Competence-Competence Under U.S. Arbitration Law After BG Group Plc V. Republic Of Argentina

Abstract

This article discusses the decision of the United States Supreme Court in BG Group plc v. Republic of Argentina, issued on 5 March 2014, and the effect of that decision on principles of competence-competence under U.S. arbitration law. The U.S. Supreme Court held that a provision in a bilateral investment treaty that required the claimant to first bring its claim in the local courts for a period of eighteen months was a procedural issue and not an issue of "arbitrability," as that term is used in U.S. arbitration law. Therefore, U.S. courts were required to defer to the UNCITRAL tribunal's decision that a claim was admissible even though the claimant failed to comply with the provision, and were only permitted to annul the award under the narrow grounds provided in the U.S. Arbitration Act.

Introduction

United States courts have long recognized the fundamental principle of competence-competence—that arbitral tribunals have the power to decide, at least in the first instance, whether a dispute falls within their authority to resolve on the merits—but there has been uncertainty as to whether a U.S. court faced with a challenge to an international award issued in the United States should defer to the tribunal or review the issue independently (or de novo). The March 2014 decision of the U.S. Supreme Court in BG Group plc v. Republic of Argentina partially resolves that uncertainty but leaves important questions unanswered.

The issue in BG Group was whether U.S. courts, asked to annul an UNCITRAL award rendered in the United States under the U.S. Arbitration Act of 1925 (known as the "Federal Arbitration Act" or "FAA"), should defer to the arbitral tribunal's decision that BG Group's claims brought under the United Kingdom- Argentina Bilateral Investment Treaty (the U.K.- Argentina BIT) were admissible. The BIT provides that an investment dispute must first be submitted to the competent court of the host State, but allows ICSID or UNCITRAL arbitration if the local court has not issued a final decision within eighteen months from submission of the dispute.1 In 2003, BG Group commenced an UNCITRAL arbitration against Argentina sited in Washington, D.C., without first suing in the Argentine courts. The tribunal concluded that BG Group's claims were admissible because the Argentina had restricted access to the courts to challenge the emergency measures passed during the Argentine financial crisis in 2001-2002.2

BG Group petitioned the U.S. courts in Washington, D.C. to confirm the award under the New York Convention and Federal Arbitration Act, while Argentina sought to annul the award. After two lower courts issued rulings, the U.S. Supreme Court agreed to review the case and held that the requirement to first submit the dispute to the local courts was not an issue of the arbitration agreement's existence, validity, or scope—which fall under what U.S. courts call the "arbitrability" of a dispute—but was instead a procedural precondition to arbitration. As such, the Supreme Court held that the award could only be annulled if the tribunal exceeded its powers in concluding that BG Goup's claims were admissible, which, the Court decided, the tribunal did not.3

In this article, I first discuss the arbitration between BG Group and Argentina and the tribunal's award. Second, in order to put the U.S. Supreme Court's decision in context, I explain U.S. law on the review of a tribunal's "arbitrability" decisions, and how that ambiguous term often encompasses both jurisdiction and admissibility, as understood by international tribunals. Third, I address the Supreme Court's holding and rationale in BG Group v. Argentina. Finally, I explain the consequences of that decision for future review of arbitral awards in the United States.

The Arbitration Between BG Group and Argentina

On 25 April 2003, BG Group, a British corporation, commenced ad hoc UNCITRAL arbitration against Argentina under Article 8 of the U.K.-Argentina BIT. The tribunal of Guillermo Aguilar Alvarez (president), Professor Albert Jan van den Berg, and Professor Alejandro M. Garro was constituted pursuant to the UNCITRAL Arbitration Rules.

BG Group had a majority interest in Gas Argentino, S.A. (GASA), which in turn had a majority ownership interest in MetroGAS S.A., a natural-gas distribution company incorporated in Argentina with an exclusive license to distribute natural gas in and around Buenos Aires.4 The license under which MetroGAS operated contained stabilization clauses that provided for the stability of the regulatory framework and tariff regime under which MetroGAS was to operate.5 In 1998-2002, Argentina experienced a severe economic crisis that led Argentina to default on its foreign debt and caused Argentina to make a number of legal changes with profound effects on public contracts. On 6 January 2002, Argentina, under President Eduardo Duhalde, enacted Law 25.561 (the Emergency Law).6 Among other things, the Emergency Law declared a state of emergency and eliminated Argentina's previously mandated parity between the Argentine peso and the U.S. dollar, ordered that dollar-denominated obligations be converted into pesos at the rate of one peso to one dollar, prohibited licensees from suspending or altering performance of their obligations, rejected any "vested rights" contrary to the Emergency Law, and authorized the executive to renegotiate state contracts with publicservice providers.7

BG Group claimed that these and other measures put MetroGAS in critical financial condition and violated various provisions of the U.K.-Argentina BIT. Argentina raised objections to the tribunal's jurisdiction and to the admissibility of the dispute. Among other such challenges, Argentina argued that the claims were inadmissible because BG Group failed to first bring the claims to the Argentina courts for a period of eighteen months as required under Article 8 of the BIT.8 BG Group responded that it would have been futile to commence litigation in Argentina because Argentina had stayed all suits challenging the emergency measures and had excluded from the contractual renegotiation process any licensees that sought judicial redress.9

The tribunal found that Argentina had directly interfered with the normal operation of its courts and created a disincentive to litigation by prohibiting licensees from both litigating and renegotiating their contracts.10 The...