In the early 1990s, BG Group PLC (BG), a British company, made a major investment in Argentina’s natural gas industry. Later, in the midst of an economic crisis, Argentina enacted an emergency law that required investors to collect tariff revenues in Argentinian pesos at a rate of one peso per dollar. Given the weak international peso-to-dollar exchange rate, these changes made it difficult for BG to see a return on its investment. Simultaneously, Argentina adopted legislation that stayed all lawsuits arising from these emergency measures. BG sought recourse under a bilateral investment treaty (Treaty) between the United Kingdom and Argentina. The Treaty required that BG first attempt to resolve its dispute before a “competent tribunal” in Argentina for at least eighteen months. Instead, BG bypassed the Argentinian courts and submitted its dispute directly to an arbitral tribunal. The arbitral panel, seated in Washington, D.C., held that Argentina’s changes to its judicial system excused the eighteen-month precondition to arbitration and awarded BG over $185 million in damages.
Argentina petitioned the district court to vacate the award under the Federal Arbitration Act by arguing that the arbitral panel exceeded its powers. The court denied the petition. In Republic of Argentina v. BG Group PLC, the U.S. Court of Appeals, District of Columbia Circuit reversed and held that, because of the litigation precondition to arbitration, the determination of whether BG could submit its dispute directly to arbitration must be made by a court, not the arbitral tribunal. BG appealed the D.C. Circuit’s decision and the Supreme Court of the United States granted certiorari.
Various individuals and organizations filed amicus briefs with the Supreme Court. One such organization was the AAA. The AAA sides with BG group and asks the Court to overturn the D.C. Circuit’s decision.
In its amicus brief, the AAA provided three arguments. Namely, the AAA argues: (1) the D.C. Circuit’s decision invites inefficiencies in the arbitral process through increased judicial intervention; (2) the D.C. Circuit’s ruling that arbitral rules do not apply until conditions precedent creates uncertainty for arbitration users; and (3) the D.C. Circuit’s decision puts the United States at odds with the international arbitration community and threatens its standing as a seat for international arbitration.
In my opinion, the argument that the D.C. Circuit’s ruling that arbitral rules do not apply until conditions precedent creates uncertainty for arbitration users is the most interesting argument advanced by the AAA.
In brief summation, the AAA argues that the parties in the instant case agreed to arbitrate under ICDR’s rules, and under ICDR’s rules, questions of arbitrability are to be determined by the arbitrators. The AAA argues that this conclusively establishes that all issues of arbitrability were to be determined by the arbitrators.
The AAA notes that the D.C. Circuit acknowledged this fact, but, nonetheless, held that the arbitrability of this particular dispute was to be decided by a court. As stated above, the D.C. Circuit reasoned that this was due to the fact that, as a precondition to arbitration, the parties were to first proceed in court. As such, the precondition expressed a clear and unmistakable intent for a court to determine issues of arbitrability in the first instance.
This is a tough issue. However, I have to agree with the D.C. Circuit’s interpretation of the parties’ arbitration agreement. Where a precondition to arbitration mandates first proceeding in a judicial forum, to allow one party to unilaterally bypass that agreed to precondition and have arbitrators determine whether such a bypass affects arbitrability would pervert the parties’ agreement. The D.C. Circuit’s interpretation appears to be the only interpretation that gives pre-perversion effect to the parties’ agreement.
What are your thoughts? Did the D.C. Circuit get it right?
This is definitely a tough issue, especially because the IDCR rules seem to conflict with the agreement entered into by the parties. I think the best approach is to give more weight to the parties' actual agreement, which in this case mandating first proceeding in a judicial forum. It's unclear whether the parties were aware of the conflict between the rules they chose and the condition precedent. I would like to assume, especially because both parties are sophisticated, that they were aware what the ICDR rules required. And, generally, I think it's a good idea to presume that sophisticated parties incorporate into their agreements the contents of all sets of rules. So, the problem becomes what to give more weight to within the agreement. Because the condition precedent here was quite specific, it appears that the parties' intent was quite clear even if their agreement is ambiguous when considering the inclusion of the ICDR rules. For that reason, I would also agree with the D.C. Circuit's reasoning even if I'm not convinced that a U.S. Court should be involved in this type of dispute in the first place.
ReplyDeleteI agree with the District Courts holding that because litigation was a precondition to arbitration, the determination of whether BG could submit its dispute directly to arbitration must be made by a court, not the arbitral tribunal. I agree with your analysis since I don’t think the question of arbitrability even arose yet since it was never triggered. It is like bringing a dispute before one arises. I think there is a dispute once the courts in Argentina fail after 18 months to resolve the dispute.
ReplyDeleteI had not read the AAA amicus brief--how interesting that they provided a brief in support of BG Group. Most of the arbitration agreements we have read this semester have incorporated the AAA rules, which provide that issues and questions of arbitrability are to be decided by the arbitrator, I believe. The incorporation of these rules would seem to provide the "clear and unmistakable" evidence that an arbitrator should decide the gateway questions. In this case, we have the rules providing for the arbitrators to determine arbitrability. However, I think the contract provided that such rules would not come into effect until after one of the preconditions for arbitration (e.g., litigation pending for 18 months) had been met and if the parties had not agreed on a set of rules three months after the notice of arbitration had been sent. As you and Adam Awad have stated, the rules might not have governed this arbitration because they had not been "triggered." I feel like this case presents a sort of structural or hierarchical debate about how a contract operates in accordance with and independent of an arbitration agreement. As a matter of equity, I would be inclined to put more emphasis on the direct conditions spelled out in the contract first before looking to the individual parts of the contract (such as the rules governing the arbitration), just as Adam Prom is.
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