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Case of the Day: Republic of Argentina v. BG Group plc

Argentine coinsThe case of the day, Republic of Argentina v. BG Group plc (D.C. Cir. 2012), is related to one of the very first Letters Blogatory cases of the day. The case arises out of the Argentine financial crisis in 2001, when Argentina enacted emergency laws to unpeg the peso from the dollar, to convert dollar-based adjustment clauses in contracts into peso-based adjustment clauses, to prohibit inflation adjustments based on foreign price indices, and to convert dollar-based tariffs into peso-based tariffs on a one-to-one basis. The new laws also provided for renegotiation of public service contracts, except for contractors that sought recourse in the courts, and for a stay of 180 days of any injunctions or executions in lawsuits resulting from the emergency laws’ effects on the financial system.

BG was an investor in MetroGAS, which had a thirty-five year exclusive license to distribute gas in Buenos Aires. MetroGAS’s contract with the state provided for calculation of tariffs in dollars and use of the US PPI to make inflation adjustments, so BG and the other investors in MetroGAS were adversely affected when the emergency laws came into effect.

Argentina and the United Kingdom had a bilateral investment treaty that provided for submission of disputes to “the decision of the competent tribunal of the Contracting Party in whose territory the investment was made”, but which also provided for arbitration

where, after a period of eighteen months has elapsed from the moment when the dispute was submitted to the competent tribunal of the Contracting Party in whose territory the investment was made, the said tribunal has not given its final decision.

The treaty then provides for a procedure to take effect upon referral to arbitration:

Where the dispute is referred to international arbitration, the investor and the Contracting Party concerned in the dispute may agree to refer the dispute either to:

(a) the International Center for the Settlement of Investment Disputes … or

(b) an international arbitrator or ad hoc arbitration tribunal to be appointed by a special agreement or established under the Arbitration Rules of the United Nations Commission on International Trade Law.

If after a period of three months from written notification of the claim there is no agreement to one of the above alternative procedures, the Parties to the dispute shall be bound to submit it to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law as then in force. …

BG demanded arbitration without first proceeding in the Argentine courts, as the BIT seemed to require. It pointed to an article by the former Attorney General and Minister of Justice, which estimated that it would take six years to resolve BG’s claim in the Argentine courts. BG therefore asserted that the treaty provision was senseless, and in the alternative, that under customary international law it was not required to exhaust its local remedies and that under the BIT’s most-favored-nation clause, BG could not be required to resort to the courts, because Argentina’s BIT with the United States lacked such a provision.

The Tribunal, sitting in Washington, decided that it had jurisdiction. It rejected BG’s arguments that the treaty’s provision on first resort to the courts was futile because of the length of time it would take the courts to resolve the dispute and that customary international law did not require exhaustion of local remedies. But it held that the treaty provision was not an “absolute impediment to arbitration”, because Argentina had, by emergency decree, restricted access to its courts and excluded from the renegotiation process contractors that sought redress, application of the treaty would be “absurd and unreasonable,” such as to permit recourse to “supplementary means of interpretation” when an interpretation in accordance with the plain language “leads to a result which is manifestly absurd or unreasonable.”

Argentina sought to vacate the award in Washington. The judge denied its motion and granted BG’s cross-motion to confirm the award (the decision on the motion for confirmation is what was at stake in the earlier case of the day). Argentina appealed.

The threshold question on appeal was whether the parties had agreed to submit the issue of arbitrability to the tribunal, since under US law, the parties may choose whether to submit the issue of arbitrability to arbitration, and the courts will not assume such an agreement without “clear and unmistakable” evidence of the parties’ intent. In general, where an arbitration agreement incorporates the UNCITRAL Rules, courts conclude that the parties clearly and unmistakably intend for the tribunal to decide questions of arbitrability. See Republic of Ecuador v. Chevron Corp., 638 F.3d 384 (2d Cir. 2011). But the panel noted that the BIT’s incorporation of the UNCITRALRules is triggered only after the investor has sought recourse for eighteen months in the courts.

Argentina had conceded, at oral argument in the district court, that the tribunal would have the power to rule on arbitrability after the arbitration clause was triggered by eighteen months’ recourse to the Argentine courts, but Argentina did not concede that the tribunal would have the power to rule on arbitrability if a party ignored the treaty’s provisions, as BG did. Nor does it really make sense to conclude that the parties intended that an arbitrator rather than a court should decide whether a provision requiring first resort to the court should be followed.

Thus, the panel held, the district court had erred in denying the motion to vacate the award, handing Argentina a rare victory in its fight against disgruntled investors and bondholders.

Esteemed fellow blogger Marc J. Goldstein has sharply criticized the decision on grounds of circularity:

Do any readers share my view that there is a certain circularity in this reasoning? “Jurisdiction” is power to adjudicate. The Republic of Argentina moved to vacate the award on the grounds that the arbitral tribunal adjudicated despite lacking power to adjudicate. How, then, could the Tribunal’s decision to the contrary have been anything other than a ruling on an objection to jurisdiction? And if it was a ruling on an objection to jurisdiction, then under the Court’s own statement of the law, the tribunal’s decision on jurisdiction was entitled to be reviewed as an award under the Federal Arbitration Act. Moreover, wasn’t the arguably premature invocation of arbitral jurisdiction a glaringly foreseeable type of dispute for the treaty parties, given the treaty’s Argentine litigation provision – making the absence of a carve-out from the arbitral tribunal’s jurisdiction-deciding powers more revealing, in terms of the treaty parties’ intent, than the absence from the treaty of a definite allocation of power over that issue to the courts or the arbitral tribunal?

On balance, I think the panel was right notwithstanding this objection. The treaty seems to provide a sequence of events that had to take place in a particular order: (1) litigation; (2) demand for arbitration; and (3) incorporation of the UNCITRAL Rules if the parties could not agree on an arbitration procedure. The premise of the objection, if I understand it correctly, is that the court had already acknowledged that incorporation of the UNCITRAL rules constitutes clear and unmistakable evidence of an intent to refer arbitrability to the arbitrator. So it should have concluded (goes the objection) that the tribunal was entitled to make the call. But the court’s point is that at the time that BG sought arbitration, Argentina had not yet agreed to the UNCITRAL Rules. Argentina’s agreement to arbitrate under those rules only could come into effect after a litigation in the Argentine courts. Given the parties’ (the UK and Argentina’s, not Argentina’s and BG’s) evident intent to litigate in the courts before arbitration, I think this is a reasonable construction of the treaty. And given the court’s conclusion that the parties’ agreement to the UNCITRAL Rules had not yet been triggered, the question of construction was for the courts to decide.

Photo credit: Jorge Gobbi (license)