US Supreme Court Rules Arbitrators, Not Courts, Have Competence to Decide Preconditions to Investment Arbitration

The United States (US) Supreme Court’s recent ruling in BG Group v. Argentina generally reflects a pro-investor approach to interpreting preconditions in investment treaties. BG Group, a United Kingdom (UK) company, was a member of a consortium with a majority interest in MetroGAS, an exclusive natural gas distributor in Argentina. The applicable bilateral investment treaty between Argentina and the UK required BG Group to bring arbitration claims arising under the treaty to Argentina’s courts before pursuing arbitration. When disputes arose, BG Group disregarded this precondition, proceeding directly to arbitration to claim compensation for losses to MetroGAS resulting from measures taken by Argentina to stem its financial crisis.

BG Group was ultimately awarded $185 million in damages. Argentina sought, unsuccessfully, to vacate the award in US District Court under the Federal Arbitration Act, arguing that the arbitral tribunal exceeded its powers by ignoring the treaty’s local litigation requirement. On appeal, the US Court of Appeals for the DC Circuit reversed, ruling that the court, not the arbitral tribunal, should decide whether BG Group could sidestep the local litigation requirement and proceed directly to arbitration.

The Supreme Court reversed. In a majority decision, supported by seven Justices, the Court determined that, under the terms of the UK-Argentina treaty, the arbitral tribunal — not the reviewing court — has competence to decide whether preconditions to arbitration have been satisfied. In reaching this conclusion, the Court applied the legal framework previously adopted in the context of commercial arbitration in its decision in Howsam v. Dean Witter Reynolds. According to the Court, the fact that the agreement at issue was an investment treaty was not a reason for excluding application of Howsam. To the contrary, it noted that a treaty is essentially “a contract between nations” that should be interpreted on the basis of the parties’ intent and, if the treaty parties failed to exclude the arbitral tribunal’s competence explicitly, than the normal Howsam presumptions apply.

Since the UK-Argentina treaty contained no evidence that the treaty parties intended to have a reviewing court address questions of preconditions, the arbitral tribunal had authority to determine the application of the local litigation requirement. Justices John Roberts and Anthony Kennedy dissented. Justice Sonia Sotomayor concurred in part, noting that the majority decision did not address the situation in which an investment treaty expressly identified pre-arbitration procedural steps as preconditions.

The BG Group decision is generally beneficial to investors who choose the United States as the seat for investor-State arbitration under investment treaties. Though the Court did not directly address whether Howsam would apply to investment treaties that expressly identify certain procedural requirements as preconditions, like recent US investment treaties, its decision generally ensures that issues other than threshold questions of arbitrability will be determined by arbitrators, not local courts.

Parties’ Needs Come First

At Arent Fox, we have a team of seasoned attorneys who are focused on supporting our clients’ interests every step of the way when a dispute arises. Our Washington, DC-based group includes Matthew J. Clark, Timothy J. Feighery, Lee M. Caplan, Matthew Nolan, and Ralph A. Taylor, Jr. Our New York-based group includes Hunter T. Carter, Elliott M. Kroll, Bernice K. Leber, Eamon O’Kelly, and Julius A. Rousseau, III. And our California-based group includes Pierre-Richard Prosper and Maidie E. Oliveau. Whether representing foreign sovereigns, investors, or private commercial parties in cross-border disputes, our attorneys have the experience and insight needed to understand every complexity that our clients face.

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