Republic of Argentina v. BG Grp. PLC

• Decision Date: 17 January 2012
• Docket Number: No. 11–7021.,11–7021.
• Parties: REPUBLIC OF ARGENTINA, Appellant v. BG GROUP PLC, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

398 U.S.App.D.C. 500

665 F.3d 1363

REPUBLIC OF ARGENTINA, Appellant

v.BG GROUP PLC, Appellee.

No. 11–7021.

United States Court of Appeals, District of Columbia Circuit.

Argued Nov. 10, 2011.Decided Jan. 17, 2012.

Appeal from the United States District Court for the District of Columbia (No. 1:08–cv–00485).Gabriel Bottini, pro hac vice, argued the cause for appellant. On the briefs was John P. Gleason. Fernando O. Koatz entered an appearance.

Alexander A. Yanos argued the cause for appellee. With him on the brief was Elliot Friedman. Paul L. Yde entered an appearance.

Before: SENTELLE, Chief Judge, HENDERSON and ROGERS, Circuit Judges.

Opinion for the Court by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

The Republic of Argentina appeals the denial of its motion to vacate an arbitral award on the principal ground that the arbitral panel exceeded its authority by ignoring the terms of the parties' agreement. That agreement, in the form of a Bilateral Investment Treaty between the United Kingdom of Great Britain and Northern Ireland, and Argentina (“the Treaty”), provides that disputes between an investor and the host State will be resolved in the host State's courts. If, however, no final court ruling is forthcoming within eighteen months or the dispute is unresolved after a court ruling, the Treaty provides that resort may then be had to arbitration. BG Group, PLC, a British corporation and investor in Argentina gas companies pursuant to the Treaty, invoked the arbitration clause without first filing a claim in the Argentine courts. The arbitral panel nonetheless ruled it had jurisdiction, found Argentina had violated the Treaty, and awarded BG Group damages.

Although the scope of judicial review of the substance of arbitral awards is exceedingly narrow, it is well settled that an arbitrator cannot ignore the intent of the contracting parties. Where, as here, the result of the arbitral award was to ignore the terms of the Treaty and shift the risk that the Argentine courts might not resolve BG Group's claim within eighteen months pursuant to Article 8(2) of the Treaty, the arbitral panel rendered a decision wholly based on outside legal sources and without regard to the contracting parties' agreement establishing a precondition to arbitration. Accordingly, we reverse the orders denying the motion to vacate and granting the cross-motion to confirm, and we vacate the Final Award.

I.

The Bilateral Investment Treaty between the United Kingdom and Argentina was signed December 11, 1990, and became effective on February 19, 1993. It aimed to promote a favorable investment environment between the contracting parties following Argentina's economic reformation to reduce inflation and the public debt. As relevant, Article 8(1) of the Treaty provides that disputes between an investor under the Treaty and the host State that “have not been amicably settled shall be submitted, at the request of one of the Parties to the dispute, to the decision of the competent tribunal of the Contracting Party in whose territory the investment was made.” Article 8(2) sets the conditions by which such a dispute may be submitted to international arbitration:

(a) if one of the Parties so requests, in any of the following circumstances:

(i) where, after a period of eighteen months has elapsed from the moment when the dispute was submitted to the competent tribunal of the Contracting Party in whose territory the investment was made, the said tribunal has not given its final decision;

(ii) where the final decision of the aforementioned tribunal has been made but the Parties are still in dispute; [or]

(b) where the Contracting Party and the investor of the other Contracting Party have so agreed.

Art. 8(2) (emphasis added). Article 8(3) provides that if, after three months from written notification of the claim, the parties to the dispute are unable to agree on one of the described arbitration procedures, then “the Parties to the dispute shall be bound to submit it to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law [“UNCITRAL Rules”],” although they can modify these rules. Article 8(4) instructs that “[t]he arbitral tribunal shall decide the dispute in accordance with the provisions of this Agreement [i.e., the Treaty], the laws of the Contracting Party involved in the dispute, including its rules on conflict of laws, the terms of any specific agreement concluded in relation to such an investment and the applicable principles of international law.”

Around the time the Treaty took effect, as part of its economic reformation, Argentina privatized the state-owned gas transportation and distribution company, Gas del Estado, and established a 1:1 fixed parity between the Argentine peso and the U.S. dollar. Gas del Estado was split into two transportation companies and eight distribution companies, one of which was MetroGAS. MetroGAS was granted a thirty-five year exclusive license to distribute gas in the city of Buenos Aires and portions of the surrounding metropolitan area, and the license provided that tariffs would be calculated in U.S. dollars and expressed in pesos. One provision of MetroGAS's license provided that adjustments to tariffs would be made every six months for inflation, in accordance with the United States Product Price Index (“PPI”). MetroGAS was entitled to review of its tariffs every five years to ensure reasonable returns. BG Group eventually acquired a 54.67 percent interest in Gas Argentino, S.A. (“GASA”), which in turn owned seventy percent of MetroGAS. In addition, BG Group invested directly in MetroGAS, and by 1998 held a 45.11 percent interest in MetroGAS.

The Argentine economy collapsed in late 2001 and early 2002 following, Argentina explained, the collapse of the Brazilian currency, a run on Argentine banks, and the withholding of a billion dollar loan installment by the International Monetary Fund. In response, Argentina enacted Emergency Law 25,561 on January 6, 2002, to terminate the currency board that had pegged the peso to the U.S. dollar, to convert U.S. dollar based adjustment clauses in agreements to peso-based adjustment clauses, to prohibit inflation adjustments based on foreign price indices (e.g., the PPI), and to convert dollar-based tariffs into peso-based tariffs at a rate of one peso to one U.S. dollar. Argentina also established, by Resolution 308/02 and Decree 1090/02, a renegotiation process for public service contracts (excluding any licensee who sought redress in court or arbitration). And on March 2, 2002, Argentina adopted Decree 214/02, Article 12 of which 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.

Eight months after the stay under Article 12 of Decree 214/02 had expired, BG Group filed a Notice of Arbitration, on April 25, 2003, pursuant to Article 8(3) of the Treaty. When it was unable to reach agreement with Argentina on an alternate forum, BG Group submitted to arbitration under the UNCITRAL Rules. As characterized by the Arbitral Panel, a ministerial opinion (appearing in an article by the former Argentina Attorney General and Minister of Justice) submitted by BG Group estimated that it would take six years to resolve BG Group's claim in the Argentine courts, and BG Group therefore viewed the requirement in Article 8(2) of the Treaty as “senseless,” Final Award ¶ 142, and saw no reason to wait eighteen months before requesting arbitration. Alternatively, BG Group argued that customary international law did not require exhaustion of local remedies, and that Article 3 of the Treaty, the Most Favored Nation Clause, obviated the requirement that it seek recourse in Argentine courts given that Argentina's investment treaty with the United States lacked such a requirement.

The Arbitral Panel issued a Final Award on December 24, 2007, in Washington, D.C. The Panel determined it had jurisdiction. It rejected BG Group's arguments that the dispute was arbitrable because an Argentine court would not resolve the dispute within eighteen months and that international law did not require exhaustion of local remedies. Instead, the Panel concluded that although BG Group did not seek recourse in Argentine courts for the eighteen month period required by Article 8(2) of the Treaty, that provision could not, “[a]s a matter of Treaty interpretation ... be construed as an absolute impediment to arbitration.” Final Award ¶ 147. Citing Article 32 of the Vienna Convention,¹ the Panel concluded that because Argentina by emergency decrees had restricted access to its courts and had excluded from the renegotiation process any licensee that sought redress, a literal reading of the Treaty would produce an “absurd and unreasonable result.” Id. The Panel thus found it unnecessary to decide whether Article 3 of the Treaty made Article 8(1) and (2) inoperative.

On the merits, the Arbitral Panel ruled BG Group had standing to bring its claim because, under the terms of the Treaty, it was an “investor” with an “investment” ² (in GASA and MetroGAS), which suffered a decrease in the value as a result of the Emergency Law. It rejected BG Group's claim that Argentina had breached Article 5 of the Treaty or expropriated its investment in MetroGAS, because the decrease in the value of BG Group's investment was not permanent. It found, however, that Argentina had violated Article 2 of the Treaty by failing to provide fair and equitable treatment to investments, ³ in that its actions in the early 1990s led to BG Group's investment and by dismantling the regulatory scheme that induced the investment, “Argentina violated the principles of stability and predictability inherent to the standard of fair and equitable treatment.” Id. ¶ 307. The violation was exacerbated, it found, by the exclusion of licensees seeking relief in an arbitral...