On March 5, 2014, the US Supreme Court reinstated a $185.3 million arbitration award for British firm BG Group PLC against the Republic of Argentina. In a 7-2 decision, the high court upheld the arbitrators' decision about the meaning and application of a local litigation clause in a bilateral investment treaty between the United Kingdom and Argentina.
The main issue before the court was what standard of review should be applied to the arbitration panel's decision. The Supreme Court reasoned that a bilateral investment treaty should be interpreted like a contract, procedural questions are for the arbitrators to decide and their decisions given deference, while substantive questions are for the courts to review de novo. The Court concluded that, given the absence of clear language to the contrary, the compliance with the local litigation requirement at issue was a procedural issue for the arbitrators to decide, and not a substantive one tied to Argentina's consent to arbitrate. The underlying dispute concerns BG Group's investments in Argentina's natural gas industry. BG Group's investment interests were initially protected under the bilateral investment treaty between the UK and Argentina. However, during an economic crisis in 2002, the Argentinian government enacted regulatory measures that made it difficult for investors to see a return on their investments. Argentina also prevented investors from legally challenging the regulatory measures by restricting access to local courts. As a result, even though the treaty required that an investor first attempt to resolve disputes in a "competent" Argentinian tribunal for at least 18 months, BG Group avoided local courts and took their claims straight to arbitration.
In December 2007, the International Chamber of Commerce International Court of Arbitration excused the local litigation precondition to arbitration because of the restrictions Argentina had placed on BG Group's access to Argentina's courts. Argentina appealed the panel's decision in the DC District Court, alleging that the panel lacked jurisdiction pursuant to the local litigation provision of the bilateral treaty. The DC District Court upheld the arbitration award, but the DC Circuit reversed, finding that a court should decide whether a dispute under the treaty could be submitted directly for arbitration. The Supreme Court disagreed with the DC Circuit's application of a de novo standard of review, reasoning that the local litigation clause was a procedural prerequisite to commencing particular arbitration, and was not a precondition to Argentina's consent to arbitration in the first place.
The Supreme Court left unanswered how to interpret "substantive" local litigation provisions that are "conditions of consent" to arbitration. Going forward, parties must explicitly clarify their intentions when placing prerequisites on arbitration rights in bilateral investment treaties, specifically if such requirements are meant to be substantive questions, even if they appear to be procedural in nature.
The decision was entered in BG Group v. Argentina, case no. 12-138.
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