The US Supreme Court considered its first investment treaty-related claim today. The issue: how much should US courts help ensure that countries are not sued by investors against countries’ consent? I describe some of the background, and do a bit of a deferred liveblog below.
SCOTUSBlog has a pretty good preview of what is at issue in this case. In a nutshell, a UK investor (BG Group) successfully challenged Argentina in investor-state arbitration. In the arbitral award handed down in 2007, a trio of arbitrators deemed that Argentina had breached its obligations under the UK-Argentina bilateral investment treaty by changing the payment regime for privatized utility providers following a national crisis.*
The case was heard under rules established by the UN agency UNCITRAL under the New York Convention treaty, but the tribunal was “seated” in Washington, DC. In arbitration-ese, this means that either BG or Argentina could have asked a US court to set aside the arbitral award.
In this particular case, it was Argentina that asked in 2008 for US courts to vacate or modify the 2007 award, on the grounds that the tribunal lacked jurisdiction. Specifically, the UK-Argentina BIT requires investors to submit their disputes to Argentine courts for 18 months before resorting to transnational arbitration – something that BG Group did not do. As a consequence, Argentina argued that the tribunal should have found that the country had not given its consent to be sued. In 2010, the US District Court for the District of Columbia denied Argentina’s petition, and confirmed the award a year later. In 2012, the appeals court for the district overturned these decisions and vacated the arbitral award.
This is extremely rare, as US courts (and other national courts) have evolved a policy over the last few decades to defer almost completely to arbitral decisions. Still, there has been controversy about whether US courts should defer to arbitrators as much in investor-state cases as in cases involving only private parties (which has accounted for all of the arbitration-related precedents previously before the Court). This complex of issues are probably among the reasons why the US Supreme Court granted certiorari. And this decision garnered a lot of interest, with the Obama administration and Ecuador’s Correa administration agreeing with parts of Argentina’s arguments, and a variety of international business interests siding with BG Group.
So how did the justices weigh in on this historic case? What follows is a delayed liveblogging of the oral arguments, since space did not suffice for members of the public (including yours truly) to get into hear the whole case.
- BG Group’s opening oral argument asks for the Court to resolve the case narrowly – basically, are arbitrators allowed to determine their own jurisdiction or not? (This is the so-called competence-competence doctrine.)
- Justice Sonia Sotomayor asked the first series of questions, hinting that US courts do not need a specific deference to foreign parties, and that it is enough to simply look at whether there are special preconditions to consent.
- BG Group then argued that, because the New York Convention envisions set-aside motions in any of over 100 national jurisdictions, Argentina had no right to expect a particular deference, and that it was the luck of the draw as to how a particular country’s arbitration regime would review an award.
- Justice Samuel Alito then chimed in, asking if it was too late to begin litigating in Argentine courts.
- BG Group responded that this would be futile, but Chief Justice Roberts contradicted that various statutory regimes (like equal employment cases) have cooling off periods, and that Argentine courts may have needed the chance to show themselves.
- Justice Anthony Kennedy wondered what would be the effect of deciding the consent issue, if this meant that the arbitration award would or would not be respected. He thought that the lower court were probably incorrect on the merits, but that procedurally, he did think that US courts have a right to review arbitration awards.
- Justice Ruth Bader Ginsburg then questioned whether there was definitely an agreement to arbitrate, and Roberts asked about the textual interrelationship in the treaty between the agreement to arbitrate versus domestic procedural preconditions.
- BG Group then argued that the 18-month litigation was a remnant of a pre-arbitration era, and that the only reason for having investment treaties would be to take disputes out of national courts. The company argued that Argentina knew it wouldn’t be able to attract investment without this provision, and that Argentina was in essence making a commercial (not a sovereign) decision, undeserving of deference under the US Foreign Sovereign Immunities Act.
- Justices Ginsburg, Kennedy and Scalia then peppered clarifying questions about how much power US and Argentine courts have in these cases.
- The US government then presented its arguments, which is that treaty interpretation between nations is distinct to contract interpretation between commercial parties.
- Justice Scalia questioned this premise, suggesting that treaty and agreement frameworks were distinguishable, and Justice Breyer questioned whether there was really any structure for determining consent in BITs. He then questioned whether purely procedural provisions (like whether claims could be filed on Saturdays) could really be barriers to arbitrate.
- The US then hinted at why it cares about these procedural provisions, namely, that it wants national courts to interpret procedural hurdles in its treaties (including NAFTA and the US-Korea agreement) as limitations on its consent to arbitrate. [ED. note: it is interesting that the US flags the two treaties with developed countries as particularly worth deference. The US may expect to see more potential claims under these treaties than those with poor developing nations.]
- Breyer, Ginsburg, and Kagan and Scalia all pushed the US to refine its argument about whether consent is a purely procedural condition or not. Alito then asked whether something that served no purpose at all could truly be a barrier to consent.
- The US argued that interpreters should be cautious when ruling out intentional use of phrases, and that post-ratification documents could help flesh out the meaning of an ambigiuous provision.
- As Argentina began its comments, it had only gotten a few words in when Ginsburg interrupted to ask if BG Group could go to Argentine courts and then to an arbitrator, and counsel for the respondent agreed that they could. Ginsburg then suggested that this means arbitrators would have the final say in any instance.
- The justices and Argentina then got into a lot of shorthand references to US arbitration cases, related to how unilateral contract formation happens.
- Alito returned to the notion that this type of provision was not important. Argentina objected, saying, “This is not some weird Argentine thing. The UK thinks this is important.” One of the reasons governments see 18-month and similar local litigation requirements as important is that they allow local courts to clarify the law. Alito pushed back that a company could comply with local litigation requirements without really presenting enough arguments to permit local courts to clarify local law. Argentina then noted that another function of these requirements is that it could promote settlement, or even allow the company to win.
- Kagan then asked what would happen if there was a judge’s strike and nothing could be decided in 18 months, and Kennedy further suggested that the clerk’s office might be closed, so filing was not even possible. Argentina suggested that, in such a case, where the claimant had actually “elected to comply”, there might be an excuse for the 18 month requirement.
- BG Group then presented follow-up arguments, emphasizing that BG Group met its conditions for arbitrating by being from the UK and making an investment in Argentina.
- BG disputed that an 18-month requirement actually functioned to inform arbitrators about local law, since it was not a sequential exhaustion of remedies requirement. He emphasized the neutrality and competence of the arbitrators in treaty questions, emphasizing that neither the UK nor Argentina could have foreseen the US Supreme Court making the call on the decision.
Chief Justice Roberts then pushed back, saying that it is not clear that sovereigns are “anxious to submit its sovereignty to three international law experts.” BG Group said that, at the end of the day, the most important feature is that “I don’t have to have my case decided by an Argentine
And with that, the arguments were over.
*A few more facts about the underlying case and system:
- The arbitrators in the case were Albert Jan van den Berg (a Dutch national appointed by BG Group), Alejandro Garro (a US/Argentine national appointed by Argentina) and Guillermo Aguilar Alvarez (a Mexican national appointed by the two other arbitrators).
- Argentina was found to violate the fair and equitable treatment (FET) standard, but not the expropriation standard. Argentina’s “necessity” defense failed.
- Under the FET standard, Argentina was found to have behaved in an arbitrary fashion that violated BG Group’s legitimate expectations and fell below the international minimum standard of treatment. However, Argentina was not found to have behaved in a discriminatory fashion, or fallen below an obligation to provide full protection and security.
- While BG Group claimed US$238.1 million plus 100 percent of legal and arbitral fees, it didn’t get everything it asked for. Instead, the Argentine public treasury was ordered to pay $185,285,485.85 (plus interest) to BG Group for damages, plus 70 percent of BG Group’s legal expenses (at US$437,073.00 and GB£2,414,141.10) and 40 percent of their arbitral expenses ($247,300.00).
- Argentina has been hit by more investor-state claims than any other country. Of the 51 countries that have had 139 cases proceed to the merits stage, Argentina accounts for 19, as compared with 12 for Mexico, eight each for Ecuador and Ukraine, seven for Egypt, and an average case incidence of 2.6 per country.
- Almost all of Argentina’s cases stem from measures it took to deal with the fallout of financial crises and privatizations from the 1990s and early 2000s.
- While Argentina upset international investors’ expectations with these actions, they don’t seem to have harmed (and may have helped) growth. According to one estimate, Argentina had the fastest growth in the hemisphere following its post-crisis reforms.