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Competence-Competence in Investment Arbitration. University of Ghana Law Journal, 28,
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 THE BATTLE BETWEEN CONSENT AND THE
PRINCIPLE OF COMPETENCE-COMPETENCE IN
INVESTMENT ARBITRATION

Rose Rameau *

Introduction

It is well established that in order for an arbitral tribunal to have

jurisdiction, the parties must have had a contractual obligation in
which they consent to submit themselves to the jurisdiction of the
tribunal.1 The parties' consent to arbitrate may be articulated in a
contract that contains an arbitration agreement also known as
'clause compromissoire' (compromissory clause) or it may be in a
separate agreement entered into after the dispute between the
parties has arisen (submissionagreementor compromise).2

Such contractual obligation has prompted leading scholars to agree

that the arbitration agreement is the nucleus of the arbitration
process because it grants the power to the arbitrators to resolve the
dispute and it burdens the parties to respect the agreement by not
seeking other means of dispute resolution that is not provided in the
agreement.3 Thus, consent to arbitrate derives from the arbitration
agreement. This is true in domestic arbitration, commercial
arbitration, and also in investment arbitration. Yet, as will be
discussed below, investment 4
arbitration presents some
particularities in this respect.

• M.A (Int. Rel.), (Syracuse); LL.M (Panthon Assas, Paris II); J. D. (Syracuse); Fulbright Fellow,
University of Ghana School of Law (2014 - 2016).
' Daniel Girsberger and Nathalie Voser, International Arbitration in Switzerland 3-4 (Schulthess, 2d
ed.2012).
2id.
Idatl
Andrea Marco Steingruber, The Mutable and Evolving Concept of 'Consent in International
Arbitration- Comparing Rules, laws, treaties and types of arbitration for a better understanding of the
concept of'Consent'; Oxford University Comparative Law Forum, (2012) at 1.0
Where investment arbitration is concerned, there is usually no
traditional arbitration agreement and such consent is ordinarily
established on a different basis, namely investment treaties between
two sovereign states for the future consent of potential claimants or
investors who are citizens of the other contracting state.5 This is
similar to a third-party beneficiary contract in that the two
contracting states make promises to each other for the benefit of
their respective citizens. In international commercial arbitration,
the agreement that the parties sign usually grants power to the
arbitrators to resolve the difference. In contrast, in international
investment arbitration, the mere signature to the international
agreement, such as a Bilateral Investment Treaty ("BIT"), does not
in itself grant the tribunal jurisdiction over a sovereign state. Thus,
where there is an objection to consent, the jurisdiction of the
tribunal is also questioned. Here, jurisdiction and consent are inter-
related because the tribunal should not proceed, if there is no
consent. Unsurprisingly, the tribunal which decides whether or not
a party consented to arbitrate would be the same tribunal which
decides to either proceed or decline to hear the matter, based on the
notion of competence-competence.

The competence-competence theory which allows the tribunal to

rule on its ownjurisdiction may become a conflicting principle with
state sovereignty because a state usually gives its future consent to
arbitrate provided that the would-be investor accepts its offer. A
state, however, may wish to be allowed to consent to arbitration by
articulating in its domestic laws and/or in other instruments, how
and when arbitration would proceed when it becomes a party to
such proceeding.

Conversely, in investment arbitration the notion of competence-

competence may be an impediment to states that are parties to an
arbitration because when and if the tribunal decides that it has
competence to decide on its own jurisdiction and ultimately
proceeds with the arbitration proceeding, a state party is compelled
to participate in the proceeding over that objection usually because

Christoph Schreuer, Consent to Arbitration, in Peter Muchlinski and Federico Ortino and Christoph
Schreuer., The Oxford Handbook of International Investment Law 831 (Peter Muchlinski et al. eds.,
Oxford University Press, Oxford 2008).
the state may have signed a treaty some years prior to the dispute.
Thus the 'old future consent' becomes 'immediate consent' and the
would-be investor's action of initiating the proceeding is usually
considered acceptance of the state offer to arbitrate.

This paper will focus on consent and jurisdiction issues in

investment arbitration. It will first look at consent in commercial
and investment arbitration. Then, it will examine the jurisdictional
effect of party autonomy in investment arbitration. Finally, it will
look at the first investment arbitration case decided by the U.S
Supreme Court, B. G Groupplc. v. Argentina, addressing the notions
of consent and competence-competence.

I. Consent in Commercial and InternationalArbitration

Without the consent of the parties, international arbitration is

impossible. Party autonomy or 7a volont des parties', as the
French describe it, is the most important standard in international
arbitration. The notion of party autonomy in international
arbitration is a well established principle in public international law.
It is well articulated under the Geneva Protocol of 1923, Art. 2.6, the
UNCITRAL Model Law, Art. 19(1); the New York Convention Art
V.1 (d)7; and the LCIA Rules Art 14(1).' The UNCITRAL Model
Law on International Commercial Arbitration Art 19(1) provides
that parties are free to agree on the proceedings that they wish the
tribunal to follow when conducting the proceeding This is one of
the major differences between court proceedings and arbitration
proceedings. Court proceedings do not require that a party consent
to it but in arbitration, such consent is paramount.'

' Geneva Protocol of 1923, Art. 2.'the arbitral procedure, including the constitution of the arbitral
tribunal, shall be governed by the will of the parties...'
' New York Convention, Art V. 1(d) 'The composition of the arbitral authority or the arbitral procedure
was not in accordance with the agreement of the parties, ... '
' Alan Redfem and Martin Hunter, Law and Practice oflnternational Commercial Arbitration 6-03 -
6-04 (Sweet & Maxwell, 3d ed. 1999).
' Model Law Art 19(1) 'Subject to the provisions of this law, the parties are free to agree on the
procedure to be followed by the arbitral tribunal in conducting the proceedings'.
" Clause Compromissoire or compromissory clause is a clause that is incorporated in the main
agreement or contract or even in an investment agreement and it is designed to dictate to the parties
how to resolve future dispute arising under the contract or the investment agreement. On the other
hand, Compromis or Compromise agreement are drafted after the dispute has already arisen.
According to the Random House College Dictionary, consent is
defined as follows:

1. Topermit,approve or agree;comply oryield

2. To agreein sentiment,opinion, etc.; be in harmony
3. Permissionor approvalof what is done orproposed
by another; agreement, compliance; acquiescence

Definition 2 above seems to be the most appropriate when dealing

with arbitration. It is not enough to say that the parties consent but
there need to be a 'meeting of the minds' in that the parties have to
agree in sentiment, in synchronization, in harmony; thus the term 'la
volont des parties' a voluntary action to bring any dispute arising
out of a particular contract before an arbitral tribunal. In contrast,
the Black Law Dictionary defines consent as "Agreement, approval
or permission as to some act or purpose given voluntarily by a
competent person; legally effective consent.""

Here, emphasis should be on voluntariness. In traditional

commercial arbitration, such voluntariness can be easily spotted
because the parties would have a contract and in it, they would have
an arbitration clause or they could agree to arbitrate if the dispute
has already started. However, when two states sign a bilateral or
multilateral treaty in which they agree to provide for future disputes
resolution between their nationals and another contracting state;
they are not agreeing to arbitration per se but rather are making a
unilateral offer to arbitrate with would-be investors in the future. 2
The initial agreement is an offer made to the investors of a
contracting state and there is no privity of contract between the
offering state and the investor because the investor is not party to the
international agreement.' 3 In order for voluntary consent to be
present, the investor must accept the state offer.

From a contract principle, under the mirror image rule, in order for
the offeree to properly accept the offer, he needs to effectuate
acceptance in the same manner that the offer was made. This is an
unambiguous and complete acceptance when the offeree accepts

Black's Law Dictionary: Standard Edition (BryanA. Garner ed., West Publishing Co, 8th ed. 2004).
Christoph Schreuer, Supra at 837.
Andrea Marco Steingruber, Supra at4.2
the offer without any modifications. Similarly, investors who wish
to benefit from a state's offer must comply with all the conditions
that the state may impose on them in order to have complete
meeting of the minds. As such, where a state incorporates certain
conditions that the investor needs to fulfill prior to arbitration; the
investor should not be allowed to bypass those conditions.

If investors are allowed to bypass such conditions imposed by a

state; the state's sovereign power is no longer secure because the
state parties to the BIT's had properly used their sovereign powers
during the BIT negotiation and agreed on the conditions for their
respective would-be investors. As such, where an arbitral tribunal
allows an investor to bypass the conditions that are required prior to
the request for arbitration; the state can argue that it has lost some of
its sovereign powers to dictate its own affairs. Arguably, the notion
of competence-competence which enables arbitrators to rule on
their own jurisdiction could be an infringement on the voluntariness
14
of state consent, thus creating a limitation on state's sovereignty.

A. Consent in Commercial Arbitration

Consent, in traditional commercial arbitration, starts with the

arbitration agreement. This consent is based on a contract principle.
It is a bargain and both parties enjoy the positive or direct effects as
well as the negative and indirect effects of the agreement.15 Usually
there is a commercial contract and in that contract, the parties would
have incorporated an arbitration clause. 6 Alternatively, the parties
may have a separate arbitration agreement that describes their
intention should they disagree in the future; or the parties can draft a
submission agreement if the dispute has already arisen. 7 Thus, to
consent is to emphasize what scholars have already established that
arbitration is governed by the notion of party autonomy, meaning
that the parties will agree together on how they want the arbitration
proceeding to take place.' 8 Contrary to the consent principle in

" NkiruOkubi, The Umbrella Clause: A Panacea For Contractual Instability? A Look at Production
Sharing Contracts, CEPMLP, University of Dundee (2006) at 5.2.
" Idat 1.1
16 See Girsbergerand & Voser, Supra note 1, at 5
17 id

" Margaret L. Moses, The Principles and Practice of International Commercial Arbitration
2 (Cambridge University Press, 2d ed. 2012).
investment arbitration; the state may attach conditions under which
it will consent to arbitrate as discussed below.

B. Consent in Investment arbitration

In investment arbitration, consent of a state to arbitrate claims

brought by foreign investors can be included in several different
instruments.19 Thus, consent can. be acquired through a direct
agreement between the parties, host state legislation, bilateral
investment treaties, multilateral treaties and by a designated
constituent subdivision or an agency of the host state. 2° However, if
based on an investment treaty, scholars have described state consent
as a unilateral offer from the state; that the future investor will
accept sometime by some specific performance in order for consent
to be perfected.2 While consent can be perfected when the investor
initiates an arbitration proceeding, specific performance of a
condition imposed by the state must be completed as well in order to
obtain proper consent.

Bilateral Investment Treaties are contracts between two sovereign

states and not between a state and the citizens of another state; thus
there is no privity of contract between a sovereign state and a
would-be investor. Where the arbitration is between two states that
are parties to a treaty, such consent might not be as problematic as
when dealing with arbitration between a state and a citizen of
another contracting state. Arguably, when two states sign a bilateral
investment treaty, they have agreed to protect future investors that
are citizens of the respective states. The consent to arbitrate usually
arises after the particular investor has accepted the state's
conditions.

As a matter of international law, each state is deemed sovereign,22 in

that it can make its own laws and take its own decisions. Where the
investor refuses to follow the conditions imposed by a sovereign
state, there is no consent to arbitrate. Failure to fulfill these

' dat233.
ChristophSchreuer, UNCTAD at 7-41
21 1d4.2
" See UN Charter Article 1(2) and Article 2(7)
conditions and if a tribunal determines that the arbitration can
proceed without fulfilling the conditions, such ruling, arguably may
constitute an infringement on the state's autonomy to enact its own
rules. Consent to arbitrate marks the fundamental difference
between arbitration and traditional court proceedings. Without the
state's formal consent in investment arbitration, we have arrived at
'coercive' arbitration.23

This contractual obligation between two or more sovereign states to

subject their citizens to future investment arbitration can be
problematic when dealing with the jurisdiction of the tribunal 24

II. How Does the Notion of Competence-competence Affect

the Consent of Sovereign States?

The notion of Competence-competence may take different forms or

characteristics depending on whether it is invoked in Europe or in
the United States. In Europe, competence-competence means the
tribunal's ability to decide on its own jurisdiction.25 In the United
States, while competence also means the tribunal's jurisdiction,
tribunals have also used the term arbitrability to mean competence
or jurisdiction. Conversely, in Europe, arbitrability means the
subject matter, whether family law, antitrust, criminal laws are
arbitrable in a given jurisdiction. For the purpose of this paper,
competence-competence means the power of the tribunal to decide
upon its ownjurisdiction.

While the competence-competence theory may work well in the

traditional commercial arbitration cases; it exhibits an inherent
conflict in investment arbitration. State sovereignty plays a major
role in the process. In investment arbitration, consent of a
contracting state can be tied up with the conditions that the investor
must accept in order for the state to consent to the jurisdiction of the

" Christoph H Schreuer, The ICSID Convention: A Commentary, citing professor Brigit Stern at xii:
"We are walking with giant steps towards a general system of compulsory arbitration against states
for all matters relating to international investments, at the initiative of the private actors of
international economic relations."
Andrea Marco Steingruber, Supra at 7.0
25 Jean-Franqois Poudret, Comparative Law of International Arbitration 5.1.1. (Stephen V. Berti and
Annette Ponti trans., Sweet & Maxwell, 2d ed. 2007).
'6 Andrea Marco Steingruber, Supra at 9.0
tribunal.27 Thus, where an investor refuses to perform the conditions
and instead initiates the arbitration proceeding as a means of
acceptance, consent is not perfected.

In addition, when the tribunal uses its competence to decide on its

own jurisdiction and validates the investor's action not to perform
the conditions; the state is now compelled to take part in an
arbitration that is rather forced.- But for the tribunal's ability to use
its competence-competence to decide on its own jurisdiction which
compel the state to partake in a forced arbitration without enforcing
the state's imposed conditions; the state would have been able to
stay the arbitration and enforce the completion of its mandated
conditions, and thereby maintain its sovereign powers.

Article 4 1of the ICSID Convention states:

(1) The Tribunal shall be the judge of its own

competence.
(2) Any objection by a party to the dispute that the
dispute is not within thejurisdictionof the Centre,
orfor other reasons is not within the competence
of the Tribunal, shall be considered by the
Tribunal which shall determine whether to deal
with it as a preliminaryquestion or tojoin it to the
merits ofthe dispute.

Under the traditional notion of competence-competence, the power

of the tribunal to rule on its own jurisdiction is provisional in that it
may be subject to the court's review (lex fori). However, even if this
is characterized as a provisional ruling, the tribunal may also
proceed and reserve its ruling until the award on the merits.28 The
tribunal's decision to reserve the ruling until the award on the merits
leaves the losing party with two remedies to fight the jurisdictional
issue: it can do so by introducing an action to set the award aside,
based on a lack of jurisdiction of the arbitral tribunal, and/or it can
oppose the enforcement of the award, on the same basis.
Interestingly, the New York Convention does not specifically

" ChristophSchreuer, UNCTAD, Dispute Resolution Settlement before the ICSID, 2.3 Consent to
Arbitration, United Nations New York and Geneva (2003) at 31.
' Supra note
25
address the principle of competence-competence,2 9 but only
governs the recognition and enforcement of awards and it does not
tell practitioners the limitation of the tribunal's jurisdiction. 0

Since the arbitral tribunal, once it is constituted, has the power to

decide on its own jurisdiction and can even proceed and determine
jurisdiction when making the decision on the merits; to say that the
losing party can challenge the award at the enforcement level is a
misnomer because as stated above, the New York Convention does
not address the principle of competence and thus will not review the
jurisdiction of the tribunal. Now, in dealing with investment
arbitration, this process can be even more problematic if it is an
ICSID matter because when a party wishes to enforce an ICSID
award it will not need the help of the New York Convention due to
the self contain mechanism of the convention. Arguably, state
parties to the convention may agree to treat ICSID award as if it was
rendered in theirjurisdiction.

While ICSIS arbitration can be bifurcated with the question on

jurisdiction being heard in a first phase before the merits; it is not
always the case because Article 4 1(2) of the ICSID rules allows the
tribunal, in an investment case to use its competence-competence to
decide whether it has the power to hear the jurisdiction matter
during the merits stage. Thus, it can be argued that such arbitration
is rather coercive because the state has objected to the jurisdiction of
the tribunal but will be forced to defend its position all the way to the
merits. In addition, the state may agree to the bilateral or
multilateral treaty and it may have conditions precedent to
perfecting its consent. Where the investor fails to comply with the
conditions, consent to arbitrate cannot be found.

The United States Supreme Court in its recent case BG Groupplc v.

Argentina reiterates the competence-competence theory as the
international norm irrespective of the state's consent.

" Paris, Rev. Arb. 2003 p. 243: The principle of competence/competence and the priority of the
arbitrator are not provided for in the New York Convention, but result from a combination of the
principles of "validity" of the arbitration agreement and of competence/competence, which prevent a
French court from examining the arbitration agreement with full power of control and thus limit this
review to the cases where the arbitration agreement is manifestly null and void or manifestly not
applicable.
" Supra note 25, at 388
BG GROUP V. ARGENTINA

B. G Group plc. v. Argentina exposes discussions on the battle of

consent and the competence-competence theory. This is an
important case because it has made its way to the U.S. Supreme
Court through a writ of Certiorari and this was the first time the
United States Supreme Court decided to hear an investment
arbitration case.

A. Factual Background

The United Kingdom and Argentina entered into a bilateral

investment treaty that required a party to allow the local court,
where the investment is made, to take the first bite of the apple.3
Section 8(1) of the treaty stipulates that if after eighteen (18)
months, the moving party is not able to obtain a decision from the
local courts or is unhappy with a decision, then only at that time,
may the disenchanted party initiate arbitration proceedings.32

BG Group plc, a British company, obtained an exclusive license

from MetroGas, an Argentine Company to distribute natural gas in
Buenos Aires.33 At the time of the BG Group/Argentina agreement,
Argentine law provided its tax calculation in dollars ensuring gas
distribution companies to make a reasonable profit.34 Some years
after the agreement, Argentina amended its laws and decided to
recalculate the taxes in pesos as opposed to dollars.35 Subsequently
BG Groupplclost profits on its investments.36

Procedural history

Due to this loss of profits, the BG Group plc initiated arbitration

proceedings under the auspices of ICSID in Washington D.C as
provided under article 8(1) of the parties' bilateral treaty. There, it
argued that Argentina's new tax law violates the treaty, which
forbids "expropriation" of investments and requires that each

BG Group Plc v. Republic ofArgentina, 134S. Ct. 1198,572 U.S., 188 L. Ed. 2d 220(2014).
Id
Id
14 BG Group Plc v. Republic ofArgentina, at 1.
' Id
'~Id
nation gives "fair and equitable treatment" to investors from the
other.37 Argentina denied the allegations and argued that in any
event, the tribunal did not have jurisdiction to hear the matter
because BG Group plc has not attempted to litigate in Argentina
first before initiating the arbitration proceedings. The arbitral
tribunal decided that it had jurisdiction to hear the matter and
further ruled that Argentina's conduct by enacting new laws made it
difficult for the BG Group plc to comply with article 8(1) local
litigation requirement of the treaty and as such it was excused from
its failure to litigate in Argentina first.38

The tribunal proceeded to hear the case on the merits and decided
that Argentina had not expropriated BG Groupplc'sinvestment but
had denied BG Group plc "fair and equitable treatment" and
awarded damages. Argentina first sought review in Federal District
Court by requesting it to vacate the order on the basis that the
tribunal lacked jurisdiction. The court ruled against Argentina and
upheld the award. On appeal, the Court ofAppeals of the District of
Columbia sided with Argentina and ruled that the tribunal did not
have jurisdiction because the interpretation and application of
article 8 of the treaty was a substantive matter that should have been
decided de novo by a court without regard to the arbitrators' views
and as such the BG Group plc was not excused from the local
litigation requirements which provided for 18 months waiting
period before commencing arbitration.3 9 Subsequently, the BG
Group plc sought review through a writ of certiorari before the
United States Supreme Court. The case was argued on December 2,
2013 and decided on March 5, 2014. The U.S Supreme Court
reversed the District of Columbia Court of Appeals decision and
held that the arbitral tribunal had jurisdiction to hear the matter
because the local litigation requirement 40
under article 8(1) of the
treaty is procedural and not substantive.

" BG Group Plc v. Republic ofArgentina, 134 S. Ct. 1198, 572 U.S., 188 L. Ed.
2d220 (2014).
38 Id
3 Idat 2.
40 Idat4.
Discussion

After looking at consent and the competence-competence theory

above, one can only conclude that, unless there is a statement that
says 'the state does not agree to arbitrateif the potential investor
does notfulfill the enumeratedconditions',the US Supreme Court
is not likely to see performing the conditions as a substantive issue
or as a requirement to consent to arbitrate. This is because the court
concludes that the issue is not whether the parties agree to arbitrate
but rather when they can arbitrate.41 This line of reasoning implies
that consent to arbitrate was perfected which was not the case in BG
Groupplc case.

BG Group plc v. Argentina is a very important case because the

United States Supreme Court clarifies the Court's opinion of how
much independence arbitrators should have when appointed to
decide cases. This case deals with both consent of the parties and
jurisdiction of the tribunal. Here, consent and competence/
jurisdiction of the court walk hand in hand. If the tribunal had said
that it did not have jurisdiction, the BG Group would have to respect
the local litigation requirements under the bilateral investment
treaty. However, when the tribunal held that it had jurisdiction over
the matter and further determined that the BG Group did not have to
respect the local litigation provision under the treaty, the tribunal
may have exceeded its power of interpretation of the treaty.

Furthermore, when Argentina argued that the tribunal did not have
jurisdiction because Argentina's courts are entitled to take the first
bite of the case and only if 18 months had lapsed could the BG
Group move forward to arbitrate; it was saying that it had not
consented to any form of arbitration unless BG Group has
exhausted the local litigation requirements which Argentina and
United Kingdom had agreed to on behalf of their future investors.
This is indeed a reverse order under the French system. Article
1458 of the Civil Procedure Code (CPC) states that:

Where a dispute, referred to an arbitrationtribunal

pursuant to an arbitrationagreement, is brought

41JP Duffy and Eric A. Bevan, Supreme Court Clarifies Competence-Competence Principle,
International Law Office News Letter, March 20,2014.
 before a court of law of the State, the latter must
decline jurisdiction. Where the case has not yet
been brought before arbitrationtribunal,the court
must also decline jurisdiction save where the
arbitrationagreement is manifestly null. In both
cases, the court may not raise sua-ponte its lack of
jurisdiction.,42

The French rule favors arbitrators to have the first bite out of the
apple and the UK/Argentina bilateral treaty clearly wanted a
different result by giving the local courts where the investment is
located the first bite before turning to international arbitration. The
agreement is clear and the notion of party autonomy supports such
arrangement so long as it does not violate public policy. However, it
appears that the arbitral tribunal used its power under the
competence-competence theory and usurped the first bite from the
local court.

In looking at the majority decision, the US Supreme Court focused

on whether the local litigation requirement was a procedural or
41
substantive issue. In its determination, the Court treated the BIT
as a contract and first ruled that there was a contract to arbitrate and
that the 18-month lapse was a mere procedure and should be
decided by the arbitrators. 44 However, Argentina's consent is
presented as an offer for a future arbitration and since the BG Group
did not comply with the conditions of the offer, then there was no
acceptance and, under contract law, there is a valid contract when
there is an offer, acceptance and consideration, which would prove
that there is meeting of the minds.

" (Decree n'81-500 of 12 May 1981, Official Journal of 14 May 1981, amendment JORF of 21 May
1981)
" KiriakiKaradelis, ICCA Replays BG v. Argentina: https://usmg6.mail.yahoo.com/neo/
launch?.rand =a9ns2lk37ensq; April 9, 2014.
BG Group v. Argentina, US Supreme Court No 12-138, March 5, 2014, citing Howman v. Dean
Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (whether a party filed a notice of arbitration within the
time limit provided by the rules of the chosen arbitral forum 'is a matter presumptively for the
arbitrator, not for the judge"); Dalysis Access Center, LLC v. RMS Lifetime, Inc., 638 F. 3d 367, 383
(CAI 2011) (same , in respect to a prearbitration "good faith negotiation" requirement);
LumberuessMut. Cas. Co. V. Broadspire Management Servs.,Inc 623 F. 3d 476, 481 (CA7 2010)
(same in respect to a prearbitration filing of a Disagreement Notice)
Consent in BG Groupplc v. Argentina

As discussed under section II of this note, in order to have a valid

arbitration, there must be consent. La volont des parties or
consent is the heart of arbitration. In commercial cases, the
consent starts from a contractual agreement to arbitrate and it is
easier to determine. In investment cases, such as the case at bar,
Argentina has not consented to arbitrate because BG Group did not
comply with the conditions for Argentina's consent to arbitrate.
The UK/Argentina bilateral investment treaty is just an offer to
arbitrate under a certain conditions. The notion of arbitration is
embedded in the parties' ability to decide how to handle their
disputes. When United Kingdom and Argentina agreed to
arbitrate; both parties negotiated the conditions under which such
arbitration is warranted. It is therefore submitted that when the
arbitrators in BG Group concluded that they had jurisdiction over
'the parties and further determined that the BG Group was excused
from respecting the conditions that would perfect Argentina's
consent; the arbitrators have overreached their competence in
treaty interpretation and as a result have violated Argentina's
sovereign rights. In order words, saying that the BG Group did not
have to perform these conditions is to also say that Argentina is not
free to determine its own laws and regulations and impose
enforcement of such laws.

The 1969 Vienna Convention on the Law of Treaties provides rules

of treaty interpretation. These rules are well established as
customary international law, and are used by investment tribunals.
Article 31 of the convention provides that: "A treaty shall be
interpretedin goodfaith in accordancewith the ordinary meaning
to be given to the terms of the treaty in their context and in the light
ofthe object andpurpose."

Tribunals have interpreted good faith in ordinary meaning and

because each treaty is different and each tribunal is differently
constituted, there is no uniformity. For instance in Plama v.
Bulgaria,Article 31 (1) good faith meant a "gross manipulation of
the language of the treaty or an interpretation that would "deprive
the investor of any certainty as to its rights and the host country's
obligations when it makes the investment" 45 On the other hand, in
SOABI v. Senegal, it was determined that "interpretation must take
into account the consequences which the parties must reasonably
and legitimately be considered to have envisaged as flowing from
their undertakings. 46 Here, UK and Argentina have properly
anticipated the need to allow the local court where the investment is
locate an opportunity to resolve the difference prior to initiating
international arbitration. It is therefore customary for parties to a
treaty to restrict their consent by invoking certain conditions and
when such conditions are not respected consent is not perfected.47

Similarly in the UKiArgentina BIT, one could easily argue that as

under SOABI the parties have legitimately considered that it was
necessary to go through the local courts prior to initiating
arbitration. This condition that the tribunal treats as procedural is
rather substantive in nature because without the completion of the
condition; consent is not perfected. Therefore, because arbitration
is a well-established dispute resolution that is consensual; without
perfect consent of both parties in an investment dispute; it is indeed
coercive or compulsory international investment arbitration.
While some may argue that, the state, by signing the BIT, has
limited its sovereign powers; the facts still remain the state's
signature to the treaty is an offer to arbitrate in the future provided
that certain conditions are met. It is therefore submitted that these
conditions constitute the cornerstone of the state's sovereign
powers and therefore should not be trivialized.

Furthermore, in Georgia v. Russian Federation, the Court

highlighted that the trend in public international law has clearly
favoured the strict application of procedural prerequisites. 48 Thus,
even if the Court determined that it was procedural in nature, BG
Group still needed to comply with the prerequisite before initiating
an arbitration proceeding. As such, it is submitted that the tribunal

Plamav. Bulgaria(Jurisdiction, para 147-164.

SOABIv. Senegal, Award, Para4.
The ICSID Convention a commentary by Christoph H Schreur, see also Georgios Fasfalis, The
dissenting opinion in BG v. Argentina before the US Supreme Court, Kluwer Arbitration Blog, April
1,2014.
" Georgia v. Russian FederationCase concerning Application of the International Convention on
the Elimination of All Forms of Racial Discrimination (ICJ, Decision on Preliminary Objections, 1
April 2011, Paras 133-135) atpara 250).
has overreached its competence-competence power when it denied
Argentina the right to enforce its condition precedent whether
substantive or procedural. It is further submitted that such a ruling
amounts to a violation ofArgentina's sovereign powers.

Competence-Competence in BG Group plc v. Argentina

As seen above, the notion of competence-competence is a well

established concept in international arbitration. It is well articulated
in the French civil code article 145 8,4 in the Washington
Convention article 41,50 in Article 7 of the Swiss Private
International Law Statute51 but it is not so clear under the US laws.
The Federal Arbitration Act Section 3 addresses jurisdiction. It
states:

If any suit or proceeding be brought in any of the

courts of the United States upon any issue referable
to arbitration under an agreement in writing for
such arbitration, the court in which such suit is
pending,upon beingsatisfiedthat the issue involved
in such suit orproceeding is referableto arbitration
under such an agreement, shall on application of
one of the parties stay the trial of the action until
such arbitrationhas been had in accordance with
the terms of the agreement,provided the applicant
for the stay is not in default in proceedingwith such
arbitration.

According to the Federal Arbitration Act (FAA), a court will stay a

proceeding in favor of arbitration if it determines that there is a valid
agreement to arbitrate and that providing that the moving party
seeking the stay is not in default in the proceeding with the

See Footnote 35 Supra

See P. 11 Supra
SPILA article 7 states "If the parties have concluded an arbitration agreement with respect to an
arbitrable dispute, the Swiss court before which the action is brought shall decline its jurisdiction
unless:
a. The defendant proceeded to the merits without contesting jurisdiction;
b.The court finds that the arbitration agreement is null and void, inoperative or incapable of being
performed; or
c. The arbitral tribunal cannot be constituted for reasons for which the defendant in the arbitration
proceeding is manifestly responsible.
arbitration. This is the notion of unclean hands. At common law, a
party cannot seek justice when said party is at fault. Arguably this
caveat would give a litigant leeway to accuse the other of some fault
so the court can proceed with the matter and not stay the proceeding
in favor of arbitration. Thus, the FAA seems to favor courts to have
the first bite even ifthere is a valid arbitration agreement.

On the other hand, when the court reverts to the arbitral tribunal,
thus enforcing the arbitration agreement; some would argue that the
losing party would still have a chance at the enforcement level.
However, as stated above, the New York Convention does not
address jurisdiction of the court in the same way. Article 11(3) of the
New York Convention states:

The court ofa ContractingState, when seised of an

action in a matter in respect of which the parties
have made an agreement within the meaning ofthis
article, shall, at the request of one of the parties,
refer the parties to arbitration,unless it finds that
the said agreement is null and void, inoperative or
incapableofbeingperformed.52

Note that the Convention's language is very different from the

language used in the Federal Arbitration Act Section 3. Under the
Convention, the local court will stay the proceedings unless it finds
that the arbitration agreement is null and void, inoperative or
incapable of being performed. However, under the FAA not only is
there the nullity requirement but a local court may decide not to stay
the proceeding if it finds that the moving party is at fault regarding
the underlying arbitration agreement. Thus, it is submitted that the
US laws do not automatically honor the arbitration agreement but
the recent case laws might suggest differently.

Then the issue becomes who should have the first bite of the apple?
Arbitrators or judges? Is it a race? The U.S Supreme Court has
decided in 1995 how courts should review arbitrators' decisions to
preside over cases where there is a dispute as to whether the parties

5 Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Art 11(3), June 10,
1958,21 U.S.T. 2519, T.I.A.S. No. 6997.

100
agreed to arbitrate.53 FirstOptions of Chicago v. Kaplan 115 S Ct.
1920 (1995.) There, the respondents argued that they did not sign
the underlying agreement which contained the arbitration clause
and since arbitrators obtain their power from an arbitration
agreement; they were not bound to the award because they had
never agreed to arbitrate.54

There is no doubt that First Options is distinguishable from BG

Group because BG Group dealt with international investment
arbitration between a sovereign State and an investor of another
country, while First Options dealt with private investments. In BG
Group,Argentina and UK made an offer to arbitrate in the future, if
the would-be investor accepts the conditions of local litigation for a
maximum of 18 months before arbitrating the claim. BG Group
refused to go through the local litigation requirement and
proceeded to arbitration under Article 8(2) of the treaty and the
tribunal allowed it and further granted damages. While it has been
well established that an investor can accept a State offer to arbitrate
by just initiating arbitration proceeding, here the conditions needed
to be fulfilled prior to arbitration. By not fulfilling the local court
litigation requirement the BG Group had in fact rejected
Argentina's offer to arbitrate and therefore, the parties had no
contract to arbitrate. Thus, because consent to arbitrate is the most
important element in international arbitration as the tribunal
derives its power from it; the arbitration is deemed coerced if such
consent is missing.

The Supreme Court in its decision did not rely on First Option of
Chicago Inc because there, it determined that it was a substantive
issue. Here, the court ruled that the local court litigation
requirement was a procedural issue for the arbitrators to decide and
not the judges (citing Howman v. Dean Witter Reynolds Inc., 537
U.S. 79, 84) where it was determined that courts presumed that
parties intend arbitrators and not judges to decide procedural
precondition for the use of arbitration. The court emphasized that it
would treat the local litigation requirement as a "condition of
consent" to arbitration if the writing was clear that it was a

" First Options of Chicago v Kaplan 115 S Ct. 1920 (1995.)

14 Id.
condition.55 The court states "absence of explicit language in a
treaty demonstrating that the parties intended a different delegation
of authority, our ordinary interpretative framework applies. 56

Conclusion

A State's sovereign power to impose conditions on investors is at

risk in international investment arbitration. The U.S Supreme
Court sees no difference between a regular contract and a treaty. In
fact, it noted that a "treaty is a contract between sovereign States",
yet it arrived at the same conclusion it would have made if it had
been a regular contract. The court, however, left food for thought
on the interpretation of treaties as related to consent to arbitrate.

Through the BG Group plc decision, the U.S. Supreme Court

confirmed that the United States is an arbitration friendly
jurisdiction. This decision is both positive and negative. For
international arbitrators, it is good news because the decision tends
to restore faith in the justice system by boldly stating that arbitrators
can get it right the first time. Thus, there is no need for court
intervention; so let the arbitrators have the first bite of the apple
because they can reach sound decisions through the competence-
competence theory. However, sovereign states that have BIT's
similar to the UK/Argentina BIT should be worried and perhaps
renegotiate any unclear provisions that do not indicate whether a
stated condition under the treaty is a requirement of consent to
arbitrate.

" BG Group Plc v.Republic ofArgentina, 134 S. Ct. 1198,572 U.S., 188 L. Ed. 2d 220
(2014).
"6Idatp.9

102