Judicial review of investment treaty awards: BG Group v. Argentina.

Author:Roberts, Anthea

On March 5, 2014, the United States Supreme Court, in BG Group PLC v. Republic of Argentina, (1) ruled for the first time on the standard of review U.S. courts should apply when examining investment treaty awards to determine whether an arbitral tribunal exceeded its powers. In a 7-2 split, with a concurrence, the majority adopted a highly deferential standard of review based on interpretive presumptions developed under U.S. domestic law for arbitration agreements found in ordinary contracts between private parties. The dissent, by contrast, opted for a de novo standard of review based on the recognition that states have delegated an important function of policing arbitral decisions on jurisdiction to national courts and that particular care is required when this function is exercised in investor-state disputes founded on interstate treaties. The dissent's approach is preferable because it appreciates the public international law basis and public law nature of investment treaty arbitration, which differs in important ways from contractual arbitration between private parties.

Standards of review are a crucial issue in the investment treaty system because investor-state awards are not currently subject to a full-blown appellate review mechanism. Instead, awards issued under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention) are subject to annulment on certain bases, which include that the tribunal "manifestly exceeded its powers." (2) Absent annulment, the ICSID Convention requires contracting states to recognize awards as binding and to enforce them as if they were final judgments of their own courts. (3) By contrast, non-ICSID Convention awards, like the one at issue in BG Group, are open to two avenues of judicial review by domestic courts. First, one of the disputing parties may seek to set aside the award in the seat of arbitration under the laws of that state. Second, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards obliges contracting states to recognize and enforce arbitral awards but permits a disputing party to resist recognition and enforcement on certain specified grounds. (4) These grounds and the grounds for setting aside are usually similar (5) and typically include that the award deals with a dispute or matters outside the scope of the submission to arbitration. (6)

Although triggered by different grounds of review and institutional structures, annulment proceedings and national court review share at least two characteristics: they cannot be too interventionist because they are not meant to amount to full appellate review, but they cannot be too deferential because they must provide some meaningful level of oversight, especially on jurisdictional questions. That is why the issue of standards of review assumes particular importance in the investment treaty system. The appropriate standard has prompted considerable controversy in the annulment context but to date has received little attention in the national court context. The sharply diverging opinions in BG Group should change this asymmetry by enlivening the debate about what standard national courts should adopt when reviewing investment treaty awards, particularly when reviewing preconditions to jurisdiction. To that end, part I contextualizes and critiques the majority approach in BG Group. Part II then develops a comparative assessment of the approaches of annulment committees and other national courts to standards of review, and explores what lesson can be drawn from this case about the disaggregated--and sometimes far from ideal--state when it comes to internalizing multiple and conflicting interests.


    The Path to the Supreme Court

    BG Group, a company from the United Kingdom, was an investor in Argentina's gas industry. In 2003, it commenced international arbitration against Argentina pursuant to Article 8 of the Argentina--United Kingdom bilateral investment treaty (Treaty). (7) BG Group claimed that Argentina's gas tariff laws enacted in the face of the Argentine economic crisis in 2001 and 2002 violated the expropriation and fair and equitable treatment provisions of the Treaty. (8)

    Article 8(1) of the Treaty provides that an investor-state dispute that has not been amicably settled shall be submitted to a tribunal in the host state. Article 8(2) provides that the dispute shall be submitted to arbitration in one of two circumstances. Under subparagraph (a), either disputing party may submit the dispute to arbitration (i) eighteen months after the dispute has been submitted to a tribunal of the host state and that tribunal has not given a final decision; or (ii) where the host state's tribunal has given a decision, but the parties are still in dispute. Under subparagraph (b), the investor and the host state may agree to submit the dispute to arbitration at any time.

    Argentina objected that BG Group's claim was inadmissible on the basis that the company had violated Article 8 (2) (a) (i) (the local litigation requirement) by failing to submit the dispute to the Argentine courts first. (9) BG Group countered that this requirement was senseless because there was no chance that a decision in a case of this nature could be rendered within eighteen months; the most-favored-nation provision in the Treaty entitled it to rely on arbitral clauses in other Argentine investment treaties that did not impose this requirement; and any customary international law rule of exhaustion of local remedies could be disregarded when rhey were unduly slow or expensive. (10)

    The arbitral tribunal rejected Argentina's argument, finding that it had jurisdiction and ordering Argentina to pay BG Group US$ 185 million for violating the Treaty's fair and equitable treatment obligations. (11) The tribunal held that Article 8(2) (a) (i) could not be construed as an absolute impediment to arbitration, as this would allow a host state to "unilaterally elude arbitration" by preventing o hindering recourse to domestic courts. (12) As Argentina had restricted access to its courts so as to implement its emergency laws, it could not insist that BG Group go to those courts to challenge these laws. (13) To find otherwise would produce an absurd and unreasonable result, which was proscribed by Article 32 of the Vienna Convention on the Law of Treaties. (14)

    Argentina filed a motion in the United States District Court for the District of Columbia--the arbitral seat--to vacate the award under the Federal Arbitration Act (FAA) (15) on the basis that "the arbitrators exceeded their powers" by permitting BG Group to arbitrate without complying with the local litigation requirement. (16) BG Group filed a cross motion to confirm the award. The district court denied Argentina's motion and confirmed the award. (17) The court adopted a highly deferential standard of review, noting that "careful scrutiny of an arbitrator's decision would frustrate the FAA's 'emphatic federal policy in favor of arbitral dispute resolution.'" (18) To overturn the tribunal's decision, Argentina had to demonstrate that the "arbitrator stray[ed] from interpretation and application of the agreement and effectively dispense[d] his own brand of industrial justice." (19) Applying this standard, the court concluded that the tribunal had not exceeded its authority because it had "relied upon a colorable, if not reasonable, interpretation" of the Treaty. (20)

    The U.S. Court of Appeals for the District of Columbia Circuit reversed the district court's decision and vacated the arbitral award. (21) The appellate court reasoned that compliance with the local litigation requirement was a matter for the courts to decide de novo, that is, without deference to the tribunal's views. It adopted this standard of review because the requirement was a "precondition to arbitration" and the Treaty was silent on whether the courts or arbitrators should decide this issue. (22) On that basis, the court found that the tribunal had ignored the treaty terms and "rendered a decision wholly based on outside legal sources and without regard to the contracting parties' agreement." (23) The court decided that BG Group must commence a lawsuit in the Argentine courts and wait eighteen months before initiating arbitration. (24)

    The Supreme Court Decision

    BG Group petitioned for and was granted a writ of certiorari. (25) A divided Supreme Court reversed the decision of the court of appeals. (26) The principal issue before the Court was, "[W]ho--court or arbitrator--bears primary responsibility for interpreting and applying the local litigation requirement to an underlying controversy?" (p. 1204). The majority opinion, written by Justice Breyer (and joined by Justices Scalia, Thomas, Ginsburg, Alito, and Kagan, with Justice Sotomayor concurring in part), held that this question was a matter for the arbitrators because it simply concerned when arbitration could commence. Accordingly, courts had to review the arbitrators' "determinations [concerning the local litigation requirement] with deference" (id.). The dissent, written by Chief Justice Roberts (and joined by Justice Kennedy), held that this question was for courts to decide de novo because compliance with these conditions went to whether the disputing parties had agreed to arbitrate, not simply when they had agreed to do so (pp. 1216, 1221-22, Roberts, C.J., dissenting).

    The sharply divided approaches clearly manifest the "clash of paradigms" underlying the investment treaty system. (27) The majority adopted a two-pronged analysis. In the first step, it implicitly embraced a commercial arbitration paradigm by approaching the Treaty "as if it were an ordinary contract between private parties" (p. 1206). Under U.S. law, contracting parties are entitled to determine whether a particular matter is primarily for arbitrators or for courts to decide. If the contract is...

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