Expert Guide Litigation & Dispute Resolution 2013 August 2013
Winston & Strawn - Kirkland & Ellis - Lubis Ganie Surowidjojo - King & Wood
U.S. Supreme Court to Venture into International Investment-Arbitration Arena By Mark N. Bravin & Eric M. Goldstein
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or the first time, the U.S. Supreme Court is poised to decide a case involving preconditions to arbitration under a bilateral investment treaty (BIT). BG Group PLC v. Republic of Argentina presents the question whether a court or an arbitrator determines whether a precondition to arbitration has been satisfied. Because the Supreme Court may set the standard for U.S. courts deciding whether to confirm arbitral awards rendered against a foreign sovereign under a BIT, the decision may impact investors’ perception of the United States as a hospitable forum for award confirmation and enforcement.
Argentina asked a U.S. district court to vacate the arbitration award. The court determined that the arbitral tribunal had jurisdiction to determine its own jurisdiction. Thus, the tribunal could decide whether compliance with the litigation precondition in the BIT was excused. The tribunal’s ruling on that issue could be reviewed by a U.S. court to determine whether the tribunal exceeded its power, but the court would give deference to the tribunal’s analysis. Applying the deferential standard, the district court denied Argentina’s motion to vacate, and granted BG Group’s motion to confirm the award.
Overview of BG Group v. Argentina At issue in BG Group is a clause in the 1990 BIT between Argentina and the United Kingdom that requires an investor first to litigate any Treatybased investment dispute for eighteen months in Argentinean court before initiating arbitration. BG Group saw its investment in Argentina’s natural gas distribution sector virtually eliminated as a result of certain market-correction measures Argentina took in the wake of an economic crisis. Because Argentina also implemented measures to restrict access to its court system and penalise investors who attempted to file suit, BG Group initiated arbitration without first going to court. The arbitral panel seated in the United States received written submissions and held hearings on the jurisdictional question. In a unanimous, 139page award, the arbitrators rejected Argentina’s jurisdictional objections and ruled in BG Group’s favour. The panel determined that, under international law principles and the Vienna Convention, compliance with the litigation precondition was excused because Argentina had itself prevented access to its courts. The panel further ruled for BG Group on the substance of the dispute. BG Group PLC v. Republic of Argentina, ad hoc arbitration (Final Award of Dec. 24, 2007) (Alvarez, Garro, van den Berg).
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On appeal, the U.S. Court of Appeals for the D.C. Circuit reversed. It recognised that the threshold question was arbitrability: Did Argentina and the U.K., as the BIT’s contracting parties, intend for an investor under the Treaty to be able to seek arbitration without first fulfilling the litigation precondition? But the antecedent question was whether the parties intended a court or an arbitrator to provide the answer. The court of appeals reviewed Supreme Court precedent establishing that a court will determine arbitrability independently in the “narrow circumstances where the contracting parties would likely have expected a court to have decided the gateway matter, where they are not likely to have thought that they agreed that an arbitrator would do so, and, consequently, where reference of the gateway dispute to the court avoids the risk of forcing parties to arbitrate a matter that they may well not have agreed to arbitrate.” Howsom v. Dean Witter, 537 U.S. 79, 83-84 (2002). On the other hand, a court will afford “considerable leeway” to an arbitrator’s determination of arbitra-
bility where there is “clear and unmistakable evidence” that the parties intended for the arbitrator to decide the question. First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 943 (1995). The Argentina-U.K. BIT incorporated the UNCITRAL Arbitration Rules, which U.S. courts have determined manifests “clear and unmistakable” evidence that the contracting parties intended for the arbitrator to determine arbitrability. See Republic of Ecuador v. Chevron Corp., 638 F.3d 384, 394 (2d Cir. 2011). But in BG Group, the court of appeals explained that the Treaty’s incorporation of the UNCITRAL Rules had a temporal limitation: They did not become applicable until the investor first satisfied the litigation precondition. The court explained further that the parties likely intended a court to decide whether the precondition had been satisfied, given that the precondition itself required resort to a court. Thus, because the Treaty required BG Group first to litigate its claim in Argentinean court for eighteen months, and it did not do so, the court of appeals reversed the district court’s judgment and vacated the award. In its Fall Term, the U.S. Supreme Court will decide the issue. In so doing, it may provide guidance for lower courts on how to deal with similar arguments by a foreign sovereign, for example that it did not consent to arbitrate an investment claim because of a temporal limitation in the BIT. The controversy over preconditions in international treaty-based investment arbitration This issue has split arbitral tribunals deciding whether to exercise jurisdiction over treaty-based arbitration claims where the claimant has failed to satisfy a local-courts precondition established in the relevant BIT. Some agree with the BG Group tribunal that a failure to comply can be excused, possibly on grounds of futility. For example, in another dispute brought against Argentina, a tribunal at the International Centre for Settlement of Investment Disputes (ICSID) excused the claim-
ants’ failure to satisfy the local-courts precondition of the Italy-Argentina BIT. Abaclat v. Argentina, ICSID Case No. ARB/07/5 (Decision on Jurisdiction & Admissibility of Aug. 4, 2011) (Tercier, AbiSaab, van den Berg). More recently, however, a different ICSID tribunal issued a final award declining jurisdiction over a $300 million arbitration claim against Turkmenistan on the ground that the claimant, a Turkish construction company, failed to satisfy the localcourts precondition of the Turkey-Turkmenistan BIT. Kilic v. Turkmenistan, ICSID Case No. ARB/10/1 (Award of July 2, 2013) (Rowley, Park, Sands). Although the tribunal was unanimous that alleged “futility” could not excuse a failure to satisfy the precondition, Kilic’s appointed arbitrator (Prof. Park) issued a separate opinion expressing his view that the failure could be remedied by staying the arbitration to permit Kilic to resort to the local courts. What the U.S. Supreme Court might do in BG Group The U.S. Supreme Court’s trend in cases involving domestic arbitrations has been to “rigorously enforce” arbitration agreements, Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985), and defer to arbitrators’ decisions. For example, the Court held recently that contractual waivers of class arbitration must be enforced even when the cost of individual arbitration exceeds the potential recovery. Am. Express Co. v. Italian Colors Restaurant, 133 S. Ct. 2304 (2013). Two years ago, the Court foreshadowed the result in American Express by holding that the Federal Arbitration Act (FAA) preempts state laws precluding classarbitration waivers. AT&T Mobility v. Concepcion, 131 S. Ct. 1720 (2011). Relatedly, the Court decided a case in which the arbitrator determined that the parties intended to authorise class proceedings, even though the arbitration agreement did not so provide expressly. The Supreme Court held that the arbitrator’s decision must stand as long as he was “arguably construing” the parties’ contract, emphasising the strong deference owed.
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Oxford Health Plans LLC v. Sutter, 133 S. Ct. 2064, 2068-69 (2013). And in 2008, the Court circumscribed the bases on which a party could successfully urge vacatur, modification or correction of an arbitral award in U.S. court, holding that the grounds stated in sections 10 and 11 of the FAA, 9 U.S.C. §§ 10, 11, are exclusive. Hall Street Assocs., LLC v. Mattel, Inc., 552 U.S. 576 (2008). BG Group puts these two goals—enforcing the parties’ arbitration agreement and deferring to the arbitrator’s decision—in tension. On the one hand, enforcing the terms of the agreement (here, the Argentina-U.K. BIT) would mean affirming the court of appeals’ ruling that BG Group was required to satisfy the litigation precondition. On the other hand, deferring to the arbitrators’ decision would mean reversing the court of appeals’ ruling. That the arbitration agreement is contained in a treaty rather than a contract may tip the scales in favour of affirmance. Under U.S. law, courts are required to take extra care in determining rights under a treaty, which often implicates foreign sovereignty. Indeed, “the background presumption is that ‘[i]nternational agreements, even those directly benefiting private persons, generally do not create private rights or provide for a private cause of action in domestic courts.’” Medellin v. Texas, 552 U.S. 491, 505-06 n.3 (quoting 2 RESTATEMENT (THIRD) OF FOREIGN RELATIONS LAW OF THE UNITED STATES § 907 cmt. a (1986)). “Accordingly, a number of the [federal] Courts of Appeals have presumed that treaties do not create privately enforceable rights in the absence of express language to the contrary.” Id. (emphasis added). Applying this presumption, the U.S. Court of Appeals for the D.C. Circuit held that the Treaty of Amity (a precursor to BITs) between the U.S. and Iran did not provide McKesson Corporation with a cause of action under U.S. law for its claim of expropriation against Iran. McKesson Corp. v. Islamic Republic of Iran, 539 F.3d 485, 488-91 (D.C. Cir. 2008). The court of appeals’ holding that “[i] 14 - Expert Guide : Litigation & Dispute Resolution 2013
n the absence of a textual invitation to judicial participation, we conclude the President and the Senate intended to enforce the Treaty of Amity through bilateral interaction between its signatories[,]” id. at 491, illustrates another unique feature of treaty- (versus contract-) based arbitration: The arbitrating parties are not the contracting parties. Rather, the arbitration pits one contracting nation against an investor of the other contracting nation. As such, courts must scrutinise the text of the treaty to determine the intent of the contracting parties, one of which is not present to explain its position. Although the Supreme Court may be prone to issue a narrow ruling, dealing specifically with the type of precondition at issue in BG Group—resort to local courts for a certain amount of time—the Court’s approach has potentially broader implications for the interpretation of treaty provisions that govern investor-state arbitrations.
Eric M. Goldstein is an associate in the Washington, DC office of Winston & Strawn LLP. As a member of the firm’s appellate and critical motions practice group, he participates regularly in cases before the U.S. Supreme Court and the federal courts of appeals. He also has significant experience in cases involving issues of international law and international arbitration. Before joining the firm, Eric served as a law clerk to the Hon. Raymond M. Kethledge of the U.S. Court of Appeals for the Sixth Circuit. He is a graduate of Washington University School of Law, cum laude, and Cornell University. Eric may be contacted via email at
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Mark N. Bravin co-leads Winston & Strawn LLP’s International Arbitration Practice and teaches Investor-State Dispute Resolution at Georgetown Law. He has represented governments and private parties in international disputes for over 30 years. In 2013, Mr. Bravin obtained a final merits judgment for McKesson Corporation against Iran for expropriation of a dairy McKesson founded in 1959. In December 2011, he assisted Romania to defeat a Greek investor’s expropriation claim and win reimbursement of attorneys’ fees. He is a graduate of Harvard Law School and the J. F. Kennedy School of Government at Harvard University. Mark may be contacted via e-mail at
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