U.S. Supreme Court Holds That Arbitrators, Not Courts, Are Entitled To Interpret Local Litigation Requirements In Bilateral Investment Treaties

On March 5, the U.S. Supreme Court held in BG Group PLC v. Republic of Argentina, --- S.Ct. ---, 2014 WL 838424 (March 5, 2014) that local litigation requirements in bilateral investment treaties (BITs) are generally procedural preconditions to arbitration and that arbitrators, rather than courts, should interpret and apply such requirements in the first instance, subject to only very limited judicial review. The decision is available here.

The majority, in an opinion by Justice Breyer, adopted a two-step analysis. It first assessed the local litigation provision as if it were contained in an ordinary commercial contract between private parties, and then it asked whether the provision's inclusion in a BIT rather than a contract altered the result. The Court concluded that, under principles applicable to ordinary contracts under the FAA, the provision's subject would be considered a procedural issue and thus a question for the arbitrator to decide in the first instance. The Court then determined that because a treaty is in many respects akin to a contract, the result was the same for the local litigation requirement in the UK-Argentina BIT. Absent a clause expressly assigning interpretation of local litigation obligations to courts, the Court held, the arbitrator's decision on the matter would be entitled to "highly" deferential review under the FAA; applying this analysis, the Court readily concluded that there were no grounds for setting aside the arbitrators' determination that compliance with the local litigation requirement would be futile and, as a consequence, not required by the BIT. Reversing the D.C. Circuit's decision, the Supreme Court reinstated the $185 million award against Argentina.

Background

Petitioner BG Group is a British company with a significant stake in MetroGas, a company that distributed natural gas in Buenos Aires. In 2001 and 2002, Argentina changed the rules that its regulators used to calculate gas tariffs, resulting in losses for MetroGas. In 2003, BG Group initiated an arbitration against Argentina under the dispute resolution provisions of the UK-Argentina BIT (under the UNCITRAL Arbitration Rules in an arbitration seated in Washington, D.C.).

Article 8(2)(a) of the BIT required parties to seek resolution of the dispute first in the local courts and wait 18 months prior to initiating arbitration under the BIT. BG Group did not comply with the local litigation requirement and Argentina argued to the arbitral...