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Valparaiso Univ. Law School

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Monday, February 6, 2012

Three Arbitration Decisions Part II: DC Circuit Vacates $185 Million Arbitral Award

In BG Group v. Republic of Argentina, the D.C. Circuit vacated an arbitral award, reversing the District Court finding that the award was enforceable. The D.C. Circuit found that the arbitral panel had exceeded its authority by accepting the case when the relevant Bilateral Investment Treaty (the Treaty) between the United Kingdom and Argentina provided that the parties were to resort to arbitration only if the Argentine courts could not address the matter within 18 months of filing.  Plaintiff never sought a ruling from the Argentine courts.

Argentinian PesosThe BG Group had acquired a 54.67% stake in Gas Argentino, S.A., which owned 70% of a recently privatized gas distribution company, MetroGAS.  BG Group also invested directly in MetroGAS, and by 1998, it held a 45.11% interest in MetroGAS.  In 2001, the Argentine economy collapsed.  Beginning in January 2002, Argentina implemented a set of emergency economic measures (the Emergency Law), and then in March it issued a new decree that “stayed for 180 days the compliance with injunctions and execution of final judgments in lawsuits brought on account of the Emergency Law’s effect on the financial system.”

In April 2003, BG Group filed its Notice of Arbitration, relying on a statement by the Argentine Minister of Justice that it would take at least six years to resolve BG Group’s claims in the Argentine courts, and also claiming that the requirement that domestic remedies be exhausted was obviated because Article 3 of the Treaty granted most favored nation treatment, and the bilateral treaty with the United States did not require exhaustion. 

The Arbitral Panel found the Treaty no bar to arbitration, since the Emergency Law had restricted access to the courts.  Because a strict reading of the Treaty would yield an “absurd and unreasonable result,” the panel found that the Emergency Law had rendered the relevant provisions inoperative. Proceeding to the merits, the panel awarded BG Group just over $185 million in damages, which represented the diminution in value of BG Group’s investment as a result of the Emergency Law.  The District Court denied Argentina’s motion to vacate the award and granted BG Group’s cross-motion for enforcement.

The key issue before the D.C. Circuit was whether the arbitral body had the power to decide arbitrability.  The Court found that the parties had agreed to leave that issue to the arbitrator only after domestic remedies had been exhausted.  Prior to that, the Court found that the parties should have expected that a court would decide arbitrability.  That intention is explicit, and therefore the public policy in favor of arbitration cannot override the intent of the parties.

[JT]

 

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