WASHINGTON, D.C. — (Mealey’s) After finding that arbitrators had the authority to determine whether a precondition to arbitration in an investment dispute was met, the U.S. Supreme Court on March 5 reversed an appeals court ruling that vacated an order confirming a $185,285,485.85 award issued in favor of a United Kingdom investor and against the Republic of Argentina (BG Group Plc v. Republic of Argentina, 12-138, U.S. Sup. [lexis.com subscribers may access Supreme Court briefs for this case]).
Argentina entered into the Agreement for the Promotion and Protection of Investments between Argentina and the United Kingdom (referred to as BIT). As part of a reformation, Argentina divided its gas transportation and distribution industries into two transportation companies and eight distribution companies. BG Group Plc, a U.K. company, invested in MetroGAS, one of the distribution companies, through a consortium of investors.
Argentina began to experience an economic crisis and enacted an emergency law in 2002 that negatively affected BG Group's investment. BG Group filed arbitration proceedings against Argentina pursuant to the United Nations Commission on International Trade Law (UNCITRAL) arbitration rules. An arbitration panel issued an award of $185,285,485.85 plus fees, costs and interest for the BG Group, finding that Argentina breached the BIT.
Argentina filed a petition to vacate or modify the award in the U.S. District Court for the District of Columbia pursuant to the Federal Arbitration Act (FAA) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, arguing that the arbitrators exceeded their authority by not taking into consideration the terms of the agreement between parties. BG Group cross-moved to confirm the award. The District Court denied Argentina's motion to vacate and confirmed the award on the merits.
Argentina appealed to the District of Columbia Circuit U.S. Court of Appeals. The appeals court reversed the District Court's ruling and vacated the award, finding that the tribunal exceeded its powers in permitting the arbitration to proceed. The appeals court found that BG Group did not comply with a dispute resolution provision in the BIT, which required it to first seek review of the dispute for 18 months in a local court of the contracting party where the investment was made.
Certiorari BG Group filed a petition for writ of certiorari in the U.S. Supreme Court. BG Group presented the question of whether "in disputes involving a multi-staged dispute resolution process, does a court or instead the arbitrator determine whether a precondition to arbitration has been satisfied?" Oral arguments in the case were held Dec. 2, 2013.
BG Group argued that the appeals court ruling is indefensible. It argued that Argentina has submitted an alternative ground for deciding the dispute in its favor that was not encompassed in the question presented to the Supreme Court. BG Group said that even if the Supreme Court reviewed the argument, it lacked merit. BG Group reinforced its argument that the appeals court erred in finding that courts, rather than arbitrators, determine compliance with preconditions to arbitration. Argentina argued that the appeals court properly found that Argentina did not consent to arbitration because BG Group failed to comply with the terms of the BIT. Argentina argued that the appeals court was correct in finding that it never consented to arbitration and, therefore, arbitral jurisdiction did not exist.
In a majority ruling, the Supreme Court found that the arbitrators’ jurisdictional findings were lawful. The Supreme Court found that the appeals court’s decision reversing confirmation of the award should be reversed and said the issue was for arbitrators to decide. The tribunal made three relevant decisions, including that “as a matter of treaty interpretation,” the local litigation provision “cannot be construed as an absolute impediment to arbitration,” the Supreme Court said.
“The first determination lies well within the arbitrators’ interpretive authority. Construing the local litigation provision as an ‘absolute’ requirement would mean Argentina could avoid arbitration by, say, passing a law that closed down its court system indefinitely or that prohibited investors from using its courts. Such an interpretation runs contrary to a basic objective of the investment treaty. Nor does Argentina argue for an absolute interpretation,” Justice Stephen G. Breyer wrote for the majority.
The Supreme Court also accepted the facts set forth by the arbitrators to be valid and found that their findings were not barred by the BIT.
Chief Justice John G. Roberts Jr. dissented, noting that the dispute should be decided by a court as an issue of contract formation. He wrote that he would vacate the appeals court’s decision and remand the case for an inquiry as to contract formation. Justice Anthony M. Kennedy joined the dissent.
The majority ruling was joined by Justices Antonin Scalia, Clarence Thomas, Ruth Bader Ginsburg, Samuel Anthony Alito Jr. and Elena Kagan and partially joined by Justice Sonia Sotomayor.
BG Group is represented by Thomas C. Goldstein, Kevin K. Russell and Tejinder Singh of Goldstein & Russell in Washington and Alexander A. Yanos, Elliot Friedman and Julia A. Lisztwan of Freshfields Bruckhaus Deringer in New York. Argentina is represented by Jonathan I. Blackman, Carmen Amalia Corrales and Carmine D. Boccuzzi Jr. of Cleary, Gottlieb, Steen & Hamilton in New York and Matthew D. Slater, Teale Toweill, M. Veronica Yepez and Caroline Stanton of Cleary Gottlieb in Washington.
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