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ARGENTINA v. BG GROUP PLC: THE U.S. COURT OF APPEAL’S (MISTAKEN?) DECISION

In this post, MARIA ATHANASIOU analyzes the US Court of Appeals decision (17.01.2012) which vacated the investment tribunal award in BG Group PLC v. Argentina.

On 17 January 2012, the U.S. Court of Appeals for the District of Columbia Circuit  reversed the orders of the U.S. District Court for the District of Columbia (Republic of Argentina v BG Group PLC, 715 F.Supp.2d 108 (D.D.C.2010); Republic of Argentina v. BG Group PLC, 764 F. Supp. 2d 21 (D.D.C. 2011) at  denying the Republic of Argentina’s motion to vacate and granting BG Group’s cross-motion to confirm, the Final Award rendered against the Republic in the international investment arbitration case of BG Group PLC v The Republic of Argentina, and vacated said Award (Republic of Argentina v. BG Group PLC , D.C. Cir. Jan. 17, 2011).  The Court of Appeals heeded Argentina’s argument that the arbitral Tribunal had exceeded its authority (a ground for annulment under Section 10(a) of the Federal Arbitration Act) by ignoring the terms of the parties’ agreement in the form of the Bilateral Investment Treaty between Argentina and the U.K – holding that the Tribunal had disregarded the conditions set forth in Article 8(2)(a) of the Argentina-U.K. BIT when it dispensed BG Group with the obligation to commence litigation before Argentine courts for 18 months prior to initiating international investment arbitration proceedings.

How did the Tribunal reach its decision with respect to the 18-month litigation provision of the BIT?

Article 8(2)(a) of the BIT provides that a party may submit a dispute to international arbitration:

“(a) if one of the Parties so requests, in any of the following circumstances:

(i) 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; (ii) where the final decision of the aforementioned tribunal has been made but the Parties are still in dispute;”

 The Tribunal went along the lines of Argentina’s characterization of its objection on BG’s non-compliance with Article 8(2)(a), that is, that the “failure by BG to bring its grievance to Argentine courts for 18 months renders its claims in this arbitration inadmissible” and dealt with the issue under the heading “Are BG’ Claims Admissible?” (emphasis added).  The Tribunal also accepted that Article 8(2)(a) is mandatory.  Nevertheless, it added that such provision, “[a]s a matter of treaty interpretation, […] cannot be construed as an absolute impediment to arbitration” and that “[w]here recourse to the domestic judiciary is unilaterally prevented or hindered by the host State, any such interpretation would lead to the kind of absurd and unreasonable result proscribed by Article 32 of the Vienna Convention, allowing the State to unilaterally elude arbitration […]”.  The Tribunal took into consideration the fact that Argentina, through its Emergency Law and its regulations restricted the effectiveness of remedies before Argentine courts and had excluded from the renegotiation process any licensee that brought an action before such courts.  The Tribunal therefore, applied the futility rule and found “admissible the claims brought by BG in this arbitration” (emphasis added).

How did the Court of Appeals view the Tribunal’s decision on the 18-month litigation provision of the BIT?

For the Court of Appeals, the question before it was one of arbitrability, or differently, the power of the arbitrator to determine its jurisdiction.  As such, the Court seems to have viewed the 18-month litigation requirement of Article 8(2)(a) as a jurisdictional requirement, albeit it had foregone any interpretation of Article 8(2)(a) itself.  The Court of Appeal focused on the intent of the parties and noted that “[w]here as here, the result of the arbitral award was to ignore the terms of the Treaty and shift the risk that the Argentine courts might not resolve BG Group’s claim within eighteen months pursuant to Article 8(2) of the Treaty, the arbitral panel rendered a decision wholly based on outside legal sources and without regard to the contracting parties’ agreement establishing a precondition to arbitration.”  Because the fulfillment of Article 8(2)(a) was not within the Tribunal’s jurisdiction, it seems that the Court of Appeals saw that the Tribunal had no competence to rule on its jurisdiction altogether.  The Court of Appeals therefore, implicitly discarded any question that this issue might have been one of admissibility (where the Tribunal would have jurisdiction to rule on it and to decide whether to exercise its jurisdiction at the specific time) and vacated the Tribunals’ decision on the ground that the latter had exceeded its powers.

Was the Court of Appeals’ decision mistaken?

My previous post on the recent Abaclat v Argentina decision , would give an impression that I would be in full agreement with the Court of Appeals’ decision for vacatur in the Republic of Argentina v. BG Group PLC.  Albeit my personal views regarding the nature of the 18-month litigation requirement, I believe that the Court of Appeals in this case, had two options, both of which would have probably led to a denial of the motion to vacate the award.

First, the Court of Appeals could have concluded that the Tribunal’s decision on the 18-month requirement was a decision on the admissibility of the claim and therefore, final.  This comes back to the long-debated (and difficult) distinction between the two concepts, that of jurisdiction and that of admissibility.  The definition of the distinction that prevails in the modern international investment arbitration world, is that of Jan Paulsson in his work on “Jurisdiction and Admissibilityin Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honour of Robert Briner (2005).  Paulsson states that to understand whether a challenge pertains to jurisdiction or admissibility, one should imagine that it succeeds:

“[I]f the reason for such an outcome would be that the claim could not be brought to the particular forum seized, the issue is ordinarily one of jurisdiction and subject to further recourse.  If the reason would be that the claim should not be heard at all (or at least not yet), the issue is ordinarily one of admissibility and the tribunal’s decision is final.” (emphasis added)

The Court of Appeals therefore, could have left the Tribunal’s decision alone.

Second, the Court of Appeals could have stated that even if the Tribunal accepted Argentina’s characterization of the 18-month litigation requirement as an issue of admissibility, non-compliance with an admissibility issue in ICSID, has the same consequence as that of failing to comply with the requirements of jurisdiction, that is, the Tribunal cannot exercise jurisdiction over the dispute. This was in fact stated by the tribunal Burlington v. Ecuador when dealing with a similar issue.

In such a case, the Court of Appeals could have found that the Tribunal would only have exceeded its powers, if it dispensed BG Group with complying with the 18-month litigation requirement without applying the futility (or any other) rule permitting it to take such course.  The Tribunal however, did not do that.  It very much found and reasoned its decision that pursuing litigation before Argentine courts in the case before it would have been futile.  In fact, the International Court of Justice is of the view that futility does not require fulfillment of similar jurisdictional requirements (See Application of the International Convention on the Elimination of All Forms of Racial Discrimination, Judgment on Preliminary Objections ).  Therefore, albeit the Tribunal’s explicit characterisation of, or implicit view on the 18-month litigation requirement, an analysis of the facts (as that made by the Tribunal) could have led the Court of Appeals to the conclusion that any objection that would deprive such Tribunal with jurisdiction, would have to be overruled.

I am therefore very sceptical as to whether the Court of Appeals followed the right path in reaching its decision.  Even more so, as its decision could cause floodgates of proceedings before U.S. courts seeking the annulment of international investment awards against sovereigns who had lost the battle on jurisdiction (or admissibility) of their claims on similar issues, but where Tribunals were correct in applying long-standing international exceptions, such as the futility rule.

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4 responses »

  1. Brilliant analysis Maria! Well-done. It is interesting though that the tribunal did not use the MFN clause to overcome the jurisdictional obstacles. I have not read the award, so perhaps the issue was debated and the tribunal declined to follow the Maffezzini approach.

    Reply
  2. Sergiy, in my opinion Tribunal did not use the MFN clause not declining neither the Maffezini, nor Siemens or Gas Natural approach. I like to turn your attention to the sections 147-156 of the Award, with conclusions in section 156 of the Award:

    “Rather, the Tribunal notes that a serious problem would loom if admissibility of Claimant´s claims were denied thus allowing Respondent at the same time to:

    a) restrict the effectiveness of domestic judicial remedies as a means to achieve full implementation of the Emergency Law and its regulations;

    b) insist the Claimant go to domestic courts to challenge the very same measures; and

    c) exclude from regenotiation process any licensee that does bring its grievance to local courts.”

    It seems to me, with emphazis to the a) point of this conclusion, that by preventing (by virtue of Decree 214/02 which imposed five year stay to any proceeding of the same matter as is subject matter of the case at hand) thatin the very centre of the jurisdiction question is not the problem “jurisdiction-or-admissibility” but one of the “precondition deliberately frustrated”.

    In fact, bearing in the mind Occidental v Ecuador, I think that legal frustration of “condition precedent” in form of proceeding before Argentine courts is of the very same nature as practical frustration of settlement negotiations as termed in “cooling-off periode” provisions in the case of Occidental… and I am quite curious why Tribunal does not adressed this point of deliberated frustration of precondition caused by precondition failure beneficiary ….

    Reply
    • Maria Athanasiou

      Dear Slavomir,

      Thank you for your interesting comments. Indeed the central issue in this case was not the nature of the precondition, i.e. jurisdictional or one of admissibility. The issue was whether the non-fulfilment of the condition (be it jurisdictional or one of admissibility) was fulfilled. As you would have seen in the practice of the International Court of Justice, which sees similar pre-conditions as jurisdictional, futility dispenses the claimant from complying with susch pre-conditions. In this respect, I trully believe that the Tribunal was right.

      My analysis on the US Court of Appeals decision touches upon the distinction of the two notions, because I wanted to show that perhaps such decision was more problematic than welcoming, if one takes into consideration the practice of investment arbitral tribunals on pre-arbitration conditions (lets exclude the issue of MFN) and the effects of such practice (which is divided into two schools of thought, one that sees them as jurisdictional issues and one that sees them as issues of admissibility):

      1. If the Tribunal dealt with it as a matter of admissibility (which it seems it did) then the Court could not have touched the decision: The Tribunal’s decision was final;

      2. If the Court believed that the Tribunal, despite its use of words, dealt with it as a jurisdictional issue, then it had the right to consider the appeal. At this point, (a), (b) and (c) become important because they seem to fall under the futility rule. In my view, the Court should not have disregarded those factors. As such, I believe that even if one sees the pre-condition as a jurisdictional issue, in this case, the requirement was met and the Court of Appeals should have left the Tribunal’s decision be.

      The discussion on such pre-conditions more often than not touhes the distinction of the two notions. This is why, I would assume that conficting decisions would be more excused based on how one sees the nature of such pre-conditions. In this case however, I believe, that regardless of either nature, the Court of Appeal’s decision could have been different.

  3. Mohammad Yaish

    Hello, it is great work. I am writng a paper in this issue.
    I can not find any articles or books discuss the 18 months litigation in the BITs. I am wondering if u have any more information reagrding to this issue.

    Reply

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