Worldwide: Whose Role Is It Anyway? Who Has Jurisdiction Over Contractual Pre-Conditions To Arbitration

Last Updated: 13 April 2017
Article by Peter Hirst

The scenario is not uncommon; a multi-tiered dispute resolution clause requires a step (or steps) to be taken by the disputing parties before arbitration can be commenced. The reality of how and when disputes arise can mean that adhering to that multi-step agreement is not always practical. When one party commences arbitration without completing a 'step', is it for the court, or an appointed arbitral tribunal, to determine whether that party is (or was) bound to fulfil the pre-condition? Is this a question of jurisdiction or of admissibility?

BG v Argentina

The issue has been considered from a US law perspective in an investor-state case, BG Group Plc v Republic of Argentina. The UK-Argentina bilateral investment treaty (BIT) requires any dispute to be referred to a local court for a period of 18 months before commencing arbitration. When a dispute arose, BG proceeded straight to arbitration, seated in Washington under the UNCITRAL Rules. The arbitral tribunal decided (for reasons specific to the case) that BG did not have to comply with the local litigation requirement and that they had jurisdiction over the dispute.

The dispute was heard at three levels:

  • District Court for the District of Columbia: Argentina petitioned the Court to vacate the award, arguing that the tribunal lacked jurisdiction because, amongst other reasons, BG had failed to adhere to the local litigation requirement. The Court dismissed the petition.
  • Court of Appeals for the D.C. Circuit: On appeal, that decision was reversed, the Court finding that the interpretation and application of the pre-condition was a matter for courts, not the arbitral tribunal. It found that, because of BG's failure to litigate the dispute in the Argentine Courts first, the arbitrators lacked authority to decide the dispute.
  • US Supreme Court: The appellate decision was overturned, the majority of the Court holding that the question was indeed one for the arbitrators to decide; it did not therefore consider the specific terms of the pre-condition. The Justices reasoned that the litigation requirement was a procedural matter arising as part of the arbitration and a matter for the tribunal to consider, applying US law. The question before the arbitrators was not whether the parties had agreed to arbitrate, but when they had agreed to arbitrate. Notably, the Supreme Court approached the issue as though the case before it was a standard contractual dispute, so there is no distinction to be drawn on the basis that the dispute was investor-state.

The key take-away from the BG case is that the US Supreme Court found fulfilment of the pre-condition to be a procedural matter and one of admissibility. The jurisdiction of the tribunal is not to be called into question for nonadherence to pre-conditions.

Could BG have been decided another way?

The opposing argument (articulated in the appellate court position in BG) is that, absent compliance with the pre-condition, the parties cannot be said to have agreed to submit to arbitration, a fundamental requirement of arbitration. The arbitral tribunal cannot therefore have authority to determine a matter which ultimately sits outside the scope of the arbitration agreement.

This is the approach adopted in a number of other jurisdictions where courts faced with a challenge centred on failure to adhere to a pre-condition will not treat the matter as one of admissibility. Instead the court will consider the interpretation and enforceability of the pre-condition within the bounds of a challenge to the tribunal's jurisdiction.

In England, for example, where the courts retain the power to examine or re-examine for themselves the tribunal's jurisdiction, a question arose as to whether the parties needed to engage in "friendly discussions" before referring the dispute to arbitration (Emirates Trading Agency LLC v Prime Mineral Exports Private Limited [2014] EWHC 2104 (Comm)). The High Court heard the challenge, noting that "...it is common ground that the application before the court is a re-hearing of the jurisdiction challenge." The High Court then went on to find that there had been an obligation to engage in "friendly discussions", in which case the condition precedent to arbitrate was enforceable. Similarly, in Switzerland where parties had agreed to follow a conciliation process but one party did not, the court accepted a challenge to the tribunal's jurisdiction. The Court considered the issue afresh, finding in favour of the party that brought the challenge, which led to a stay in the arbitration pending compliance (Case 4A_628/2015 (Swiss Supreme Court, 16 March 2016)).

While BG v Argentina certainly had its own factual and procedural peculiarities and is not without its critics, it could be said that the US approach adopted in BG is a forward-looking method of dealing with such quasi-jurisdictional issues. There may be a practical reason why it cannot or does not make sense to require adherence with a pre-condition to arbitrate and the tribunal should be able to decide that without its jurisdiction to hear the substantive dispute being challenged. It could be seen that in hearing challenges of this kind anew, national courts are undermining the arbitration process and stepping in where the question is simply one of admissibility and, therefore, procedure within the context of the arbitration. It allows pre-conditions which are maybe out of step with the circumstances of a dispute potentially to derail an otherwise valid attempt to arbitrate.

Tackling multi-tier clauses

If a party is faced with a multi-tier dispute resolution clause but, for justifiable reasons, wishes to by-pass possibly mandatory pre-conditions and resort to arbitration, advice as to the law in the seat of the arbitration should be obtained. The outcome will be different in many jurisdictions and might prevent a costly jurisdictional challenge in due course. As a practical point, ask yourself why, as a party to a contract, you would wish to oblige yourself by contract to negotiate. You have that right without the multi-tier dispute resolution clause!

Whose Role Is It Anyway? Who Has Jurisdiction Over Contractual Pre-Conditions To Arbitration

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