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October Term, 2013

March 5, 2014

Today the Supreme Court issued one decision, described below, of interest to the business community.

Federal Arbitration Act—Preconditions to Arbitration

BG Group PLC v. Argentina, No. 12-138 (previously discussed in the June 10, 2013, Docket Report)

When parties disagree about whether a particular dispute is subject to arbitration, a threshold question often arises: Should that disagreement be resolved by the court or the arbitrator? The Supreme Court has confronted issues of this type on a number of occasions in the context of domestic arbitration. In BG Group PLC v. Argentina, No. 12-138, the Supreme Court addressed a similar question in the context of international arbitration—specifically, whether an arbitrator or a court should resolve the parties’ disagreement over the effect of the claimant’s lack of compliance with an international treaty’s precondition for arbitration, which required suit to be brought first in the local courts of the parties to the treaty. Today, the Supreme Court held that (1) under its past precedents applicable to contractual agreements to arbitrate, such “procedural preconditions” to arbitration are presumptively for an arbitrator to decide unless the parties have agreed otherwise; and (2) the fact that the requirement was included in an international treaty did not require taking a different approach.

In 1990, Argentina and the United Kingdom entered into a Bilateral Investment Treaty that provides protections to investors in each country who invest in the other country. Under the treaty, British investors who seek to challenge Argentina’s compliance with the treaty may submit the dispute to arbitration if the investors complied with a precondition—namely, a “local litigation requirement” that the investor first submit the dispute to a “competent tribunal” in Argentina and give it 18 months to rule.

In 2001, Argentina suffered a severe economic crisis and enacted emergency legislation that dramatically changed the return that the petitioner, BG Group PLC, could expect from its investment in an Argentine gas company. Argentina also adopted measures to penalize foreign investors who sought to challenge the emergency legislation in court. Contending that Argentina had violated the Bilateral Investment Treaty, BG Group commenced arbitration without complying with the local-litigation requirement. The arbitral panel excused that choice, citing Argentina’s penalties for engaging in litigation, and awarded BG Group $185 million plus interest and attorneys’ fees. Argentina then challenged the arbitral panel’s decision in federal district court in the United States. The district court confirmed the award, but the U.S. Court of Appeals for the D.C. Circuit reversed, concluding that it was for courts rather than arbitrators to decide whether the parties had complied with the local-litigation requirement.

The Supreme Court reversed in an opinion by Justice Breyer, who was joined by five other Justices. The Court first concluded that, in assessing the treaty’s arbitration provision, it would “initially treat the document before us as if it were an ordinary contract between private parties.” Slip op. 6. In that context, absent an agreement to the contrary, “courts presume that the parties intend courts, not arbitrators, to decide … disputes about ‘arbitrability.’” Slip op. 7. “On the other hand, courts presume that the parties intend arbitrators, not courts, to decide disputes about the meaning of particular procedural preconditions for the use of arbitration.” Slip op. 8. The Court concluded that the question of compliance with the local-litigation requirement was of the latter variety, and that there was nothing in the treaty that would negate the presumption that an arbitrator should resolve questions relating to procedural preconditions to arbitration—here, the effect of BG Group’s failure to comply with the local-litigation requirement. Slip op. 8-9.

Next, the Court concluded that the fact that it was interpreting a treaty rather than an ordinary contract did not alter the result. The Court noted that the United States had argued that the local-litigation requirement was a condition of Argentina’s consent to arbitration, and therefore it should be decided by a court because courts generally decide whether parties have agreed to arbitrate in the first place. But the Court disagreed, concluding that that “the treaty does not state that the local litigation requirement is a ‘condition of consent’ to arbitration,” and therefore declined to address whether different rules would apply if consent were at issue. Slip op. 11-12. (Justice Sotomayor concurred in a short opinion underscoring her view that questions of consent should be treated differently.) Having concluded that the parties’ dispute about the local-litigation requirement was properly resolved by arbitrators, the Court—applying a deferential standard of review—held that “the arbitrators’ jurisdictional determinations are lawful” because the arbitrators had not exceeded their powers. Slip op. 18-19.

Chief Justice Roberts, joined by Justice Kennedy, dissented. Viewing the treaty context as highly significant, the dissent framed the case differently, asking whether BG Group and Argentina had ever agreed to arbitrate at all. In the dissenting Justices’ view, the treaty between the United Kingdom and Argentina constituted merely a standing offer from the countries to arbitrate with investors who meet certain conditions, including satisfying the local-litigation requirement. Thus, according to the dissent, compliance with the local-litigation requirement was not merely a procedural precondition but instead a critical element of whether any arbitration agreement existed—and questions about the existence of an arbitration agreement are properly resolved by courts rather than arbitrators.

Today’s decision reaffirms the framework developed in the Court’s prior precedents on who decides different types of questions pertaining to whether a dispute is to be arbitrated. In the international-arbitration context, it is significant that the Court borrowed from its jurisprudence governing private arbitration agreements in assessing treaty questions. Participants in international-arbitration disputes should be aware that the Court has left “for another day the question of interpreting treaties that refer to ‘conditions of consent’ [to arbitration] explicitly.” Slip op. 15.

Any questions about this case should be directed to Archis A. Parasharami (+1 202 263 3328) in our Washington office, James E. Tancula (+1 312 701 7900) in our Chicago office, or William H. Knull (+1 713 238 2636) in our Houston office.

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