United States: U.S. Supreme Court Holds That Arbitrators, Not Courts, Are Entitled To Interpret Local Litigation Requirements In Bilateral Investment Treaties

On March 5, the U.S. Supreme Court held in BG Group PLC v. Republic of Argentina, --- S.Ct. ---, 2014 WL 838424 (March 5, 2014) that local litigation requirements in bilateral investment treaties (BITs) are generally procedural preconditions to arbitration and that arbitrators, rather than courts, should interpret and apply such requirements in the first instance, subject to only very limited judicial review. The decision is available here.

The majority, in an opinion by Justice Breyer, adopted a two-step analysis. It first assessed the local litigation provision as if it were contained in an ordinary commercial contract between private parties, and then it asked whether the provision's inclusion in a BIT rather than a contract altered the result. The Court concluded that, under principles applicable to ordinary contracts under the FAA, the provision's subject would be considered a procedural issue and thus a question for the arbitrator to decide in the first instance. The Court then determined that because a treaty is in many respects akin to a contract, the result was the same for the local litigation requirement in the UK-Argentina BIT. Absent a clause expressly assigning interpretation of local litigation obligations to courts, the Court held, the arbitrator's decision on the matter would be entitled to "highly" deferential review under the FAA; applying this analysis, the Court readily concluded that there were no grounds for setting aside the arbitrators' determination that compliance with the local litigation requirement would be futile and, as a consequence, not required by the BIT. Reversing the D.C. Circuit's decision, the Supreme Court reinstated the $185 million award against Argentina.


Petitioner BG Group is a British company with a significant stake in MetroGas, a company that distributed natural gas in Buenos Aires. In 2001 and 2002, Argentina changed the rules that its regulators used to calculate gas tariffs, resulting in losses for MetroGas. In 2003, BG Group initiated an arbitration against Argentina under the dispute resolution provisions of the UK-Argentina BIT (under the UNCITRAL Arbitration Rules in an arbitration seated in Washington, D.C.). 

Article 8(2)(a) of the BIT required parties to seek resolution of the dispute first in the local courts and wait 18 months prior to initiating arbitration under the BIT. BG Group did not comply with the local litigation requirement and Argentina argued to the arbitral tribunal that this failure deprived the tribunal of jurisdiction. The tribunal found in favor of BG Group and decided that Argentina's own actions, restricting the possibilities of challenging its actions in local courts, had made it "absurd" and "unreasonable" for BG Group to comply with the terms of Article 8(2)(a). The tribunal subsequently rendered an award in favor of BG Group on the merits of its claim, holding Argentina liable for some $185 million in damages.

Argentina sought to vacate the award under §10(a)(4) of the Federal Arbitration Act on the ground that the arbitrators lacked jurisdiction. The district court denied Argentina's claims and confirmed the award. The D.C. Circuit reversed. The court of appeals held that interpretation of Article 8(2)(a)'s local litigation requirement was a question for the courts and that BG had failed to comply with the requirement.

Supreme Court Decision

In answering the question whether arbitrators or courts should have primary responsibility for interpreting the local litigation requirement, the majority first analyzed the provision as if it were in an ordinary contract between private parties. Under this analysis, the local litigation requirement would be classified as a procedural precondition to arbitration, rather than a substantive issue of jurisdiction, such as whether the parties have given consent to arbitration or whether a particular type of controversy is subject to arbitration. Under Howsam v. Dean Witter Reynolds, 537 U. S. 79, 84-5 (2002), substantive issues are for the courts to decide de novo, while procedural issues are for the arbitrator to decide in the first instance, subject only to highly deferential judicial review, unless the parties make clear that they intend otherwise. See also Granite Rock Co. v. Teamsters, 561 U.S. 287, 299-300 (2010).

The Court observed that it has previously held procedural issues to include "claims of waiver, delay, or a like defense to arbitrability," as well as "prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate." (Slip op. 2). The Court analogized the local litigation requirement to these types of provisions, noting that the function of the local litigation requirement is to "determine[] when the contractual duty to arbitrate arises, not whether there is a contractual duty to arbitrate at all." (emphasis original). Id. The "litigation provision is consequently a purely procedural requirement—a claims-processing rule that governs when the arbitration may begin, but not whether it may occur or what its substantive outcome will be on the issues in dispute." (Slip op. 2-3). 

The Court next held that the Howsam analysis does not change when the agreement at issue is a BIT because treaties are similar in many respects to contracts between national governments. The Court thus concluded that "in the absence of language in a treaty demonstrating that the parties intended a different delegation of authority, the ordinary interpretive framework applies." (Slip op. 3). Citing the first edition of Gary Born's International Commercial Arbitration 842 (2009), as reflecting the "bulk of international authority," the Court held that the BIT's local litigation requirement "functions as a purely procedural precondition to arbitrate." 

The Court left open the treatment of treaties that contain language making clear that certain provisions are conditions of a country's consent to arbitrate. The Court noted that the UK-Argentina BIT did not state that the local litigation requirement is a "condition of consent" to arbitration, contrary to the U.S. Solicitor General's argument in its amicus brief. While not deciding the issue, however, the Court intimated that even when a BIT uses phrases like "conditions to consent," that would not necessarily be dispositive. In other words, the Court suggested that merely using the label "conditions of consent," and nothing more, may be insufficient to constitute an explicit assignment of interpretative authority to the courts, rather than to the arbitrator. 

Justice Sotomayor concurred. She agreed with the majority that the local litigation requirement is a procedural question. However, she wrote to disagree with the Court's dictum that even if the words "consent" were used to describe conditions in a treaty, such labels would not be conclusive in determining whether the parties intended for the condition to be resolved by the courts or by arbitrators. 

Chief Justice Roberts, joined by Justice Kennedy, dissented. They argued that the local litigation requirement is part of the host country's unilateral offer to arbitrate, which the investor must accept by complying with its terms. Unlike a provision in an ordinary contract, the arbitration agreement contained in a BIT runs between the signatory countries, rather than between the host country and private investors such as BG Group. In the dissenters' view, prior to the fulfillment of the local litigation requirement, there is no arbitration agreement in place between Argentina and private investors such as BG Group. Because Article 8(2)(a) is a condition to the formation of an arbitration agreement, its meaning is a substantive question for the courts to resolve de novo.

The dissent also rejected the argument (not reached by the Court) that the BIT's incorporation of the UNCITRAL Rules delegated the question of compliance with Article 8(2)(a)'s local litigation requirement to the arbitral tribunal. The dissent reasoned that the local litigation requirement was a condition to Argentina's consent and, consequently, that the UNCITRAL Rules had no effect unless that requirement was satisfied: "If the parties have not validly agreed to any arbitration agreement at all, then they also have necessarily not agreed to institutional arbitration rules." (Slip op. at 15) (citing G. Born, International Commercial Arbitration 870 (2009)). Thus, in the dissent's view, the question whether Article 8(2)(a)'s local litigation requirement had been satisfied or waived was subject to de novo judicial review.

Despite these conclusions, the dissent also suggested fairly clearly that the court of appeals had erred in its de novo review of the arbitral tribunal's application of Article 8(2)(a). The dissent observed that the court of appeals "seems to have simply taken it for granted" that the local litigation requirement had to be complied with even if futile. The dissent suggested that this conclusion found no support in principles of either contract law or international investment law.


The Court's decision provides a measure of welcome clarification regarding the allocation of competence between U.S. courts and arbitral tribunals over jurisdictional disputes. The Court reaffirmed its previous decisions (in Howsam and Granite Rock) that "procedural" requirements associated with an arbitration agreement are generally matters for the arbitral tribunal to decide, subject to only very limited judicial review under §10(a) of the FAA. The Court also displayed marked receptivity to international authorities, with both the majority and dissent relying on a range of international commentary and arbitral awards. Its decision should go far in reassuring international businesses (and foreign states) that the United States provides a predictable and reliable seat for international investment and commercial arbitrations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
In association with
Practice Guides
by Mondaq Advice Centers
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions