This article discusses the decision of the United States Supreme Court in BG Group plc v. Republic of Argentina, issued on 5 March 2014, and the effect of that decision on principles of competence-competence under U.S. arbitration law. The U.S. Supreme Court held that a provision in a bilateral investment treaty that required the claimant to first bring its claim in the local courts for a period of eighteen months was a procedural issue and not an issue of "arbitrability," as that term is used in U.S. arbitration law. Therefore, U.S. courts were required to defer to the UNCITRAL tribunal's decision that a claim was admissible even though the claimant failed to comply with the provision, and were only permitted to annul the award under the narrow grounds provided in the U.S. Arbitration Act.
United States courts have long recognized the fundamental principle of competence-competence—that arbitral tribunals have the power to decide, at least in the first instance, whether a dispute falls within their authority to resolve on the merits—but there has been uncertainty as to whether a U.S. court faced with a challenge to an international award issued in the United States should defer to the tribunal or review the issue independently (or de novo). The March 2014 decision of the U.S. Supreme Court in BG Group plc v. Republic of Argentina partially resolves that uncertainty but leaves important questions unanswered.
The issue in BG Group was whether U.S. courts, asked to annul an UNCITRAL award rendered in the United States under the U.S. Arbitration Act of 1925 (known as the "Federal Arbitration Act" or "FAA"), should defer to the arbitral tribunal's decision that BG Group's claims brought under the United Kingdom- Argentina Bilateral Investment Treaty (the U.K.- Argentina BIT) were admissible. The BIT provides that an investment dispute must first be submitted to the competent court of the host State, but allows ICSID or UNCITRAL arbitration if the local court has not issued a final decision within eighteen months from submission of the dispute.1 In 2003, BG Group commenced an UNCITRAL arbitration against Argentina sited in Washington, D.C., without first suing in the Argentine courts. The tribunal concluded that BG Group's claims were admissible because the Argentina had restricted access to the courts to challenge the emergency measures passed during the Argentine financial crisis in 2001-2002.2
BG Group petitioned the U.S. courts in Washington, D.C. to confirm the award under the New York Convention and Federal Arbitration Act, while Argentina sought to annul the award. After two lower courts issued rulings, the U.S. Supreme Court agreed to review the case and held that the requirement to first submit the dispute to the local courts was not an issue of the arbitration agreement's existence, validity, or scope—which fall under what U.S. courts call the "arbitrability" of a dispute—but was instead a procedural precondition to arbitration. As such, the Supreme Court held that the award could only be annulled if the tribunal exceeded its powers in concluding that BG Goup's claims were admissible, which, the Court decided, the tribunal did not.3
In this article, I first discuss the arbitration between BG Group and Argentina and the tribunal's award. Second, in order to put the U.S. Supreme Court's decision in context, I explain U.S. law on the review of a tribunal's "arbitrability" decisions, and how that ambiguous term often encompasses both jurisdiction and admissibility, as understood by international tribunals. Third, I address the Supreme Court's holding and rationale in BG Group v. Argentina. Finally, I explain the consequences of that decision for future review of arbitral awards in the United States.
The Arbitration Between BG Group and Argentina
On 25 April 2003, BG Group, a British corporation, commenced ad hoc UNCITRAL arbitration against Argentina under Article 8 of the U.K.-Argentina BIT. The tribunal of Guillermo Aguilar Alvarez (president), Professor Albert Jan van den Berg, and Professor Alejandro M. Garro was constituted pursuant to the UNCITRAL Arbitration Rules.
BG Group had a majority interest in Gas Argentino, S.A. (GASA), which in turn had a majority ownership interest in MetroGAS S.A., a natural-gas distribution company incorporated in Argentina with an exclusive license to distribute natural gas in and around Buenos Aires.4 The license under which MetroGAS operated contained stabilization clauses that provided for the stability of the regulatory framework and tariff regime under which MetroGAS was to operate.5 In 1998-2002, Argentina experienced a severe economic crisis that led Argentina to default on its foreign debt and caused Argentina to make a number of legal changes with profound effects on public contracts. On 6 January 2002, Argentina, under President Eduardo Duhalde, enacted Law 25.561 (the Emergency Law).6 Among other things, the Emergency Law declared a state of emergency and eliminated Argentina's previously mandated parity between the Argentine peso and the U.S. dollar, ordered that dollar-denominated obligations be converted into pesos at the rate of one peso to one dollar, prohibited licensees from suspending or altering performance of their obligations, rejected any "vested rights" contrary to the Emergency Law, and authorized the executive to renegotiate state contracts with publicservice providers.7
BG Group claimed that these and other measures put MetroGAS in critical financial condition and violated various provisions of the U.K.-Argentina BIT. Argentina raised objections to the tribunal's jurisdiction and to the admissibility of the dispute. Among other such challenges, Argentina argued that the claims were inadmissible because BG Group failed to first bring the claims to the Argentina courts for a period of eighteen months as required under Article 8 of the BIT.8 BG Group responded that it would have been futile to commence litigation in Argentina because Argentina had stayed all suits challenging the emergency measures and had excluded from the contractual renegotiation process any licensees that sought judicial redress.9
The tribunal found that Argentina had directly interfered with the normal operation of its courts and created a disincentive to litigation by prohibiting licensees from both litigating and renegotiating their contracts.10 The tribunal therefore excused BG Group from first submitting the dispute to the Argentine courts for eighteen months.11 It subsequently found that Argentina breached the U.K.-Argentine BIT by failing to accord fair and equitable treatment to BG Group's investment and by adopting unreasonable measures. The tribunal awarded BG Group damages in the amount of approximately US$185.3 million plus interest.12
Because the legal seat of the arbitration was Washington, D.C., and the arbitration was not conducted under the ICSID Convention, Argentina had the right to seek to set aside the award under U.S. arbitration law—the Federal Arbitration Act and related case law—while BG Group could seek to confirm and enforce the award under the New York Convention and Federal Arbitration Act.13 Accordingly, the parties cross-petitioned the U.S. District Court for the District of Columbia (the federal court of first instance) under the Federal Arbitration and New York Convention. Before discussing the U.S. courts' treatment of the award, it is first necessary to provide some background on the law applicable to U.S. court review of decisions on jurisdiction and admissibility, to which U.S. courts broadly and ambiguously refer as issues of "arbitrability."
U.S. Courts' Review of "Arbitrability" Issues
The United States Supreme Court, whose decisions are binding on all other courts in the United States on matters of U.S. federal law, has issued a number of decisions concerning competence-competence, although that term is not often used in U.S. case law. Instead, the U.S. Supreme Court has adopted the term "arbitrability" to refer to a host of threshold issues. Although these decisions in which it had done so primarily addressed domestic arbitration, BG Group v. Argentina makes clear that the Supreme Court's prior decisions equally apply to international arbitration agreements and awards.14
Arbitrability issues under U.S. law include questions as to the existence, enforceability, and scope of an arbitration clause.15 As one lower U.S. court has put it, "'arbitrability' is a term of art covering disputes about whether the parties are bound by a given arbitration clause [i.e., formation] as well as disagreements about whether an arbitration clause in a concededly binding contract applies to a particular type of controversy [i.e., scope]."16
The Supreme Court has distinguished arbitrability questions from other threshold issues like waiver, delay, prescription (statutes of limitation and laches), notice, and other conditions precedent to arbitration, which the Court has called "procedural gateway matters."17 The Supreme Court has held that whether an issue is for the court or the arbitral tribunal to resolve depends on whether the issue is one of arbitrability or is a procedural precondition or gateway issue.18 U.S. courts presume that parties to an arbitration agreement intend issues of arbitrability to be decided by a court, unless there is "clear and unmistakable" evidence that the parties intended to refer arbitrability questions to the tribunal.19 If there is no such clear and mistakable evidence, U.S. courts address arbitrability issues independently or de novo. But if an arbitrability issue clearly and unmistakably falls within the parties' agreement to arbitrate, the court will review the tribunal's decision on that arbitrability issue as it reviews the tribunal's decisions on the merits, "setting aside [the award] only in certain narrow circumstances"—i.e., the grounds specified in the Federal Arbitration Act to annul an award.20
On the other hand, courts presume that procedural matters that are not questions of "arbitrability" are for the arbitral tribunal, not the courts.21 Absent evidence in the arbitration agreement that the parties intended a court to resolve such a procedural issue, U.S. courts will not independently review an award for substantive correctness as to procedural gateway issues.
Supreme Court cases before BG Group left open a number of important questions, however. First, the cases provided no clear test to distinguish between arbitrability issues that U.S. courts will ordinarily adjudicate independently, and "procedural gateway" issues that U.S. courts will not review absent evidence that the parties intended them to do so.
Second, the Supreme Court itself has not resolved what constitutes "clear and unmistakable" evidence that parties intend to refer arbitrability questions to the arbitral tribunal, nor has it decided whether the scope of review of different types of arbitrability issues might differ on a petition to set aside an award. Lower U.S. courts have repeatedly held that provisions in arbitral rules regarding the tribunal's competence-competence meet the clear-and-unmistakable standard.22 For example, the U.S. Court of Appeals for the Second Circuit, an intermediate federal appellate court with jurisdiction over appeals from federal district courts sitting in New York, among other U.S. states, has held that "when . . . parties [to an arbitration agreement] explicitly incorporate rules that empower an arbitrator to decide issues of arbitrability, the incorporation serves as clear and unmistakable evidence of the parties' intent to delegate such issues to an arbitrator."23
In another decision, the Second Circuit held that Thailand "was not entitled to independent court adjudication" as to whether an UNCITRAL tribunal had jurisdiction under a BIT over a dispute with a foreign investor because the BIT incorporated the UNCITRAL Arbitration Rules, which provided that "[t]he arbitral tribunal shall have the power to rule on objections that it has no jurisdiction, including any objections with respect to the existence or validity of the arbitration clause or of the separate arbitration agreement."24 According to the Second Circuit, the BIT therefore provided clear and unmistakable evidence that issues of arbitrability were for the tribunal, not the courts.
This rule would appear inapplicable, however, if the dispute concerned whether there existed an arbitration agreement between the parties at all. If a party claimed that it never consented to arbitrate, for example, because it's signature on the agreement was forged, then the incorporation of arbitral rules into an arbitration agreement could not prevent a court from deciding whether the party was bound to arbitrate. One intermediate federal appellate court has so held. In a recent decision, the U.S. Court of Appeals for the Eighth Circuit ruled that the courts had to independently determine whether a putative arbitration agreement was binding on a party that claimed it never consented to the agreement, despite the fact that the putative agreement incorporated the AAA Arbitration Rules, which grant competence-competence to the tribunal.25
The U.S. Supreme Court's Decision in BG Group v. Argentina
BG Group provided the U.S. Supreme Court with an important opportunity to clarify when U.S. courts will exercise independent review of particular threshold questions and when incorporation of arbitral rules into an arbitration agreement renders such issues within the tribunal's exclusive competence. The Supreme Court provided some guidance on the first issue, but none on the second.
In BG Group, the Supreme Court granted BG Group's petition to review a decision of the U.S. Court of Appeals for the District of Columbia Circuit.26 The D.C. Circuit had held that the U.S. courts should independently review whether BG Group's failure to first seek relief in the Argentine courts for a period of eighteen months rendered the dispute not subject to arbitration.27 The D.C. Circuit appeared to assume that the eighteen-month litigation requirement concerned the arbitrability of the dispute, and was not a mere procedural precondition to arbitration. Indeed, the D.C. Circuit began its analysis from the premise that BG Group's failure to comply with the eighteen-month requirement presented an issue of arbitrability.28 The court then concluded that there was no clear and unmistakable evidence that the parties intended the UNCITRAL tribunal to resolve arbitrability issues. Although the BIT incorporated the UNCITRAL Arbitration Rules, which recognize the tribunal's competence-competence, the D.C. Circuit held that "the Treaty's incorporation of the UNCITRAL Rules has a temporal limitation: the Rules are not triggered until after an investor has first . . . sought recourse, for eighteen months, in a court of the contracting party where the investment was made."29
By a vote of seven to two, a majority of the Supreme Court disagreed with the D.C. Circuit. The majority opinion, in a decision by Justice Stephen Breyer, laid out the question before the Court: "[S]hould a United States court review the arbitrators' interpretation and application of the provision [requiring litigation in the host State's courts for eighteen months] de novo, or with the deference that courts ordinarily show arbitral decisions on matters the parties have committed to arbitration?"30 The majority explained that, under Supreme Court precedents dealing with commercial arbitration, the issue is really one of the parties' intent; where the arbitration clause "is silent on the matter of who primarily is to decide 'threshold' questions about arbitration, courts determine the parties' intent with the help of presumptions."31 As already noted, the presumption is that arbitrability questions are for the court, while procedural preconditions are for the arbitral tribunal.
Based on the text and structure of the BIT arbitration clause, the majority concluded that the litigation requirement was "a procedural condition precedent to arbitration" rather than a limit on arbitrability.32 The provision "determines when the contractual duty to arbitrate arises, not whether there is a contractual duty to arbitrate at all." And Article 8 of the BIT allows arbitration even after a final decision of a local court if the parties are still in dispute, but explicitly states that the arbitration award shall be final and binding. Further, the majority concluded that the provision is analogous to requirements that parties file an arbitration within a set time limit or negotiate in good faith before arbitration, which are procedural provisions for arbitrators to evaluate.33
After applying Supreme Court precedent for commercial-arbitration agreements, the majority of the Court held that the fact that the arbitration agreement was contained in a treaty did not alter the analysis. The majority stated that "a treaty is a contract, though between nations," and cited Article V(1)(e) of the New York Convention to support its view that "where . . . a federal court is asked to interpret [the parties'] intent pursuant to a motion to vacate or confirm an award made in the United States under the Federal Arbitration Act, it should normally apply the presumptions supplied by American law."34 Thus, the Court held that absent some indication to the contrary, U.S. arbitration law, presumably as the lex arbitri for awards made in the United States, will determine whether an issue is to be finally decided by the arbitral tribunal or by the courts. Under that law, the BIT had to contain evidence that the State parties intended courts, and not an arbitral tribunal, to finally decide whether compliance with the local-litigation requirement rendered a dispute nonarbitrable. The Court found no such evidence in the BIT.35 The majority also noted that international arbitrators were likely to be more familiar with requirements like the one contained in Article 8 of the BIT, and that the UNCITRAL Arbitration Rules, authorized for use by the BIT, gave the tribunal the authority to decide its own competence.36
In what can be described as obiter dictum, the majority explained that it did not believe that an arbitration clause stating that a particular issue was a condition on the parties' consent would be sufficient evidence that the parties intended that issue to be resolved by a reviewing court. Instead, in the majority's view, "the word 'consent' could be attached to a highly procedural precondition to arbitration, such as a waiting period of several months, which the parties are unlikely to have intended that courts apply without saying so."37 The majority noted that certain U.S. BITs, such as the U.S.-Korea Free Trade Agreement, included "Conditions and Limitations on Consent of Each Party" to arbitration, but left for another case whether such a provision would render those specified issues for judicial review as matters of arbitrability.38
Finally, the majority rejected the dissenting justices' view that the provision was a condition on sovereign consent to arbitration and thus concerned the formation of an agreement to arbitrate between the State and the investor. The dissenting opinion, written by Chief Justice John Roberts, reasoned that the BIT itself did not contain an agreement to arbitrate between the host State and any particular investor, but was rather a unilateral offer to arbitrate that was not properly accepted unless and until the investor complied with the local-litigation requirement as a condition to the State's consent. Failure to comply with that requirement, in the dissenters' view, meant that no arbitration agreement was formed, which is an issue of arbitrability to be reviewed independently by the courts.39 In response, the majority reiterated its view that the requirement to first litigate in the local courts for eighteen months was a "claims-processing rule" or "purely procedural precondition to arbitrate" that did not affect "the arbitration contract's validity or scope."40
Because the issue of whether BG Group's failure to first submit the dispute to litigation in Argentina was for the arbitral tribunal to decide, the Supreme Court did not review the question independently, but instead applied Section 10 of the Federal Arbitration Act to determine if the award should be vacated on the narrow grounds authorized by the statute.41 Section 10(a)(4) permits a U.S. court to vacate an arbitral award "[w]here the arbitrators exceeded their powers."42 U.S. courts apply Section 10 of the Federal Arbitration Act when asked to annul an arbitral award rendered in the United States, whether the award falls under the New York Convention or is domestic.43 The majority explained that it might not agree with the tribunal that Argentina's measures rendered compliance with the local-litigation requirement unreasonable, but the tribunal's decision was nevertheless within its competence to make and the courts could not disagree on the merits.44
Consequences of BG Group For Future Cases in the United States
The Supreme Court's decision clarifies to some extent U.S. judicial review of arbitral tribunals' decisions on issues of jurisdiction and admissibility, to use the terminology of international tribunals, in both commercial and non-ICSID investor-State cases. First, U.S. courts will apply U.S. law on competence-competence to decide whether to review a tribunal's decision on jurisdiction or admissibility independently. And that law is the same for both domestic and international arbitration, and commercial and treaty arbitration: The basic question is whether the parties to the arbitration agreement intended a particular issue to be resolved by the tribunal or independently by the courts in the place of arbitration. Absent some evidence that the parties intended the tribunal to decide an issue of arbitrability, a U.S. court will review issues regarding the existence, validity, and scope of an arbitration agreement without deference to the tribunal. Threshold procedural conditions to arbitration, on the other hand, will not be reviewed unless the arbitration agreement discloses a contrary party intent.
But the BG Group decision equally leaves a number of issues unresolved. The Supreme Court did not set out a clear test for deciding when an issue pertains to the existence, validity, or scope of the arbitration agreement, or when it is a procedural precondition. For example, given the different terminology used by U.S. courts and international tribunals, the BG Group decision does not clearly align arbitrability with what international tribunals would call jurisdiction and procedural preconditions with admissibility. In any event, international tribunals have noted the difficulty in distinguishing between jurisdiction and admissibility.45
Parties and courts in future cases will most likely need to analogize to particular issues that the Supreme Court has held fall within one category or the other.
In addition, despite the prevalence of the clear-andunmistakable evidence standard in prior cases, and the D.C. Circuit's application of the standard in the BG Group case itself, the Supreme Court did not discuss or apply that standard, calling into question whether it remains the evidentiary standard. The Supreme Court also did not address whether the incorporation of the UNCITRAL Rules provided sufficient evidence of the parties' intent to refer arbitrability issues to the tribunal, presumably because the Court concluded that the provision in the UK-Argentine BIT did not impact arbitrability. But if the Court had wanted to avoid deciding whether the local-litigation requirement affected arbitrability of disputes, it could have assumed it was a matter of arbitrability and referred to incorporation of the UNCITRAL Rules as sufficient evidence that the issue was nevertheless for the tribunal to decide. Moreover, given the Court's dictum about the use of the label "conditions to consent" in an arbitration agreement, it is not clear what language in an agreement will sufficiently convey the parties' intent as to the tribunal's competence.
Finally, the decision does not concern, and therefore leaves open, whether U.S. courts must apply U.S. law on competence-competence—including the distinction between arbitrability and procedural preconditions and the differing presumptions applicable to both—when asked to refuse recognition and enforcement of a foreign arbitral award subject to the New York Convention. This issue will also need to be addressed in future cases.
1 See Agreement Between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Argentina for the Promotion and Protection of Investments, Art. 8(2), 11 Dec. 1990, 1765 U.N.T.S. 38.
2 See BG Grp. Plc. v. Republic of Argentina, Final Award, 140-157 (24 Dec. 2007), available at http://www.italaw.com/sites/default/files/case-documents/ita0081.pdf (BG Group Award).
3 See BG Grp. plc v. Republic of Argentina, 134 S. Ct. 1198, 1212 (2014).
4 See BG Group Award 23-24.
5 Id. 46-51.
6 See id. 45, 60.
7 See id. 73-76.
8 See id. 140-141.
9 See id. 148-154.
10 Id. 155.
11 Id. 157.
12 See id. 413, 444, 457.
13 As will be well known to readers of this publication, Article 54 of the ICSID Convention requires each Contracting State to recognize an award rendered under the ICSID Convention as if it were a final judgment of a court of that State. The United States has adopted legislation to comply with that requirement. Section 1650a of Title 22 of the United States Code provides that U.S. courts must enforce ICSID awards as if they were judgments of U.S. state courts. In contrast, awards rendered in the United States that are subject to the New York Convention can be set aside, recognized, and/or enforced under the Federal Arbitration Act, Sections 1-208 of Title 9 of the United States Code. Chapter 2 of the Federal Arbitration Act incorporates and implements the New York Convention. See 9 U.S.C. §§ 201-208.
14 See BG Grp., 134 S. Ct. at 1206-08 (reviewing UNCITRAL award under precedent on role of courts in deciding challenges to arbitrability of domestic disputes).
15 See id. at 1206-07.
16 Republic of Ecuador v. Chevron Corp., 638 F.3d 384, 393 (2d Cir. 2011) (internal quotation marks and alterations omitted).
17 See Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 86 (2002); Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 (1983).
18 See BG Grp., 134 S. Ct. at 1207.
19 First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 942 (1995).
20 Id. at 942-43.
21 BG Grp., 134 S. Ct. at 1208.
22 For examples of such arbitral rules, see ICC Arbitration Rule 6(5) (2012), ICSID Arbitration Rule 41 (2006), and UNCITRAL Arbitration Rules, Art. 23 (2013).
23 Contec Corp. v. Remote Solution Co., 398 F.3d 205, 208 (2d Cir. 2005).
24 Schneider v. Kingdom of Thailand, 688 F.3d 68, 72 (2d Cir. 2012) (quoting UNCITRAL Arbitration Rules, Art. 21(1) (1976)).
25 Neb. Mach. Co. v. Cargotec Solutions LLC, __ F.3d __, No. 13-2753, 2014 WL 3896179, at *3 n.2 (8th Cir. May 14, 2014).
26 In almost all cases, there is no right to an appeal to the U.S. Supreme Court. Instead, parties must seek permission of the Supreme Court to be heard on a petition for a writ of certiorari.
27 See Republic of Argentina v. BG Grp. plc, 665 F.3d 1363, 1369-73 (D.C. Cir. 2012).
28 See id. at 1369 ("The 'gateway' question in this appeal is arbitrability . . . .").
29 Id. at 1371.
30 BG Grp., 134 S. Ct. at 1206.
32 Id. at 1207.
33 Id. at 1207-08.
34 Id. at 1208.
35 See id. at 1209-10.
36 Id. at 1210.
37 Id. at 1209.
38 Id. at 1209-10.
39 See id. at 1216-24 (Roberts, C.J., dissenting).
40 Id. at 1211-12 (majority op.).
41 Id.at 1212.
42 9 U.S.C. § 10(a)(4).
43 See 9 U.S.C. § 10 (setting out grounds to vacate U.S. arbitral awards); 9 U.S.C. § 208 (providing that Chapter 1 of FAA, which applies to domestic arbitration, also applies to arbitration governed by the New York Convention to the extent that Chapter 1 is not inconsistent with the Convention); Yousef Ahmed Alghanim & Sons v. Toys 'R' Us, Inc., 126 F.3d 15, 21-23 (2d Cir. 1997) (holding that Section 10 of the FAA also applies to awards that fall under the New York Convention when made in the United States).
44 BG Grp., 134 S. Ct. at 1212-13.
45 See, e.g., Nuclear Tests (New Zealand v. France), 1974 I.C.J. 457, 515 (Joint Dissenting Op. of Judges Onyeama, Dillard, Jiménez de Aréchaga, and Sir Humphrey Waldock to Judgment of 20 Dec. 1974) ("the practice neither of the Permanent Court nor of this Court supports the drawing of a sharp distinction between preliminary objections to jurisdiction and admissibility"); Northern Cameroons (Cameroon v. U.K.), 1963 I.C.J. 15, 102 (Separate Op. of Judge Sir Gerald Fitzmaurice to Judgment of 2 Dec. 1963) ("The line between questions of jurisdiction (which basically relate to the competence of the Court to act at all) and questions of admissibility, receivability or examinability (which relate to the nature of the claim, or to particular circumstances connected with it) is apt in certain cases to get blurred. For this reason, international courts have tended to decline to draw too hard and fast a distinction, or to sub-categorise too rigidly the general category of 'preliminary objections', or else they have declared the distinction to be of secondary importance . . . ." (footnotes omitted)).
Previously published in Revista Română de Arbitra
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