U.S. Supreme Court Holds Arbitrators Are to Decide Meaning and Application of Procedural Preconditions to Arbitration if Contract Does Not Specify Otherwise

BG Group PLC v. Republic of Argentina, 134 S. Ct. 1198 (Mar. 5, 2014) 

This action arose from an investment by British company BG Group PLC (“BG”) in Argentina and under the protection of a treaty between the United Kingdom and Argentina.  The treaty included a provision that required an aggrieved investor to submit their dispute to a local court in the country where the investment was made for a period of eighteen months prior to pursuing arbitration.   BG invoked the treaty for Argentina’s alleged breach of a natural gas distribution contract.  However, prior to exhausting the treaty’s local litigation requirement, BG proceeded to arbitration in Washington D.C.

Argentina argued that the arbitral panel lacked jurisdiction because BG had not complied with the local litigation requirement. The arbitral panel concluded that it had jurisdiction, finding, among other things, that Argentina’s conduct (such as enacting new laws that hindered recourse to its judiciary by investors in BG’s situation) had excused BG’s failure to comply with the local litigation requirement.  The matter proceeded through arbitration where BG was awarded $185 million in damages.

Argentina turned to American courts to overturn the award, again advancing the argument that the arbitral panel lacked jurisdiction.  The district court initially confirmed the award, but on appeal to the Circuit Court it was vacated.  The Circuit Court held that the gateway issue of arbitrability at hand—whether BG was required to commence litigation before the local courts and wait eighteen months before it could commence arbitration—was for a court, and not the arbitral panel, to decide.

In a 7-2 decision, the Supreme Court reversed.  The Court held that the local litigation requirement was a matter for the arbitrators primarily to interpret and apply, and that the arbitral panel’s interpretation was entitled to judicial deference.  In so holding, the Court analyzed the local litigation requirement in the treaty as if the treaty were an ordinary contract.  The Court reasoned that an agreement to submit disputes to arbitration is a matter of contract and that the parties are free to decide whether a precondition to arbitration should be decided by a court or an arbitrator.   But, if the contract is silent on the matter of who is to decide a “threshold” question about arbitration, courts determine the parties’ intent using presumptions.  On the one hand, “courts presume that the parties intended courts to decide disputes about ‘arbitrability’”.  These include questions such as “whether the parties are bound by a given arbitration clause,” or “whether an arbitration in a concededly binding contract applies to a particular type of controversy.”  On the other hand, the courts presume that the parties intended “arbitrators to decide disputes about the meaning and application of procedural preconditions for the use of arbitration.”

The court then reviewed the text of the local litigation requirement in the treaty and determined it was a purely procedural “claims-processing rule that governs when the arbitration may begin, but not whether it may occur.”  The Court explained that the local litigation requirement simply “determine[d] when the contractual duty to arbitrate arises, not whether there [was] a contractual duty to arbitrate at all.” Accordingly, the Court concluded that the dispute over the local litigation requirement was a question for the arbitrators to decide.

Having concluded that the local litigation requirement was a procedural issue as a matter of contract, the Court analyzed whether it made any difference that the requirement was set forth in a treaty.  The majority concluded it did not.  Therefore, the Court was required to show deference to the arbitral panel’s underlying decision, and could only review whether the panel exceeded its powers in excusing BG’s compliance with the local litigation requirement.  Because the decision was a proper exercise of the panel’s authority, the Court reversed the Circuit Court, and reinstated the arbitration award in favor of BG.

To view the full text of this decision, courtesy of Lexis ®, click here.

Jeffery R. Mullen

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