Justices Revive $185M Award Against Argentina

WASHINGTON (CN) - Argentina failed to show that a $185 million arbitration ruling for an energy investor tramples the authority of its courts, the Supreme Court ruled Wednesday.

The dispute stems from a controversial emergency law Argentina enacted after its economy collapsed in 2002, terminating the 1:1 currency parity between the Argentine peso and the U.S. dollar. Emergency law 25,561 also converted dollar-based adjustment clauses in agreements to peso-based adjustment clauses, barred inflation adjustments based on foreign price indices and converted dollar-based tariffs into peso-based tariffs at a rate of one peso to one U.S. dollar.

U.K.-based BG Group said these changes hurt its investment in Gas Argentino, of which it owned 54.67 percent. Gas Argentino owned 70 percent of MetroGas, one of eight distribution companies under the state-owned Gas del Estado.

Though the U.K.'s bilateral investment treaty with Argentina would have compelled BG Group to resolve any dispute with the country in Argentine courts, the treaty also says that arbitration is the next step if no final court ruling is forthcoming within 18 months or if a court ruling failed to resolve the dispute.

Estimating that it would take six years to resolve its claim in the Argentine courts, BG Group filed a notice of arbitration against the South American country in 2003.

An arbitral panel in Washington, D.C., then concluded that it had jurisdiction because Argentina's emergency decrees restricted access to its courts.

Indeed, a literal reading of the treaty would produce an "absurd and unreasonable result," the panel said.

After finding in 2007 that Argentina had violated Article 2 of the treaty, the panel awarded BG Group $185 million, excluding interest, cost and attorneys' fees, for the loss in its investment.

Finding that Argentina had induced BG Group to invest in Gas Argentino in the early 1990s, the panel said Argentina "violated the principles of stability and predictability inherent to the standard of fair and equitable treatment" by dismantling the regulatory scheme that induced the investment.

A federal judge later granted BG Group's request to enforce the award, but the D.C. Circuit reversed in January 2012, saying that courts should have reviewed de novo, meaning without deference to the views of the arbitrators, the local litigation requirement in Article 8 of the treaty.

The U.S. Supreme Court took up BG Group's last year and reversed for the investor, 7-2, Wednesday.

Here it was correct to interpret the provision "with the deference that courts ordinarily show arbitral decisions on matters the parties have committed to arbitration," Justice Stephen Breyer wrote for the court.

The treaty "nowhere demonstrates a contrary intent as to the delegation of decisional authority between judges and arbitrators," Breyer added. "Thus, were the document an ordinary contract, it would call for arbitrators primarily to interpret and to apply the local litigation provision."

Justice Sonia Sotomayor joined the decision in full except as to a part that found no need to treat the treaty as anything more than a contract, rejecting arguments the court received on the issue from the solicitor general.

"As a general matter, a treaty is a contract, though between nations," Breyer wrote in that section. "Its interpretation normally is, like a contract's interpretation, a matter of determining the parties' intent."

In a concurring opinion, Sotomayor emphasized that the court did not reach the issue of whether "that the local litigation requirement is a 'condition of consent' to arbitration."

Joined by Justice Anthony Kennedy, Chief Justice John Roberts said the majority got it wrong from the beginning by treating the treaty like a contract.

"It should come as no surprise that, after starting down the wrong road, the majority ends up at the wrong place," the Roberts dissent states.

It is for the courts, not an arbitrator, to decide "whether the investor has managed to form an arbitration agreement with the host country pursuant to Article 8(2)(a)" of the treaty, Roberts added.

"The majority opinion nowhere explains when and how Argentina agreed with BG Group to submit to arbitration," he wrote (emphasis in original). "Instead, the majority seems to assume that, in agreeing with the United Kingdom to adopt Article 8 along with the rest of the treaty, Argentina thereby formed an agreement with all potential U. K. investors (including BG Group) to submit all investment-related disputes to arbitration. That misunderstands Article 8 and trivializes the significance to a sovereign nation of subjecting itself to arbitration anywhere in the world, solely at the option of private parties."

The 17-page dissent states that the justices should have vacated the underlying decision with instructions to decide whether Article 8(2)(a) included "an implicit aspect of Argentina's unilateral offer to arbitrate."

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