irrelevant to the question at bar. Consequently, the DC Circuit ruled that “BG Group was required to commence a lawsuit in Argentina’s courts and wait eighteen months before filing for arbitration pursuant to Article 8(3) if the dispute remained” and vacated the award.

The DC Circuit’s decision sets up a dangerous clash between the public international law of arbitration and the Federal Arbitration Act. Arbitrations governed by international law expressly require the arbitrators to determine their own competence. Arbitrators in fact would manifestly exceed their powers should they refuse to resolve jurisdictional questions submitted to them.

This facial difference between the US Federal Arbitration Act and international law has a simple structural reason. In cases governed by the Act, the consent to arbitration displaces courts of general jurisdiction. These courts remain able and available to resolve all questions not submitted to arbitration.

In public international law cases, there are no such courts of general jurisdiction. There is no forum that could resolve arbitrability questions—other than perhaps the objecting state itself. If the question of arbitrability was a matter to be decided by the respondent state however, it would be practically impossible to submit international legal disputes to arbitration by means of an advance consent.

Luckily, the clash between the Federal Arbitration Act as interpreted by the DC Circuit and international law can be resolved in light of US arbitration jurisprudence for two reasons. First, the US Supreme Court as a matter of definition limits the role of courts to decide the gateway matter of “arbitrability” to “narrow circumstance[s] where contracting parties would have expected a court to have decided [that] gateway matter.” Given that there are no courts of general jurisdiction in international law, it is precisely not the case that a party could have expected the construction of a potential condition to a host state’s treaty obligation to arbitrate certain disputes to be decided by a court. The DC Circuit therefore erred in its classification of the question as pertaining to “arbitrability” as that term has been defined in US jurisprudence.

Second, the DC Circuit erred when it looked principally to the UNCITRAL Arbitration Rules to determine whether the parties intended to submit the arbitrability question to the arbitral tribunal. Rather, the issue is laid to rest by the nature of the arbitration clause itself: it is a public international law obligation of the Argentine government. As such, the applicable law of the consent to arbitration is international law. As a matter of public international law, the power of the arbitral tribunal to construe the jurisdictional instrument in its entirety is clear and unmistakable.

Consequently, there is every hope that the US Supreme Court will reconcile US jurisprudence on the review of BIT awards with public international law. Doing so will strengthen the role of the United States as a forum for the resolution of similar disputes in the future. It also will avoid an absurd result born from a failure to understand the different functions of commercial arbitration and investor-state arbitration in which the United States is a significant player.

Frédéric G. Sourgens is an Associate Professor of Law at Washburn University School of Law. He is a contributor to Investment Claims, an online law resource from Oxford University Press. For a full discussion of this topic, see By Equal Contest of Arms: Jurisdictional Proof in Investor-State Arbitrations, 38 N.C. J. INT’L L. & COM. REG. 875 (2013)

Investment Claims is a regularly updated collection of materials and analysis used for research in international investment law and arbitration. Described as an invaluable resource by its users, Investment Claims contains fully searchable arbitration awards and decisions, bilateral investment treaties, multilateral treaties, journal articles, monographs, arbitration laws, and much more, all linked and cross-referenced via the Oxford Law Citator.

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