January 18, 2012

US Appellate Review of a BIT Award: Unmistakably Unclear

In a commentary appearing in this space a few months ago, after the Ontario Court of Appeal’s decision in Government of Mexico v. Cargill, I suggested that American courts might decide the scope of judicial review of an investment treaty tribunal’s determination of its own jurisdiction by concluding that the parties’ agreement to resolve disputes by arbitration under the UNCITRAL Rules constitutes “clear and unmistakable evidence” of the treaty parties’ intent to have arbitrators decide jurisdiction issues with the same latitude that they decide the merits. 

In a decision yesterday, the federal court of appeals in Washington D.C. appeared to endorse that position, and yet the Court vacated an award issued in favor of an investor from the UK against the Republic of Argentina, on the ground that the arbitral tribunal exceeded its powers in hearing the case before the claimant investor had complied with a provision of the UK-Argentina bilateral investment treaty requiring, before arbitration, litigation for 18 months in an Argentine court.  (Republic of Argentina v. BG Group PLC,  2012 WL 119558 (D.C. Cir. Jan. 17, 2011)).

The DC Circuit accepts, with citation to the Second Circuit’s decision the Republic of  Ecuador v. Chevron Corp., 638 F.3d 384, 394 (2d Cir. 2011), that as a general matter a BIT’s incorporation of a provision for arbitration of disputes under the UNCITRAL Rules – which empower arbitrators to rule on objections to its jurisdiction – constitutes “clear and unmistakable evidence” that the parties intended for the arbitrators to decide questions of arbitrability.  The Court agrees that, in such case, the arbitrators’ arbitrability decision is subject to judicial review as an award to only the limited extent permitted by the Federal Arbitration Act.

But in this Court’s view the fulfillment of the BIT’s condition precedent to arbitration – that the investor should first file litigation in Argentina’s court system and refrain from commencing arbitration for 18 months thereafter – was not within the arbitral tribunal’s jurisdiction-deciding powers because the investor, having not complied with the litigation pre-condition, had no right to invoke the arbitral tribunal’s jurisdiction.   

Do any readers share my view that there is a certain circularity in this reasoning?  “Jurisdiction” is power to adjudicate.  The Republic of Argentina moved to vacate the award on the grounds that the arbitral tribunal adjudicated despite lacking power to adjudicate. How, then, could the Tribunal’s decision to the contrary have been anything other than a ruling on an objection to jurisdiction? And if it was a ruling on an objection to jurisdiction, then under the Court’s own statement of the law, the tribunal’s decision on jurisdiction was entitled to be reviewed as an award under the Federal Arbitration Act.  Moreover, wasn’t the arguably premature invocation of arbitral jurisdiction a glaringly foreseeable type of dispute for the treaty parties, given the treaty’s Argentine litigation provision – making the absence of a carve-out from the arbitral tribunal’s jurisdiction-deciding powers more revealing, in terms of the treaty parties’ intent, than the absence from the treaty of a definite allocation of power over that issue to the courts or the arbitral tribunal?

For today I leave readers with the foregoing questions, and also with the additional commentary that I posted today on the OGEMID website:

Comment Posted by Marc Goldstein:

“U.S. courts do not get many chances to decide if principles developed in a commercial (and usually domestic) arbitration context make sense as applied to investment treaty arbitration. Most of the investment treaty cases go through the ICSID system and don’t reach our courts. This does not excuse what the D.C. Circuit has decided in BG Group, but in substantial measure explains it.

The First Options decision was the governing law here by default because US courts have not thought through distinctive compétence-compétence principles applicable to BIT arbitrations.  Because  First Options arose from a private domestic commercial arbitration, state common law contract law principles applied to determine if the parties had agreed to arbitrate arbitrability, and intent of the parties was the litmus test provided by that common law.  The presumption in favor of judicial determination of the “who decides arbitrability” question was explained by Justice Breyer on the grounds that the question “is rather arcane” — one on which a private contracting party in the U.S. “might not focus” when signing a commercial contract containing an arbitration clause. An unstated premise, but I submit an equally important one, was that private commercial entities and persons in a US domestic context generally assume the availability and adequacy of their own domestic courts to resolve disputes.

The BG Group decision is disconcerting because most of these premises of First Options do not apply in the BIT context.  Interpretation of the BIT is governed by international law including the VCLT, not domestic contract law, and the intent of the parties is relevant only insofar as international law makes it so.  Then there is the problem that one of the parties to the dispute is not a party to the treaty. Further, the “who decides arbitrability” issue is not “arcane” in the context of a modern-era BIT negotiation between developed nations such as Argentina and the UK. Given the 18-months-in-court requirement in this BIT, and the presumed advantage to the State of resolving foreign investor disputes in the State’s court system, it seems fair to assume that treaty negotiators thought quite a bit about the prospect that investors would seek to curtail or avoid entirely the 18-months-in-court requirement, and foresaw that Argentina would find itself in the position of arguing lack of exhaustion as an obstacle to arbitral decision on the merits.   Did the Argentine Republic foresee that it would be arguing this to an Argentine judge, from whom the UK investor would seek a pre-arbitral declaration of the investor’s right to proceed with arbitration? Obviously not.

 

If these assumptions about the behavior and mindset of the States in the BIT negotiations are valid, then a BIT arbitration clause that provides for arbitration under rules that empower arbitrators to decide issues of their own jurisdiction should create a presumption under US arbitration law that the parties intended the arbitrators to decide “arbitrability” issues, including the fulfillment or validity of conditions precedent to arbitration, unless it can be said with positive assurance that the parties intended to exclude such issues from the scope of arbitrable issues.

So the BG Group case is a desirable candidate for the granting of a writ of certiorari by the US Supreme Court. Perhaps the arbitration community will pull together as amici curiae in support of the petition for writ if one is filed. And it will no doubt already have occurred to BG Group’s counsel that the winning counsel for the Respondent in the First Options case is now the Chief Justice of the United States.”

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